Is This the Big One? September 15 2019 EconVue Spotlight

This was already slated to be a busy week for markets.  The Federal Reserve, the Bank of Japan, the Bank of England, and Bank Indonesia will all be meeting to decide rates.  Given the spike in oil prices after the Saudi Aramco attacks over the weekend, we now face an even higher degree of uncertainty as geopolitics returns to energy markets.  It could be that the greatest risk is overreaction, since there has been slack in oil markets, OPEC has tools it can use, and President Trump has authorized use of the Strategic Petroleum Reserve. As he tweeted today, there is "PLENTY OF OIL".  That is, if nothing more happens. Energy analyst John Kemp writes:

Abqaig has always been a much greater source of risk for the oil market than the Strait of Hormuz. But until the last 48 hours it was assumed to be a high-consequence low-probability danger so was largely discounted. That won’t be possible any more. 

Abqaiq is perhaps the most valuable and heavily guarded piece of real estate on earth. Yet along with Khurais, this weekend it succumbed to an attack that surprised nearly everyone.  Markets are assessing the damage as significant, although The Wall Street Journal is reporting that a third of capacity will be restored by Monday. The attack led to a potential reduction in world oil supplies of about 5% although Aramco has global reserves that would compensate for at least thirty days' production. 

In August, CSIS published a paper on these vulnerabilities that now seems quite prescient: Iran's Threat to Saudi's Critical Energy Infrastructure. (They will also be hosting the launch of the Energy Information Administration's 2019 Outlook via webcast on September 24th.) 

This level of market disruption was last achieved by Saddam Hussein when he invaded Iraq in August 1990. Prices then doubled over the following two months. However, the UN imposed an embargo on Iraqi exports, which will not happen with Saudi oil. As energy economist Michael Lynch wrote today, "Bigger concern is whether attacks continue and/or escalate, and whether U.S. responds militarily".  Will this be how the US and Iran get dragged into a larger military conflict?

Iran has denied involvement, but said that it is ready for war.  Yemeni Houthi rebels supported by Iran have claimed responsibility for the attack, but Debka is reporting that the drones were launched from Iranian strongholds in Iraq. Yemen, which in days gone by was Egypt's headache, is now without a doubt Saudi Arabia's Afghanistan. 

University College London professor and EconVue expert  Albert Bressand puts this all in perspective: 

The drone attack on Saudi Aramco installations needs to be read at three levels—two regional and the third global. 

Regionally, the attack illustrates new forms of ‘asymmetric wars’  and thus the vulnerability of Saudi Arabia. By itself, this should reintroduce a geopolitical risk premium in oil pricing, Undeniable increased vulnerability can be seen as tactical rather than strategic—but also highly symbolic. In line with this highly-symbolic, mild-real-economy-impact assessment, the attack also illustrates the staying power of all key participants in the Saudi-Iranian conflict. A previous drone episode (US drone downed by Iran) is a further reminder that the region will remain a place of wars by proxy rather than all-out conflict. Globally, and oil inventory-drawbacks notwithstanding, this will show how US Light Tight Oil has changed market sensitivity to Middle-Eastern geopolitical risks.


So is this the Big One?  Probably not, but these attacks could be an inflection point leading to either resolution, or disaster. On that uncertain note, here are some links discussing ongoing issues in the rest of the world:

The World

Rather than complaining about German trade policy the Trump administration should be complaining about German fiscal policy
Brad Setser, Council on Foreign Relations 9/3/2019 via Twitter thread

The near-term health of the Eurozone depends on a sharp u-turn in German fiscal policy, especially against the backdrop of a hard Brexit and a slowdown in China.

Is Germany Unbalanced or Unhinged?
Barry Eichengreen 5/11/2017 Project Syndicate

Germany needs to massively increase fiscal spending to avoid a European and possibly a global recession. Barry Eichengreen has been writing about this since 2017. 

The Rise of Phantom Investments
Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen 9/2019 IMF

In less than a decade, phantom FDI has climbed from about 30 percent to almost 40 percent of global FDI or $15T. What would the world look like if all tax havens were eliminated?

The Bank of England now says that a no-deal Brexit won't be as bad as previously predicted. 
Bruce Lawson 9/3/19 Excellent, detailed discussion via Twitter thread. 

Logistics and the demand for empire
Andrew Batson 8/24/2019

After WWII, the United States and its allies did something highly unusual: they won a war and gave up territory.

Global Health

Why Do Demographic Trends Matter for Global Health? (Podcast)
Janet Fleischman 9/5/2019 Center for Strategic & International Studies

Africa's population will double by 2050. Will the demographic dividend of a youth boom be spent on a range of public health issues?

Why the most important tool in healthcare is trust
Jeremy Ferrar 8/26/2019 World Economic Forum

Africans trust vaccines more than people of any other region.

U.S.

Will the US follow Germany and Japan below zero?
Colby Smith 9/3/2019 Financial Times

FT on whether yields on government bonds in the US will go negative (like Germany and Japan). What's missed in such discussions is the damage that negative yield inflicts, gradually and consistently, on the functioning of financial systems and economies. - Mohamed A. El-Erian

America’s Stalwart Savers Get the Sucker Punch
Karen Petrou 9/9/2019 Economic Equality

Whatever you think you know about negative interest rates, Americans as consumers rather than savers, and income equality, read this article.

10-year yield vs credit card interest rates. Consumers are getting totally hosed.
Sven Henrich 9/1/2019 Twitter Thread

Credit cards enable Americans to live from paycheck to paycheck. Imagine the jump in consumption if credit card borrowing rates were cut in half. 

A slowdown in US business formation poses a risk to economy
Josh Boak 9/5/2019 AP News

Entrepreneurship, the engine of employment growth in the US, is slowing. Possible reasons: student debt, and young people who are more risk-averse than their parents. Could this be a knock-on effect of the Great Recession?  

The Mayor Says Outloud that Many of Us are Thinking
Crain's Chicago Business 9/4/2019

The hard truth is Illinois needs a constitutional amendment to fix the pension clause. The Chicago mayor may not be willing to say it in so many words, but this is the relief she needs, and the governor, despite his protestations, needs it, too. 3% COLA—unsustainable.

So, How Would a Congestion Tax Work in Chicago?
A.D. Quig 9/9/2019 Crain's Chicago Business

The answer is it wouldn’t. So many downsides, and so little revenue potential for the city.

Government Facilities for the Homeless Coming to San Francisco?
Jeff Stein, Tracy Jan, Josh Dawsey, Ashley Parker 9/10/19 Washington Post

Technology

Technology’s threat to jobs fuels populist anger. But lack of labour mobility could be a bigger problem
Gillian Tett 9/4/2019 Financial Times

It is labor mobility, not automation that is impacting economic mobility. In addition to the factors mentioned by Gillian Tett, I'd add the psychological impact of the Great Recession on Millennials, who stay close to home.

Fry’s to close its Palo Alto doors for good in January
Maggie Angst 8/30/2019 Mercury News

Perfect metaphor for what has happened to Silicon Valley. Artificially high (enabled by regulatory capture) real estate prices have knock-on effects, from Palo Alto to Hong Kong.

The 600 Billion Dollar China IP Echo Chamber
China IPR 5/12/2019

Calculating losses due to IP theft is probably impossible, but here's where this number is coming from. 

Undersea cable to China may be nixed on national security grounds
8/28/2019 Aljazeera

The new Digital Divide.

China 

China's Manufacturing Job Losses Are Not What They Seem
Nicholas R. Lardy 9/31/2019 PIIE

The other question is how to measure formal vs informal employment in China.

China, Like the US, Faces Challenges in Achieving Inclusive Growth Through Manufacturing
Robert Z. Lawrence 8/2019 PIIE

Chinese manufacturing employment has been slowing since 2014 and has probably peaked.

SOEs Told: Pay Your Bills On Time
Liu Jiefei and Shen Fan 9/4/2019 Caixin

It's not just SOEs who have been delaying payments, but also many municipalities have been paying teachers, suppliers and civil servants late. This piling up of payables should -- but typically don't -- show up in the aggregate debt numbers.  - Michael Pettis

Bureaucratic strategies of coping with strongman rule: How local officials survive in President Xi Jinping’s new order
Minxin Pei 9/1/2019 China Leadership Monitor

China’s Happiness Paradox
M.E. Strickland 9/2/2019 SupChina

A key paradox: personally unhappy, yet nationally hugely optimistic. Modern China explained.