Q3 Analyst Insight - The Coming Storm (Recession!) & Other Thoughts

The thing that has been on my mind quite a bit recently is the apparent impending recession. We are very long in the traditional business cycle, with the last US recession in 2008. We also have a clear slowdown in raw materials demand. For example, China is showing a 23% drop in imports compared to a year earlier in copper; used to manufacture everything from electronics to plumbing. The drop is down 11% from the previous month, looking at May statistics, meaning that the fall is apparently accelerating.

In the US we also now have experienced an inverted yield curve, meaning that secondary market yields on notes are higher than the yields on long bonds. This is a clear indication of diminished investor confidence. Yesterday we had the worst day of the year in the Dow Jones Industrial Average, with the index dropping 800 points.

The (US) Federal Reserve Bank has indicated that it is willing to take an aggressive stance with monetary policy, but with the Fed’s discount rate already at a low 2.75%, it has limited room to maneuver. Furthermore, in this case, the recession appears to be global, and demand rather than credit driven.

Looking at the economic situation globally, we see:

1. The US is headed into a presidential election year with probably the most polarized political climate since the Reconstruction years of the 1870s.
2. Gold, strongly correlated with economic and political uncertainty has surpassed $1500 USD per ounce. This is great for mine operators, but where I am, here in Colombia, gold mining doesn’t make up enough of the country’s exports to prop up the entire economy or shield the country from ill effects. Even with the tensions in the Straits of Hormuz, Britain and Iran seizing each other’s oil tankers and sanctions in place, oil prices remain low, again signaling slack demand.
3. China is facing a trade war with the US, and unrest at home. There are worrying developments in Hong Kong that I predict will prompt a harsh response from Beijing. This will bring a very negative response from Western Europe and North America. China is already importing less, as mentioned, and I see that correlated to weak demand as we are entering high season for Christmas season orders.
4. In Europe, attention is rightly focused on the Brexit debacle. No matter if one is for or against Brexit, the execution of the separation has been a fiasco. People are not paying enough attention, in my opinion to how this may affect the peace in Northern Ireland and The UK’s relationship with the Republic of Ireland. Brexit also appears to be stoking Scottish independence desires. In the past, this has motivated other Eurosceptics within the EU such as in Hungary, and even movements for independence within the EU such as the Catalan independence movement.

Active Measures are clearly being executed from the Kremlin to further undermine European Union solidarity, and there is no reason to believe that such efforts will diminish in next year’s US Presidential election. Great documentation—the Mueller Report itself—is free and even in audio format for anyone who wishes to listen. I highly recommend it. Though people may debate whether the US President colluded, the proof of Active Measures, a type of disinformation campaign that many governments do (but The Kremlin’s Soviet predecessors were champions at) was going on is indisputable in face of the evidence. Maybe the presidential campaign had nothing to do with it, not making a judgment here, but it certainly went on, and continues.

Speaking of these tactics, I am working on some research that so far, demonstrates an attempt to co-opt environmental groups, not in order to “save the planet” but for economic gains. Saving the planet is, of course, good. But manipulating opinion with the real intention of monopolizing global markets is nefarious. I will have more on that very soon. An article is coming soon. There is actually enough material for a book! It wouldn’t be the first political exposé I have collaborated on. Maybe I will keep going, time & resources permitting. Let me pose a hypothetical to you as a teaser: Who (what country, let’s say) stands to benefit if petroleum production in democratic countries like those in The Americas or Northern Europe can be successfully curtailed? More to come on that.

Recessions bring an increase in outsourcing.

I had a great conversation with the head of a global BPO (Business Process Outsourcing Firm). He reminded me that in recessions or times of economic uncertainty, firms tend to outsource more, rather than hire their own staff. While this is true, it happens within a context of decreased demand across the board. Are you as an executive being more conservative on your hiring approach in 2020? Or if you are an outsourcing executive, are you taking steps to best position yourself to take on new business?

In the neighborhood.

I have had a couple of great conversations recently on location strategy in The Americas. Parul Jain of The Everest Group and I had a conversation on the comparative benefits of Guadalajara; Mexico’s second largest city, as a destination for IT Outsourcing talent. Mexico has a lot of advantages over many of its neighbors, especially when it comes to scale, with over 140 million people and English as the de-facto second language. There is a lot of IT talent in Mexico, too.

Here in Medellín, Colombia, Catalina Restrepo has run investment promotion efforts for the last year and a half, building upon the success of her predecessors in at ACI (Agencia de Cooperación e Inversión) Medellín. ACI is Medellín’s Investment Promotion Agency and one of the best in the Foreign Direct Investment promotion business anywhere. They have been key to Medellín’s resurgence. Catalina and I had a great conversation that you can read here.

If you plan on coming to Colombia anytime soon, let me know.

Incidentally, FedEx just opened up a new facility at Medellín’s international airport and is starting direct flights for cargo between Medellin, Bogotá and Miami running 6 days a week. I had a great conversation with Juan Cento, Fedex’s president for Latin America and the Caribbean which I share with you here. Mr. Cento discusses Fedex's increased commitment in the Andes, from Colombia down to Chile.

Recommended Reading

Before I go, let me recommend a very good book. The Strategy of Conflict by Thomas C. Schelling. It’s not a new book, it’s last reprint was in 1981 but it is readily available in paperback or audiobook from Audible. It was written during the cold war, but the principles are timeless. I will warn you that it can be a bit dry and academic at times; like taking something fascinating and trying to squeeze all the juice out of it so that it can be taken more seriously. How do you negotiate with someone or some entity when your interests don’t perfectly align? In other words, almost 100% of the time? Even when you are “on the same side,” your interests can clash with your teammates or colleagues. For college gridiron football fans like me, this can be seen in Miami’s Tate Martell drama. Or a great example from recent history is the bitter clash between John C Houbolt and his colleagues at NASA.

The book is not about psychology, but rather strategy. Think about the famous “Prisoner’s Dilemna” writ large. The book references the Cold War Mutually Assured Destruction (MAD) problem from the Cold War between the US and the Soviet Union. “I don’t know what my opponent is going to do…so what should I do?” The book attempts to systematize a way of thinking that can be applied to these types of complex problems. Negotiations among allies vs negotiations among enemies, or as in the real world negotiating with ambiguous entities that may be either, both or neither of the above. Have you read anything good lately? If so, I’d like to hear.

Thanks for your time, I hope you don’t feel that I have wasted it. If there is anything that my team or I can do for you, let me know. We have done quite a bit of research for our clients recently, accompanied by some really effective business development efforts that have yielded well for our clients.

Have I missed anything? Am I off base? In any case let’s stay in touch.