Flagship – 01.10.22

 The Flagship: An ‘Officer of the Watch’ Briefing

Briefing:  Monday 10, January 2022

·         Busy Economic News Week AheadThis will be a hectic week for economic reports as everything from inflationary measures (both CPI and PPI), retail sales from December, wholesale trade, and the small business sentiment index report from the NFIB.  Chris has written a sneak peak of the details of these reports later in the brief. Earnings season will also get kicked off this week with some big names and analysts will be looking for a combination of demand indicators, how strong the consumer really is, and whether inflationary pressures are starting to squeeze corporate profits. Watch for markets to be more volatile this quarter if a big name drops some industry-shaping news about any of those three areas of their operations. Some of this information could easily sway markets and set the economic sentiment tone for Q1.  

·         “Great Resignation” DataA survey conducted by ResumeBuilder (and reported by the WSJ) showed that 25% of workers expect to find a different job in 2022 with about 52% of those that want to jump jobs planning to make those moves in the first half of the year (nearly 30% want to make the jump by Spring Break). Fifty percent want to do so for better pay or benefits – but 50% are jumping for other reasons (job flexibility, they dislike their current work, better opportunities for advancement, etc.). Batten down the hatches, some of the worker challenges may just be starting to show up.

·         Interesting: Rolls Royce has Record YearOne of the premium automakers in the world reported record sales in 2021. In fact, the company produced and sold more vehicles last year than at any time in its 117-year history.  The firm delivered 5,586 vehicles, up nearly 50% year-over-year.  This says a lot about the pandemic and what it did to consumer spending.  We saw consumer savings surge by $2.5 trillion at the height of the pandemic.  Much of that has been spent and many people were looking for ways to spend money on products, since they couldn’t go out and do much on the services and entertainment front. M&A activity on the business front also saw a record year in 2021, businesses were investing a record amount last year.  It wasn’t just the consumer going on a spending spree.  

·         $100 a Barrel Oil Speculation Heating UpThere are several analysts making headlines again forecasting $100 per barrel oil sometime in the first half of 2022. They point to “open interest” for June 2022 West Texas Intermediate above $100 a barrel rising by 14% over the past 4 months. Others point to OPEC’s miscalculation that they can rapidly increase production.  They are falling short of their promise to increase production by 400,000 barrels per day and MarketWatch estimated that this shortfall had led to nearly a 14 million barrel shortfall in Q4 alone.  Many things can happen that push it up or down, just be aware that the threat exists that oil prices could see double-digits.  If you have a triple-digit oil playbook to dust off, you might want to at least know where it is and put your hands on it.  We ran those “plays” during the Obama Administration off and on for a couple of years, it looks like those days may return if some of these predictions hold true.  – KP

Global Quick Items of Interest

·         Putin Blames Outsiders – To the surprise of absolutely nobody, Vladimir Putin is blaming the unrest in Kazakhstan, Ukraine, Belarus, Georgia and everywhere else on “foreign meddling” and has vowed to make national security trouble for those he blames. It seems that only foreign interference is enough to provoke a population to rebel against economic deprivation and political repression. The protests in all these nations (and within Russia itself) have sprung from economic crisis and the repressive response of the dictators that run these states. The Russian government has sent troops to support the Kazakh leader and he has given his military and police orders to shoot to kill any protestor. The bloodbath has started and is expected to escalate. News has been cut off from the region but is still escaping as people film what is happening and manage to sneak it out. – CK

·         China’s Omicron Policy Tested in Tianjin – The discovery of two cases of the omicron variant in Tianjin has triggered a whole new wave of restriction on the city of 14 million. Schools have been closed, factories shut down, and most shops and restaurants have been ordered to close. Travel out of the city is now forbidden unless one has been tested that day. The Chinese continue to have a “zero-tolerance” policy but that will be put to a severe test as the Olympics are scheduled to start in just days. The assertion by many in China is that there are far more cases of the virus than China has admitted to and that puts these responses in question. China has far less in the way of hospital access and the vaccine in use in China is not as effective as those in the US and Europe. – CK

·         Massive Exodus of Talent from Central America – There are always many reasons for people to migrate out of their countries. Many flee violence and war; others flee grinding poverty. The migration that hurts a nation most is that of the talented and educated that are needed to develop economically. For many years, the majority of those trying to enter the US legally or illegally from Central America were relatively unskilled and untrained – people fleeing the abject poverty they faced at home. In the last few years, this group has been joined by those with skills and education seeking a way to actually use these abilities to advance. It has been estimated that half of Hondurans with either advanced education or job skills have left the country for opportunities in the US, Europe, Canada and Brazil. – CK

·         South Africa and Omicron – The fourth wave of the pandemic started (for all intents and purposes) in South Africa and now this is the country that is seeing the other side of this wave first. There are expected to be lessons from that experience. It seems that there are two characteristics of this variant that have played the most important role – one negative and the other positive. The virus spreads as fast as any virus seen since the measles and that is the primary threat. On the other hand, it really has been far less serious than others – especially for those that have been vaccinated. That has meant that pressure has been reduced on hospitals where vaccination rates are high and fatalities have been reduced (again, among the vaccinated). South Africa has seen a dramatic drop in numbers of infections in the last week and that bodes well for other parts of the world. – CK

·         Why the Disappearance of the French Left Matters – According to every major poll in France the Socialists would not even come close to making the second round of elections in France. The party is pulling no more than 4% of the vote and the combined share of all the leftist parties is at slightly over 20% (Greens at 7.0% and the far-left France Unbowed at 10%). The race will be between the center right and the far right. It matters to Europe as the French left was the champion for a whole host of reforms around labor and the environment as well as foreign policy. The anti-US sentiment came from the left as has the anti-German positions taken within the EU. – CK

US Domestic Economic Items

·         Issues to Watch in This Week’s DataMost of the data this week will focus on inflation. There will be a report from the Consumer Price Index on Wednesday and expectations are that it will top 7.0% for the first time since 1983.

The reasons for the surge in inflation are all too familiar at this point. It is supply chain, wages, money supply, reduced productivity due to the pandemic and so on. The CPI is not generally the measure the Fed pays most attention to as they prefer the Personal Consumption Expenditure numbers as more accurate, but the PCE is slower to be released as it has to be computed based on what consumers have actually done with their money.

The CPI is current, but its weakness is that it is based on a “basket of goods.” This is supposedly what the average consumer buys but the reality is that there is no “average” consumer – especially now. The basket for a Boomer will be very different from that of a Gen-X or Millennial or Gen-Z. Some generations are feeling inflation threats more than others.

On Friday there will be reports on retail sales and these are expected to be down somewhat as consumers confronted shortages. The retailers reported good traffic but reduced purchasing as people simply could not find the items they were looking for. This affected the online retailer as well as the brick-and-mortar store.

There will be some global reporting on inflation as well. China’s consumer price index is expected to show a 1.6% gain over a year ago but that is slower than the pace seen in November when it hit 2.3%. The most serious inflation has been seen in their producer price index which hit a 26 year high in October. In November, the increase was at 12.9% and it is expected to fall to 11.2% this month. This is still high but trending in the right direction. Much of the inflation in China has been due to food shortages and the impact of the pandemic on productivity. – CK

·         The “Anti-work” Movement It has been observed that the quit rate as measured by the JOLTS (Job Opportunity and Labor Turnover Survey) report is as high as it has been in years. Nearly 4.6 million people have quit their jobs without having a next one lined up. This has long been seen as a sign of a strong labor market as it suggests that people are confident they can get a new job at any point.

There are still many that are quitting so that they can make another choice of employment but there is a new phenomenon that is gaining traction – an “anti-work” movement that is picking up speed on various social media outlets.

Members of these forums are venting about all the things they hate about work – their bosses, their co-workers, customers, the hours, the interruption of their social life and so on. They urge others to quit and vent as well and thousands upon thousands have done just that.

Assuming that those who are quitting still need to earn income in some way the question is how they are going about it. Many were getting government aid during the height of the stimulus effort but much of that expired in September. There remains a large population of people getting aid but no more than was common prior to the pandemic. There are new alternatives to holding a traditional job and these are changing expectations for some in the workforce.

Much has been discussed as regards the growth of the “gig economy” and that has played a major role in the ability to quit traditional activity. The most commonly cited version is the ride share platform but there are many other options that essentially cobble together part-time jobs into some sort of income. These generally appeal to the younger worker who doesn’t yet have many obligations like mortgages and kids but it also appeals to the older workers who have retired and are seeking supplemental income. The assertion is that those between 30 and 65 are much less likely to embrace the gig approach- at least voluntarily.

The “anti-work” aspect of this development is an example of the leverage shift that has taken place in the last couple of years. The labor shortage has made employers far more tolerant than in the past as they can’t find workers to replace those they lose. The behaviors that might have gotten somebody fired or disciplined are overlooked – for the time being. The expectation is that the balance of employment power will shift in the coming years and that tolerance will likely end as jobs become scarce again. – CK

Global Economic Items

·         Trends to Watch in Global Trade – This is shaping up to be a critical year as far as global trade is concerned. For the last two or three decades the perceived wisdom held that globalization was a given and would only accelerate in terms of its importance and influence. It is clear that much of what has been termed globalization is indeed a permanent feature but there are major elements that are changing and likely on a permanent basis. More than a few of these changes have been anticipated for years and the pandemic accelerated the timing of these adjustments.

Top of mind has been the breakdown in the supply chain. The cascade of issues are pretty familiar by this point but the key question remains. Is this a temporary situation or one that has been developing for years and will likely take years to correct?

There are basically two schools of thought – the side that attributes the problem to temporary consumer durables demand and the side that asserts this is a supply side rupture that will not be easily repaired. The demand side argument is that trillions in stimulus money combined with a consumer desire to resume old patterns overwhelmed a system that had all but shut down during the 2020 recession. It has taken a long time to get back to normal production and that process has been made more difficult by the ongoing pandemic. Every time it seems that production and transportation might be getting back to normal there are another set of restrictions and protocols to overcome. The huge stimulus overhang has dissipated almost completely and that should slow demand enough to give the producers an opportunity to catch up along with transportation providers. Those looking at the demand side assume there will be real recovery by Q2.

Those that assert the supply chain is irrevocably broken point at a number of other factors that have played a role in the past year. There are the mounting geopolitical tensions that have made China a great deal less appealing to risk averse companies.

There is the “trade nationalism” that has become more common in the US, Europe and in many other nations. This is the desire to reduce imports and beef up exports by producing more and more at home. This can be good for those domestic producers who have been competing with imports, but consumers will see higher prices as they lose access to the less expensive imports, they have become accustomed to. Technology and robotics have evened the global trade playing field and placed greater emphasis on the ability to react quickly to customer demands. This supply chain theory holds that the entire system is being reevaluated and changed on a permanent basis.

A second trend to watch in 2022 will be government intervention around trade. Politics has always played an enormous role in trade but that stands to intensify in the coming year. Trade deficits worry people even as they really shouldn’t. A deficit is a bad thing in the minds of most but in terms of trade it means a country is getting goods at a cheaper price and that benefits the consumer. Were it not for imports, the average US family of four would be spending between $8,000 and $10,000 more on goods than they do now.

The US has shifted further towards economic nationalism and so have the Europeans and Asians. This is not only aimed at rivals such as China but to long time trade partners such as Canada and Mexico. The US effort to boost the purchase of EVs has led to a tax provision that rewards buyers with a $7500 tax break if the EV is made in the US (and an additional $4500 if it was union made).

There is a race to build semi-conductors in the US as well as dozens of other products deemed vital. Generally speaking, government attempts to manage trade and create industrial policy create more problems than they solve and at a very high cost.

The third trend to monitor in the coming year is the increasingly hostile competition over dominance in Asia. The US wants to reestablish itself as the key trade partner for the Asian states but has been largely unable to do so. The best opportunity to freeze China out to some extent was the Trans Pacific Partnership that was put together in the Obama administration. The TPP was shot down by Democrats that feared opening up opportunities for Japan and South Korea and the nail in the coffin was President Trump’s rejection as some kind of move against China (even though it was aimed at curtailing China).

The Asian states have a natural connection to trade with China as they supply everything from commodities to parts and assemblies. They also buy a great deal from China. As much as they would like to balance that Chinese influence, the US has been a very unreliable trade partner. The US wants to blunt Chinese influence but shows little desire to undertake policy that will lure nations away from China. The weak gestures that have been made thus far only served to make potential allies less confident. The Chinese are directly threatening Taiwan and the South China Sea, and the US response has been extremely weak. The real fear is that China will be emboldened by this weakness and will test the envelope more aggressively – to the point of creating a major crisis the US will have to respond to.

The fourth trend is really the lack of a trend. There are very few trade deals of any note in the works – anywhere in the world. The US and Europe have buried the hatchet a bit when it comes to the Boeing-Airbus dispute and the tariffs imposed by the Trump Administration on steel and aluminum, but that has not moved the US and EU any closer to a new trade deal. There is nothing brewing in Europe or Asia and even the smaller nations seem to be quiet. The WTO will likely have its meeting in the summer (it was delayed by the pandemic) but there is little anticipation of anything significant being accomplished. The world has simply not been focused on trade – all part of that economic nationalism. – CK

Geopolitical Items

·         What Could Lithuania Teach Us About China/Taiwan?   Lithuania is being punished for recognizing Taiwan, something that China has warned many countries about. Lithuania made a decision last year to allow Taiwan to open an embassy in Lithuania, and now the repercussions are being launched at the country.

The problem is that China still claims that Taiwan is a renegade province and that it will eventually be reunited with the mainland. It gets very upset when a country does something to give the Taiwanese Government autonomy or authority, as if it were an independent country.

Taiwan obviously considers itself to be independent and believes that it earned its freedom after the civil war in 1949.

China is hitting Lithuania with heavy sanctions including recalling its ambassador, banning inbound cargoes headed into China from Lithuania, and the Chinese Government is now pressuring manufacturers in the country to stop using component parts from Lithuania.

Lithuanian exports to China accounted for $357 million in 2020 (out of $55 billion in GDP).  At those levels, it is a significant amount for the small country and will carry a significant impact to the local Lithuanian economy.

The US has weighed-in on the situation and has asked China to not impose such stern sanctions on the country. 

But more importantly, it reinforces China’s gameplan for a bigger, broader approach to its relationship with Taiwan and punishing anyone that cooperates or recognizes Taiwan’s independence.  China can only afford to take these stringent actions with smaller countries so as to not impact its economy too dramatically.  But more of these types of reprisals could follow – and it becomes an interesting geopolitical event to watch as we gameplan how China will react in 2022 as Taiwan flexes more independent muscle. – KP

Supply Chain Items

·         Ningbo Impacts Could Mount to $4 billion per WeekThe COVID-related challenges that we mentioned last week in Ningbo (one of the four busiest ports in the world) are estimated to impact approximately $4 billion of trade per week according to one analyst firm.

Container price increases could be coming once again, more disruptions are possible. Container ship lines were reporting different experiences with port operations around Ningbo and Shanghai.  A few larger maritime firms have reported no difficulties in processing and moving freight and very few delays as a result.  But at least one of the four largest container lines in the world stated that activity was indeed delayed and the unexpected disruptions from lockdowns and quarantines of staff was having a significant impact on throughput. Again, it was reported last week that there were as many as 100 ships anchored off the coasts of the two primary ports in China, a story that sounds all too familiar.

Rates for shipping containers between China and the United States have fallen from $20K per TEU last summer to about $12K per TEU in January.  But analysts don’t believe that this price will hold.

Shippers are scrambling to get their products to ports prior to the Lunar New Year celebrations and COVID has impacted inland distribution systems to a degree. Analysts believe that this will tighten outbound capacity coming out of inexpensive areas of China (inexpensive from a freight handling perspective) and that higher operating costs for carriers will pass through to shippers. – KP

·         The Good and the Bad of Omicron on Shipping. Not that any virus is a good thing, but there are some good and bad features of Omicron that make it something to watch, but perhaps not something that forces us into long-term changes in strategy or planning. The ports of New York / New Jersey are giving us an interesting perspective on the risks of Omicron, and the upside.

Two of the busiest ports in the country managed to weather last year’s maritime backlog nightmare that hit many other ports. The West Coast saw a hundred ships or more anchored for weeks before it was able to start getting freight processed.  But fortunately for the northeast, the ports in and around New York managed to get through the period without too much delay.

But that is changing.

Omicron is spreading so fast and people with vaccines are coming down with it – even if they aren’t sick. But the quarantine orders pull them out of operations for at least 5 days (under new CDC guidelines), and that’s creating a problem.

A backlog of ships is starting to back up off the coast of New York. Part of this is due to a strong inbound wave of freight headed to the country, but it is primarily the result of absenteeism at the hands of Omicron.  Just like we see across the health care and airline sector (only because they are most publicized), shortages of workers are starting to create a material impact on throughput.

The bad news is that Omicron is now taking a toll on businesses and causing disruptions. And the ability to predict when, where, and how deeply Omicron will strike an area is very difficult. That’s the downside.

The upside is that these disruptions seem to be short-lived. We could be seeing a peak in the United States this week or next, and this could be one of the final stages that help lead the country into more of a herd immunity situation.

But for now, if you are running a supply chain, this is just one more disruption that you will need to work your way through. – KP

Consider This:  Personal Thoughts and Insights from Chris and Keith

·         Life Lessons from Watching Home Improvement Shows.  Now that the holiday season has come and gone, I am less inclined to escape through those Hallmark fantasies and my “go-to” for leaving the turmoil of the world behind has become the home improvement show. I watch these all year of course and I have my favorites but all have some very important lessons to impart.

The first is that there is nothing more fun and satisfying than tearing something apart. “Demo Day” is always the highlight of the show as atrocious bathrooms meet the sledgehammer, funky carpets are ripped asunder and whole walls succumb to saws, crowbars and feet. A very productive means by which to vent frustration I would assume.

The second lesson is the work should best be left to the professionals. I am well aware that many people are far more skilled at DYI than myself and I have always felt more than inadequate on that count. Once upon a time I was willing to try this stuff as I was a renter. Once the home was mine, I dared not attempt this kind of activity and am quite content with letting those with the skill do the job. I watch what these people are capable of creating and can only be in awe.

The third lesson is that people are REALLY different. Not that I had not noticed this before but when you see what people put in their homes all one can do is stare in disbelief. My tastes run towards what my wife describes as “country French” or perhaps “Tuscan.” Stark and modern looks too much like a hospital waiting room to me. As they say – to each their own.….- CK

 The Flagship: An ‘Officer of the Watch’ Briefing

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