BUSINESS INTELLIGENCE BRIEF
June 28, 2016
NATIONAL AND INTERNATIONAL NEWS
AFFECTING LOCAL BUSINESS
Short Items of Interest – US Economy 
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Defining the “Gig” Economy – To be honest we don’t even really know what to call this. Some refer to it as the “sharing economy” or the “digital economy” and there are many others. All we know is that we have something that is quite different from what was normal in the past. The Commerce Department is now trying to apply some definitions so that it can be measured to some extent. The four characteristics are assumed to be 1) using mobile apps to facilitate peer to peer interaction, 2) reliance on user based evaluation for quality control, 3) maximum flexibility for workers as far as working hours, 4) reliance on workers to provide their own tools to do the job. (More on this in this week’s Black Owl Report) Lessons Learned – Or at least we can only hope they will be learned. There is a distinct sense of unbridled anger and frustration in the global electorate and we have just seen something happen that was never supposed to. Even those who voted to leave are now telling pollsters that was not their intent – they just wanted to protest. The point lost in all the commentary thus far is that the EU has been doing a pathetic job for years and is generally disliked throughout Europe. The US is in the midst of that protest as well. It is hard to find people who actually like Trump but he is the GOP candidate because he embodies that frustration and anger. The voter is sick of what appears to be a fixed and rigged system that takes care of everyone but them and that voter is fully capable of doing what many would consider unthinkable. Workforce Dropouts – The steady erosion of the rate of labor force participation is an issue that evokes a lot of comment but precious little policy. The reasons for the reduction are clear enough – too few people qualified to take the jobs on offer. Fixing this is anything but simple as it means motivating business, government, the education system and the workers themselves to change much of what they are doing now in order to develop a whole new plan designed to train people and fill these positions. Short Items of Interest – Global Economy 
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Negotiations to be Bitter – The US swooped into Europe and sought to calm the situation as John Kerry urged a cautious and measured response. He has been ignored and essentially asked to mind his own business. Europe is angry and seeks what amounts to revenge. They have been listening to the UK complain about Europe for years and they have tolerated the condescension and insults. Now they want the Brits out immediately and have no interest in trying to make the break more tolerable. They will take economic and political hits before giving Britain anything at all. German and French leaders are the key and they are as bitter as they can be – not even watching their words in public. Language Wars – Among the changes that could take place in Europe is the abandoning of English as the common tongue. There is now a proposal that only German and French be used officially in the EU and that English be demoted. There are already schools that are dropping English and will focus only on “European” languages. Brazil Tries to Prepare – The Olympics will either provide a respite from the travails that have beset Brazil or it will be the nail in the coffin. The city is not ready to accommodate the people coming and the venues are not ready either. The poor are increasingly frightened as they assume the police will attack sooner than later as they always do. The country wants the favelas (slums) out of sight and mind and there are always many more killings as events like this occur. The security of the Games is a concern and many assume there will be terrorist incidents of one kind or another. The government is begging for an IMF rescue and the economy is in the midst of a full scale recession. The government is weak with a temporary leader while Rousseff undergoes her impeachment trial. There is a feeling of impending doom that is only offset by the fact that Brazilians will always rise to the occasion when there is a party at stake. They have rescued Carnival every year and they may find a way to rescue the Games as well. [Type here]
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Things Happening – Other than Brexit
Not everything in the world is tied to Brexit – although it can be asserted that for the time being there is more that is being affected than not. As with most unexpected and major developments there will be a period of digesting before it is possible to offer much in the way of definitive analysis. There are already signs of recovery in the financial markets – at least in Asia and the US. Things look a lot better in Europe and the UK but the plunge was steep and even these signs of progress are limited. The world as a whole is reacting but there are other issues to consider and these tend to point in diverging ways. Analysis: Yesterday the heads of the world’s central banks met and the agenda was dominated by the Brexit vote although that was not the original focus. The central banks are all facing much the same dilemma. They have been engaged in all the traditional activity expected and they have been doing this for several years now. It hasn’t worked as expected and hoped and the issue is what they can possibly do now. The interest rates are at rock bottom, there have been all manner of attempts at quantitative easing and even the use of negative interest rates but thus far to no avail. The meeting didn’t have an opportunity to address this problem in any depth but frankly the central banks have really reached the end of their rope as far as shifting the economies out of recession by themselves. Today there will be some other critical meetings. The European Union will have the first formal meeting after the Brexit vote and fireworks are expected. The British leaders in attendance never wanted this outcome and it is now clear that many in the UK are having an acute case of buyer’s remorse. Meanwhile the Europeans are furious and many want the British out as soon as humanly possible. The British assumed they could take their time and use the two‐year window established in the agreement but most of the major economies in Europe are asserting they want the UK gone by the end of the summer. The actual timing will be somewhere in between. This is also the day the Commerce Department releases the third version of first quarter GDP and it is expected to be close to the second iteration – maybe just slightly higher. The current estimate is 0.8% growth and that is considerably less than had been expected at the end of last year. Frankly most analysts have moved on and are much more interested in the second quarter as there seems to have been a partial recovery. Not that growth at around 2.3% is cause for dancing in the streets but at least there is some discernible progress. Some of the biggest data releases will come at the end of the week as the various Purchasing Manager’s Indices are released. There will be the version from the Institute for Supply Management which focuses on the US and there will be the versions that come from Markit that deal with a couple of dozen other countries. The ones that will be watched most closely will be China, Japan, Germany, France, the UK and Brazil. The European PMIs will be duly noted as the data was collected prior to the Brexit vote and there will doubtless be some bleak comparisons to what will be seen next month. Last month the PMI notched its third straight month of modest improvement with a reading that was 0.5% better than it was the month prior. It now sits at 51.3 and the New Orders index is sitting at 55.7 – a 0.1% decline from what it was in May. The hope and expectation is that there will be additional growth but the reality is that there will not be all much change from the prior reading. The manufacturing sector has been struggling against several headwinds and now there will be fears of what the Brexit mess is going to mean for the next month’s readings. The word of the day seems to be caution and there is no reason to expect much to change – at least in a good way. The Credit Managers’ Index is also due out this week (as soon as I write it). The data shows another month of decline after six months of gain and that is worrying as far as the future is concerned. We will provide a full write up of the CMI in tomorrow’s edition of the BIB. Tomorrow the Commerce Department releases data on spending and wages and for obvious reasons these are closely related. There will be a lot to note in this report given that two thirds of the US economy depends on the spending of the consumer sector. The last few months have seen slow growth in wages although not at nearly the pace that had been expected. The fact is that some parts of the country are struggling to find workers and are paying them more and that skews the national data. There are many jobs available and they pay well but require skills that are in short supply. This report also included the data the Fed counts on to gauge inflation. We have already seen some movement in the Consumer Price Index and the Producer Price Index but the data the Fed likes comes from the Personal Consumption Expenditures. Thus far nothing has suggested that prices are going up and the Fed will continue to miss its target inflation rate of around 2%. That also means there will be little pressure to hike rates. There will be additional data on car sales and this has become an all‐important number. For the past two to three years it has been the automotive sector that has supported the US economy – sales hit a record 17.5 million in 2015. The sales numbers this year have been solid enough but not as robust as they were last year and the data for May was surprisingly weak. The big issue now is whether these May numbers were an anomaly or the signal of an end to that sales growth. Thus far the demand has been holding up but the fact is that most of those who wanted or needed a new car have made that purchase. The consumer has been cautious about everything else so it stands to reason that this caution would finally make its way to the auto sector. Finally, there will be additional housing data this week. The Case Shiller index will be released today and that will show whether the price of homes is still going up and at what pace. On Wednesday there will be a new report from the National Association of Realtors and this will be watched to see if there is continued demand on par with what has been the case thus far this year. Last month the sales of existing homes went up and hit a nine year high. It is unlikely this pace will be matched this month but the hope is that it didn’t fall all that far. The new home sales have been solid but not this spectacular – at least not in most of the markets. [Type here]
Market Turmoil
Thus far the global markets have lost over three trillion dollars since the Brexit vote and that is a record that surpasses the collapse in 2008‐2009. Granted, the fall that led to the recession was much longer in duration and ultimately cost far more than $3 trillion but the speed of these recent losses are unprecedented. The bottom line is that nobody really believed the vote would go this way. The polls had the “Stay” position ahead by between 5 and 7 points – right up to the last minute. It is more than a little astonishing that most of the investment community had failed to put contingency plans together in the event the “Leave” position won but that was indeed the case. Much of the distress in the markets was due to frantic unwinding of positions that would be vulnerable to the Brexit. In the days that followed, the motivation has shifted towards trying to figure out who will be hurt by this and who might reap some benefits. The BMI (S&P Global Broad Market Index) fell by 6.9% and that is worst performance since the collapse in 2008. The S&P saw the third worst two‐day drop it has ever seen and the benchmark US index has lost 5.37 in the last few days. Developed markets took the brunt of the decline with a loss of $2.8 trillion while the emerging markets lost just $179 billion. The scary part is that this is likely to be just the start as there is a lot of chaos to work through before anyone has a sense of what happens next. The pound hit a 30‐year low and has only started to recover. The euro also fell and that has meant a far stronger yen and dollar and neither the Japanese nor Americans have any desire to see their currencies gain. Analysis: The pressing question is, of course, what now. This is at the heart of the volatility. The British did not anticipate this despite the polls that suggested such a development was possible. After all, both of the major parties were pushing for a “stay” vote. This is what has many so worried. Both the Conservatives and Labor lost control of their parties. The Tories knew full well that there were significant numbers of Euroskeptics in their midst and over the years the leaders have actively pandered to that part of the party. Some of those who cast a wary eye on the EU were genuinely motivated by the economic issues and resistance to the bureaucracy but many were focused on immigration issues almost exclusively. The Labor Party has long been supportive of the EU and has been pro‐stay from the start. The shock to the Labor hierarchy is that many of the rank and file members supported the “leave” position and the majority of them did so due to their opposition to immigration. These were often the people who feared job competition the most and they are often living in the same places the immigrants settle so they worry about cultural change as well. The current crisis is magnified by the fact there is no secure leadership in either party. David Cameron has resigned and will be out by October. Jeremy Corbyn asserts he will not leave the Labor Party leadership but his supporters are few and most of the shadow cabinet has bolted and are demanding he step down. There is no group organized around what to do about leaving Europe – there is no plan in place and not even a serious debate over what this should be. This leaves everything unsettled and that inhibits any sort of financial sector recovery. Tanzania and the “Bulldozer”
This is another of the African states that should be doing far better than it is. Tanzania is chock full of resources that range from gas to minerals. The population is better educated than most in the region, it has port facilities and a young consumer base that could be developed. The problem is the same as has been the case through most African states – corruption. The wealth of the nation has been siphoned off for decades and nobody has cared to do much about it. The vast majority of those who work for the government got their jobs through patronage appointment and most do not even bother to show up for work. Analysis: Last October the country elected an unexpected candidate – one that had limited ties to the parties that have long dominated the country. He is nicknamed the “bulldozer” as he has a reputation for getting things done regardless of who stands in his way. John Pombe Magufuli was a mid‐level Minister but one who tried to root out corruption in his own department and since becoming President he has been ruthless. Within hours of becoming the head of the country he fired hundreds of people working for the government and is still doing so. He has been appealing directly to the people who have been denied any of the riches that have come from the country’s expansion but he has ruled almost as an autocrat and some fear he will go too far or be corrupted himself. For the moment he is the hero of people tired of grasping politicians and corruption on an epic scale. The Black Owl Report – An Executive Intelligence Brief
There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact [email protected] and we will start a one‐month free trial – there are no obligations – just an opportunity to see additional publications.
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Partners
We know that we can’t really do much alone. We tend to prize our independence and all but the fact is that we rely heavily on those who are our intimates – friends and especially family. Those who have support from that group will be far more likely to overcome the challenges thrown every day. I have seen people with very solid relationships with their spouse and their parents and even their children (amazing!). There are also those who have friends that really do have their backs. Then there are those who lack these relationships and they struggle mightily. Perhaps the most important relationship a person can have is with their spouse. The home has to be a refuge, a place where one is understood and appreciated and allowed to be themselves. It has to be a place to relax. When there is tension there is none of this and over time it wears people down. In that environment people become angry or they just give up. Their life is just something to be endured and no longer promises any sort of respite at all. I have seen this erosion within my own family and it is heartbreaking. I have extolled the virtues of my singing, cooking, gardening wife on more than a few occasions and I love her for all that. These are not the most important traits. It is the unwavering support. I travel too much and leave her alone to handle the household too much. I work too many hours and my schedule is the dominant one to which she has to adapt. The world frequently makes me grumpy and I am not gifted with a lot of patience anyway. She seeks ways to smooth out the edges. I do my best to recognize what she does for me but the reality is that what I do for a living is challenging to a relationship and I am not easy to live with. She offers that same support for her sons and grandchildren and sister and I am always amazed at her capacity for tolerance and understanding. Would that more people could learn to be like her. Check out the Black Owl Report
San Andreas Fault Moving? There is a report circulating that may or may not have an element of truth in it. Scientists at the University of Hawaii have found a way to eliminate “white noise” out of movement data along the San Andreas Fault. That’s the big story. At times, when scientists measure the movement in a fault line, they get “noise” from precipitation and sub‐surface moisture, drought, etc. Therefore, when they see one side of a fault “moving” (being pushed up on one side or the other which can ultimately create an earthquake), they don’t know whether it is because of tectonic shifting or other factors. One can certainly cause an earthquake, the other conditions might not. That’s the great news in the entire story, that scientists now have a technology that can filter out white noise and see true movements in the plates. Now for the secondary story (which has captured all of the headlines and the one that you might be most interested in), they were watching the San Andreas Fault and have found some interesting new data concerning the movement of the fault. Nature Geoscience published the chart at right which shows the various direction of movement along the fault line. The red dots signify upward movement; the blue dots signify a dipping or diving of the fault line. What scientists found when they mapped it was that the fault looks a little bit like it is crumbling. It’s tough to predict, but as one would expect, the areas where the two plates are coming together is getting pushed up slightly, despite the two plates moving primarily lengthwise against one another – rather than colliding and pushing one under the other. Too many media outlets are using this recent detection of movement as a reason to predict “the big one” for California. Scientists are quick to point out that these types of movements have been happening over time and they don’t always result in a major earthquake. What they found most importantly is that there is “significant variability” in the areas of the fault that are rising and falling. That’s obvious in the graphic from Nature Geoscience. Scientists did say in a Forbes article that the southern portion of the San Andreas Fault has not seen a significant “release” of energy since the 1857 7.9 magnitude quake. It’s a little difficult to see in the map at right, but the area along the US West Coast has not seen the major release of energy that we have seen around the rest of the Pacific plate. This is not anything new and we aren’t telling you anything that you don’t know. Perhaps the collective group of smaller earthquakes serves as a pressure relief valve of sorts helping to diminish the threat of “the big one”. To subscribe to the Black Owl Report, go to www.armada‐intel.com/paypal [Type here]
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