The Independent Investor: China's role in Iran
The de-escalation of the potential conflict between Iran and the United States sent markets higher this week. It could have turned out much differently. The question is why did the situation defused so rapidly, and who really is responsible for that outcome? I'm thinking it was China.
Taking out the number two guy in Iran, Maj. Gen. Qassem Soleimani, in a U.S. drone attack last week was a highly provocative move. The world expected push-back from Iran and feared a tit-for-tat escalation on both sides. That didn't happen. Sure, the Iranians did lob a dozen-plus missiles at two military bases across their border into Iraq, but relatively little damage resulted from that attack.
The following morning, the president seemed to offer an olive branch to the Iranians. It wasn't quite a kiss-and-make-up moment, given we slapped more economic sanctions on them, but it was dovish enough to calm the nerves of global investors.
Investors feared that, at the very least (after last year's Iranian drone attack on Saudi Arabian oil facilities), Iran would respond by either more of the same or attempting to shut down shipping through the Strait of Hormuz. For those readers who aren't familiar with that strategic piece of real estate, the Straits accounts for 35 percent of all seaborne oil traffic, or about 20 percent of oil traded worldwide.
Of all the major powers that could have been hurt by such an action, China stands out as the potential number one casualty in a war of escalation. China is the world's top importer of oil, buying 41 million tons, or more than 10 million barrels a day, with Middle Easten imports accounting for over 45 percent of that total.
China's imports of Saudi oil are at record levels (up 53 percent since 2018), thanks to the decline in Venezuela's output and the impact of America's sanctions against Iran. As of this year, Saudi Arabia replaced Russia as China's number one importer of energy. Iraq is also an important supplier and, although Iran‘s oil exports to China have declined by more than half, they are still substantial.
Given China's reliance on this energy pipeline, ensuring that the Straits of Hormuz remains open is as much in their strategic interest as it is in our own. And when China speaks, Iran listens. Readers may fail to realize how deep and long political and economic relations have existed between these two countries. The two nations, for example, were instrumental in the development of the ancient Silk Road of Marco Polo fame.
In the modern-day era, the break in diplomatic relations between Iran and the U.S. in 1980 only brought Beijing and Tehran that much closer. Trade blossomed in the decades since with petroleum products exchanged for imports of clothing, vehicles, electronics, chemicals, household appliances, telecommunications equipment and, from a strategic perspective, arms and influence. Since 2010 (the sanction era), when the U.S. and the United Nations imposed all sorts of sanctions on Iran to deter the country from building nuclear weapons, Iran's dependence on China escalated.
Bridges, subways, ports, highways, schools, hospitals and so much more in infrastructure projects have been planned, engineered and built in Iran, thanks to China. As in other nation states throughout the world, China has used their expertise and funding in infrastructure projects to cement economic and political ties to countries like Iran.
On the diplomatic front, China, along with Russia, has been against sanctions and trade embargos levied on Iran that hurt their own economic interests. But, at the same time, they do not want to see an Iranian nuclearized threat in the Middle East either.
As such, China has long been willing to be the negotiator behind the scenes, trying to forge peaceful solutions to the issues at hand. Just a week prior to the U.S. assassination of Soleimani, the Chinese, Iranian and Russian navies were conducting joint exercises. A week later, China's Foreign Minister, Wang Yi, was on the telephone with Iran, Russia and France while Yang Jiechi, the country's top diplomat was urging Secretary of State, Mike Pompeo, not to start a regional war in the Middle East.
I would expect that next week's signing of the Phase One China trade agreement here in the U.S. will be accompanied by further diplomacy by China in reducing tensions between the U.S. and Iran, so stay tuned.
The Independent Investor: Why Is Inflation so Low?
The inflation rate has not been a cause of concern in this country for well over a decade. On the contrary, economists have been worried that the opposite might occur, a bout of deflation.
Throughout the last decade, inflation has averaged no more than 1 1/2 percent, which is well below the Federal Reserve Bank's targeted inflation rate of 2 percent. Historically, that is highly unusual, given how economics are supposed to work. Central banks around the world (although they don't like to admit it), have no idea why the inflation rate is as low as it is. Neither do global economists, or Wall Street strategists.
World economies continue to grow, and interest rates remain at historically low levels, the previous correlations between inflation and economic growth have somehow gone awry. It's as if the basic economic laws of supply and demand no longer apply.
Usually, when economic activity is rising, there is more demand for goods and services, which pushes up prices on almost everything. In order to produce more, there is also a greater demand for workers. But in a historically low unemployment rate environment like we have now, companies can't find skilled workers. As a result, wages should have risen dramatically to keep and/or attract workers.
Here in the U.S., wages are one of the key variables in determining the inflation rate. And yet, while wages have increased about 3.1 percent year-over-year, this has had little impact on the inflation rate. Those demand pressures in any other cycle would have had a much greater impact on the inflation rate, but not this time.
There are several theories going around to explain this phenomenon. As a result of a decadelong low rate of inflation, for example, people now expect inflation to remain low and stable. Therefore, there is no reason to buy that widget now because the price may actually go down (not up) in a few weeks or months.
Globalization may also be partially to blame. Greater trade in goods and services, and tighter connections between financial markets worldwide, may be influencing the U.S. inflation rate more than we know. If, for example, another region's economy is slowing, or simply not growing as fast as our own, there could be a dampening effect on prices and wages worldwide.
Continued breakthroughs in technology, as well as continued global competition in labor markets, could also be improving productivity, capping wage growth, and in the process, keeping inflation lower than in the past.
And let us not forget the source of all this data on inflation: the world's governments. Statistics are based on data and the means and methods of acquiring and compiling this information is constantly evolving. Who is to say that the government's numbers accurately reflect the real inflation rate?
Think of how the U.S. government's official Consumer Price Index (CPI) differs from the real world of prices that we face every day at the supermarket, or the hospital, or in tuition fees for our kids. In any case, there are few, if any, arguments that inflation is about to spike in the year ahead.
The Independent Investor: Investors Ignore Impeachment
Abuse of power, obstruction of Congress; these are accusations that ordinarily evoke sharp emotions among Americans. Yet, the financial markets have barely blinked, if they have paid attention at all. Why?
The short answer is that investors have done the numbers and calculated that Donald Trump has less than a snowball's chance in hell of being impeached by the U.S. Senate. For those who don't follow the actual political process of impeachment, once the Congress voted to impeach the president, the next step is up to the Senate. They are required to hold a trial to decide whether to remove him from office. A two-thirds majority is required to convict and then remove the president from office.
Trump is only the third president (after Andrew Jackson and Bill Clinton) to be impeached by the House. However, Trump's predecessors were acquitted in the Senate. And therein lies the reason investors are ignoring the event. Republicans hold the majority of seats in the Senate (53 seats). In order to get a conviction, 20 Republicans would need to join the Democrats' entire minority of seats to pull off a palace coup. That's not likely to happen.
Now, while the country is roughly split down the middle by those who believe impeachment is the only solution to end the reign of America's Mad King, an equal number of Americans believe that President Trump is an innocent victim who is being nailed to the cross of political partisanship by the Democrats. None of that matters to the markets.
The only question financial markets care about is "can money be made from this event?" Given the answer is no, (not directly) global traders focus on things that can provide an immediate return. Next month it will be the chances of a Brexit, the signing of a Phase One China/U.S. trade deal and the prospects for earnings in the first quarter.
I understand that the market's disregard of social issues rubs many Americans the wrong way. To be sure, it bothers plenty of Wall Streeters as well, but righting wrongs is not the mission of financial markets. It never has been.
Plenty of people, including the president, in my opinion, get confused on this point. Every time the stock market hits a new high, a tweet from the White House follows shortly thereafter. It appears that the president attributes the market's gains to some policy or action he has taken or may take. His view is that the market is a better and more accurate indicator than voter polls. And he is correct, as long as the action or policy is something investors perceive will move the market. Good or bad, traders will respond, otherwise it is ignored.
Markets don't care if immigration policy is changed, for example, unless it has an immediate impact on prices. Trump can fill containment camps to the brim. He can kill, maim, and starve whomever he wants, but markets won't care unless money can be made (or lost) over it. Markets do not approve or disapprove of the impeachment of President Trump. They just don't care.
That's why financial markets need to be regulated. If the most profitable business in the world is building and selling nuclear weapons to terrorists, the markets will do it, if they can get away with it. It is society's responsibility, through their governments to make sure that does not happen. Right now, few if any market participants are enamored with either Bernie Sanders or Elizbeth Warren.
Both candidates are proposing policies that Wall Street fears might curtail or change the game for everyone in the economic arena. People in the financial markets worry that they will make less money, or worse, actually lose money, if either are elected. As such, they will oppose everything those candidates do.
It is nothing personal. In fact, some trader or other might actually approve of their social platforms. And if suddenly one of them proposed something that could make investors lots of money, you would see Wall Street change their tune. It is the nature of the beast, so you might as well get used to it.
The Independent Investor: Business of Santa Claus
As we approach that most joyous of holidays, the image of Santa Claus greets us in every nook and cranny. From television commercials to internet greeting cards, "Jolly Old St. Nick" is a ubiquitous figure. What you probably didn't know is without American business there probably wouldn't be the Santa Claus of today.
Santa and business go back a long way, but before you ask, the answer is no, Coca-Cola did not invent Santa Claus, although they will celebrate their 100-year anniversary in 2020. This modern-day, cherry-cheeked, fat elf of a figure has been best buds with the owners of many U.S. enterprises. Montgomery Ward, Macy's, F.W. Woolworth, General Electric and dozens, if not hundreds, of other businesses have made Santa the elf he is today.
Back in the day, "Sinterklaas," the Dutch name for a monk named Saint Nicholas, was the stuff of legends. His kindness and compassion were his claim to fame among the Christian faithful, and through the centuries he became known as the protector of children. His myth emigrated to America from Europe in the early 1800s.
Christmas at that time was a great big drunken party over here, especially in New York. Remember, it was the beginning of the Industrial Revolution, and the differences among the social classes in the U.S. was as large as it is today. Bands of tough, working-class young men, rowdy and often-times angry, would roam the city blocks, going from home to home, demanding
handouts from the rich. Often, these gangs would "wassail" (sing) bawdy tales at the top of their lungs in the process.
History credits a number of figures, from John Pintard of the New York Historical Society, to Washington Irving, to Clement Clarke Moore, who took it upon themselves to "tame" Christmas for the American masses. "A History of New York," published in 1809 by Irving introduced a more benevolent St. Nick, while the 1822 poem, "A Visit from St. Nicholas" ("Twas the Night before Christmas") by Moore attempted to hone in on the exact time and date of the modern-day legend we call Christmas.
The American version of Christmas continued to expand through penny press publications and women's home magazines. These publications were an early version of both marketing and advertising. The notion of Christmas trees, for example, can be traced back to Godey's Lady's Book that featured Queen Victoria and the royal family gathered around one such tree.
In 1841, a Philadelphia store created the first Christmas blimp of sorts (a life-sized model of Santa) as a marketing effort to draw kids and their parents into their store. In 1862, Macy's introduced the first "live" Santa. An army of Santas soon followed, creating an entirely new business in America. But Santa still lacked the vigor of today. He was most often depicted as a small, elf-like figure, grim and serious (sort of like the Grinch with a red suit and a white beard).
It took the marketing efforts of Coca-Cola to transform Claus into the Santa of today. He was first featured in Coke's advertising in 1920, and within a decade became a staple of their holiday advertising. The company hired an illustrator, Haddon Sundblom, to create a more "wholesome" image of the big guy that would sell in America. It worked so well that just about everyone adopted Coke's version of Santa Claus.
But Santa isn't the only figure that business created. Rudolph the Red-Nosed Reindeer was a marketing effort by the department store, Montgomery Ward. They used one of their own copywriters, Robert May, to write a children's book that the department store could give out to the children of their customers. Millions were given out in the first year, and many millions more have been published since then. In 1949, May's brother-in-law wrote a song, based on the book, that is now part of holiday history.
So, the next time you want to complain about all the bad things that big business does to this country, take heed. There are some things they do well. If it wasn't for business, Christmas in America — gift-giving, Christmas trees, ornaments, dinner, caroling, holiday cards and all that family love — would probably not exist.
And on that note, "Merry Christmas to all, and to all a good night!"
The Independent Investor: False Promises Hit Farmers, Manufacturers
The very people who were supposed to benefit from making America great again have become victims of the man who promised them so much but has delivered so little.
While the Rust Belt states of Michigan, Wisconsin, Indiana, Illinois, Ohio and Pennsylvania teeter on the edge of recession, those in the agricultural sector (also Wisconsin, as well as Georgia, Nebraska and Kansas) are already facing an increasing number of bankruptcies. These are the swing states that carried Donald Trump to a win three years ago. They are now feeling the brunt of his trade, tariff, and wholesale rejection of climate change.
Farm bankruptcies through September 2019 are up 24 percent versus last year. Suicide rates are rising among small farmers, and many towns that are dependent on the farming community are fast becoming ghost towns. Even Trump's own Agricultural Secretary, Sonny Purdue, said he wasn't sure that the family dairy farm could survive in the future. At least he has the courage to tell the truth.
Americans, especially those who live in urban/suburban areas of the country, have this mythical myopia when it comes to the nation's agricultural sector. Most think that the small family farm is what feeds us, and what surplus exist are sold overseas as exports. I am here to tell you that all of that claptrap no longer exists and hasn't for decades.
Global competition, Federal government policy, and big business has changed the fabric of the farming sector. Back in the 1970s, Federal farm policy sent an unmistakable message to the nation's farmers to either get bigger or get out of agriculture. A decade later, we witnessed a quarter-million farm foreclosures. Overproduction, a grain embargo against the then-USSR, and high debt decimated the industry. Today, 80 percent of American farmland is owned by "Big Ag."
In the last two years things have gotten immeasurably worse. Trump's tariffs on China elicited a predictable response. Chinese tariffs were levied on U.S. agricultural imports like soybeans and corn. Since then, the Trump administration has given the industry $28 billion in financial assistance of which at least 80 percent of that is going to big conglomerates, not the small farmer.
At the same time, thanks to climate change, the last six years have produced increasingly unstable weather patterns resulting in floods, droughts and debilitating crop failures. The administration's continued denial of these huge risks to our food production have been ignored. In fact, recent policies, in my opinion, have actually made our climate far worse.
Given the facts of farm production in this country and throughout the world, the small farmer of old is heading into extinction. In its place have risen boutique farms that are producing crops and food stuffs for a large population of consumers who buy direct and live close by. There are no or limited exports from these establishments.
A similar trend is occurring in the nation's manufacturing sector. Countries such as Australia, China, South Korea, Argentina and Mexico produce steel, aluminum, cement and a host of other manufacturing products of the same quality (but at lower prices) than the U.S. can produce. This is not a new phenomenon, but Trump's trade wars have made it infinitely worse for our manufacturing workers. And no one is talking about government assistance to this sector.
Tariffs may have prevented the manufacturing sector from total extinction, but they haven't fixed what is wrong with the sector either, nor can they. It is the same story with farm subsidies. They won't and can't fix what is ailing the family farm. The tariff argument is an old one: we need these industries for our national defense in the event of war. While that argument does carry weight, it does little to help our manufacturing and farming sectors, which continues to face global overproduction of just about every product they make.
As in farming, some would like to think that Trump's policies will not only save but reverse the decline in manufacturing. That is as realistic as thinking of today's workers as burly-armed men and women (as in WW II posters), when the reality is that today's manufacturing workers are far more likely to be sitting behind a computer screen than toiling with sledge and hammer beside a belching furnace.
Sometimes, the cruelest thing one can do is give a person (or in this case, an industry) false hope. Trump, it appears, has done just that. Most people realize you can't turn back the clock, no matter how hard you try. It is at the root of what Donald Trump promised and failed to deliver. The America he wants is an America that no longer exists, if it ever did.
The America I live in is always changing, growing morphing into something new and different. Sure, it has its problems, and even the nature of these challenges' changes over time, but by and large, I wouldn't want to live anywhere else. Would you?