Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Week 08. February 20 - February 26, 2023
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Analytics
Will China assist Russia?
To attempt to answer this question, one must first comprehend the essence of China's long-standing foreign policy concept. The Chinese psyche differs from that of the average European, and even more so from that of the average American, and many Chinese decisions that appear nonsensical in the European system of values have their own rationale in China.
Two extremely visible examples of a demonstrative blow to Chinese interests occurred when the West destroyed Huawei's main company, at least its mobile section, undercutting the impetus of technical progress against the backdrop of American companies record performance in China.
Pelosi's audacious provocation in early August, when the invasion of China's zone of interests in Taiwan was extraordinarily loud and poignant against the backdrop of China's greatest military drills near Taiwan and the threat of a strong response.
China did not respond in each instance. What exactly is this? Cowardice, humble tolerance for painful blows, or astute strategic manoeuvring? China is weak in improvisation, public relations, and tactics, but great in strategy.
What distinguishes China's international diplomacy and collaboration with foreign partners?
Imitation of the opponent's interception of the initiative and the feeling of profit. In order to effectively integrate the "victim" into China's zone of influence while pursuing Chinese goals, the Chinese will give the impression of friendliness and, if necessary, "fight" and countermeasures, giving the opponent a sense of bait and tactical victory.?
The scheme is complicated, but it is intriguing. When trading with the Chinese, you will have a strong feeling that you deceived them (for example, by demonstrating a super discount or super favourable conditions), but it was the Chinese who deceived you by selling illiquid assets or something with a lower price, but "the feeling benefits" overshadow your consciousness, and the Chinese either sold the "extra" goods or created a trade turnover.
By creating the impression of US sanctions success, China created the illusion of seizing the initiative in favour of the US while realizing its strategic goals, which resulted in quite a palpable achievement when the trade surplus between the US and the EU hit an all-time high. As a result, China's strategic position will improve while it continues to seize new markets.
The second element of Chinese diplomacy is to go all the way when the decision space is limited and does not allow for effective manoeuvrability. This is when the "great Chinese patience" comes into play.
This idea differs greatly from Western civilization's reactive and aggressive policy, in which the West creates direction and pressure. China behaves differently, adopting a quiet and waiting posture that is literally ingrained in the Chinese DNA.
As a result, the Western model of foreign policy interactions and the value system is at odds with China's value system. For China, it is critical to realize the potential of opportunities before moving on to the next level.
What exactly is meant by potential? To accomplish so, it is vital to establish the input circumstances that exist in China.
It turns out that "unfriendly" countries account for nearly two-thirds of foreign trade turnover; however, "unfriendly" countries dominate investments, technologies, and high-tech imports, implying that China's external dependence on "unfriendly" countries' capital and high-tech products is nearly absolute.
China's global integration processes are quite sophisticated, and China's long-term viability is heavily reliant on innovative technology solutions and free trade.
It is vital to comprehend the following conditions in China in 2023:
China's success is largely due to the scale and magnitude of integration processes with the collective West, as well as the ability to profit intelligently (only China has done so in this form), but this is a synthesis of unique circumstances, the analysis of which will take a very long time (China's success story).
Hence, the struggle between Russia and the West is taking place in the context of the Chinese economy's most serious challenges in 40 years, as well as its greatest reliance on the West.
Collaboration between Russia and China is conceivable if the balance of geostrategic interests shifts in such a way that cooperation with Russia compensates for the potential costs of the war with the West, which can amount to hundreds of billions of dollars and cost China's economic stability.
On the other hand, China will not be able to accept the loss of Russia and the West's expansion to the East, as this will worsen the geostrategic balance and create a fundamental source of tension in China's north, with the risk of the anti-Chinese project crystallizing, just as Ukraine has become an anti-Russian project.
How may this contradiction be resolved? China is tactically weak but strategically strong, and it does not make unexpected actions.
In theory, the existing conflict scenario benefits both the US and China. Why?
Russia is acting as a battering hammer for the Western world. As long as there is a crisis between Russia and Ukraine, the American focus will shift to that conflict, giving China an opportunity to manoeuvre and transfer the focus away from Taiwan, providing time for development and regrouping.
The United States mission is to deplete Russia, robbing it of the ability to respond. A rapid defeat will elicit a revanchist feeling and an attempt to re-engage in combat. Gradual defeat will allow absorbing all of the anguish, robbing the desire and ability to respond.?
The US will continue to back Ukraine, or whatever remains of it, for as long as it is necessary to undermine Russia. The United States will not accept Russian supremacy in Europe because it would undermine the United States' international standing and authority, and China will not allow American dominance in Russia because it would damage China's strategic security.
Given China's global integration processes, the expense of taking Russia's side in the conflict is too expensive for China. It is one thing to give drones, thermal imagers, and technology; it is quite another to engage in combat with ammo and armoured vehicles.?
Under this scenario, China's tasks will be completely subordinate to Russia, resulting in complete economic, technological, political, and military-technical dependency, thus reducing it to the status of a raw materials appendage.
Russia has the potential to transform from a subject of international politics to an object, an instrument of geostrategic conflict between the United States and China.
China will provide economic and humanitarian assistance to Russia (even surreptitiously) but will refrain from becoming more involved in the conflict because China's time for disintegration with the West has yet to come.
Europe's gas usage
The huge decrease in gas use in Europe, as well as the largest built reserves prior to the heating season, has become the key accomplishment in conquering the winter.
Current European gas reserves are nearing all-time highs of 70.3 billion cubic meters (bcm) and 72 bcm for mid-February.
At 34.3 bcm for this time period, inventories were more than half of what they were the previous year. Europe reached spring with 28 bcm of reserves a year ago, and the trend suggests that reserves may top 60 bcm this year.
This means that before the next warm season in 2023-2024, Europe will only need to replenish 45-50 billion cubic meters of storage, whereas last year it had to aggressively fill about 80 bcm at any cost.
The differential of 35 billion cubic meters is large, accounting for approximately 13-15% of net imports.
Given the well-established supply infrastructure over the last year, as well as the preparedness of emergency mechanisms and processes for forced consumption dumping, Europe will "survive" the upcoming heating season with a high probability. In this sense, Russia's gas lever of pressure on Europe has failed.
The reduction in consumption is significant. According to Bruegel, EU consumption restriction protocols and a warm winter compared to the average temperature over the past ten years resulted in a 25% y / y decrease in consumption for the EU-27 countries in January 2023, with Germany minus 25%, France minus 20%, Italy minus 25%, Spain minus 25%, the Netherlands minus 33%, Poland minus 14%, and the UK minus 19%.
The pan-European decline in gas usage was 12% at the end of 2022 (Germany reduced by 14%, France 9%, Italy by 7%, Spain by 3%, the Netherlands by 22%, Poland by 12%, and the UK minus 9%).
Most European countries began to drop consumption by 10-15% in May-June 2022, increasing to 15-20% in Q3 2022, raising the intensity of gas demand contraction to 25% in Q4 2022.
What is a 25% decrease in demand? This is over 140 billion cubic meters, which is comparable to Gazprom's declining volume in 2023.
China's "Peace Plan"
The Chinese peacekeeping role and function are completely impossible "on the ground" in the context of the current conflict configuration, and the plan is more at odds with the Russian position than with the US position, while the plan does not suit either side of the current war.
However, the "peace plan" also emphasized that China is not yet ready to conduct global projects within the framework of the notion of a "multipolar world" and take real actions to do so. In the medium term, at least during the initiator's active phase. Most likely in 5-7 years, but not right now.
China adopts an unsure, cautious, and passive stance, smoothing the edges within the observer's balancing posture.
The plan is written in such a way that it distances itself from the conflict and refuses to implement the global project of a new world-order architecture. In truth, China is for all the good and against all the evil, as it is in any other hot confrontation.
Although China recognizes that it is the next in line after Russia, it is not prepared to act. There is no proactive mindset.
National interests are entirely transferred to the domestic agenda in the current stage of China's growth.
Since 2009, China has aggressively transitioned from an export-oriented model of economic development to the building of a middle class and the promotion of local demand, growing the depth of the domestic market, filling the economy with credit resources, and enhancing technological autonomy.
Chinese technology programs rely heavily on high-level and relatively effective reengineering and replication of foreign technologies, and foreign technologies from western countries account for around 97% of all foreign technologies in China.
As Chinese wealth grows, the concept of the "global factory" fades, and the trade war with the United States puts a stop to long-term Western initiatives in China. In truth, ties between China and the collective West are currently in a state of breaking obligation.
At the same time, the depth of integration linkages is too great to make radical moves, and everything China does is predicated on a long-term breakdown of ties with the outside world.
There are no doubts about the vector, just as there are no doubts about identifying "friend or foe," no one creates illusions, China just exploits the resource of cooperation with the collective West to take everything that can be taken away before breaking off relations.
Given the degree and scale of China's integration into global programs under US supervision, and given the scale of China, this process is lengthy, with a significant inertial component. China is acting cautiously in order to avoid dramatic manoeuvres.
Another crucial issue that can be found between the lines in the "peace plan" is China's considerable doubt in its capacity to repel US tactical attacks, thus it is attempting to end the fight.
China believes that in a direct confrontation, China will be unable to successfully neutralize US operational threats due to the US's acknowledged expertise in tactical planning and improvisation. China is good at strategic planning and can achieve spectacular achievement, while the US outperforms on a tactical level.
All of this boils down to normal Chinese behaviour. They will go with the flow, resolving their strategic responsibilities in technical re-equipment and economic sustainability with both Western and Russian resources.
Thankfully, the confrontation at this level is congruent with China's objectives because it shifts the US emphasis from China to Russia while increasing Russia's reliance on China for inexpensive and dependable Russian resources.
So, what comes next? China will not intervene as long as Russia remains stable.
The US economy
According to official data, the US economy is far more resilient than was anticipated six months ago, when the Fed initiated a series of aggressive rate hikes.
After 20 months of stasis, real spending on goods and services per capita in real terms (adjusted for inflation) takes a surge forward, updating the previous maximum established in October 2021.
Despite record inflation and a significant hike in the Fed's benchmark rate, the consumer urge has not been broken - spending is at historical highs.
This contradicts the behaviour pattern in the 1970s during the inflationary crisis, when consumer spending fell by 4% in real terms from March 1973 to December 1974 and by 4% from December 1978 to June 1982 (by 8% over numerous phases).
Strong salaries, a historically low savings rate, and a record credit impulse are all resources for record consumer spending.
As the government shut off helicopter money, real disposable income seemed to have achieved a new equilibrium.
Revenues fell from the second half of 2021 to June 2022, forming a local bottom, and since July have been growing by 3.5% for half a year (or 7% in annual terms, taking inflation into account); however, revenues are comparable to January 2021, implying that growth from July 2022 to January 2023 compensates for the failure of January-June 2022.
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Now, per capita income is back to pre-Covid levels (December 2019), implying that three-year cumulative growth is zero adjusted for inflation, while spending is nearly 5% higher - this gap is filled by the depletion of the savings rate, which fell from 8.7% in the second half of 2019 to 3.8% in the last six months, but has been noted since October increase in the savings rate from 3 to 4.7%.
Fiscal policy is quite difficult because net state assistance in population earnings has been minus 5.3% over the last six months, compared to the "norm" of minus 3-3.4% from 2014 to 2019, i.e. the government withdraws 2% of income on average compared to the pre-Covid period. Moreover, 7-8% of income was distributed at the height of the helicopter money mania.
The Fed's monetary policy appears to be tightening further (+0.25)
The labour market in the United States
The United States has a record low unemployment rate and a record high number of job vacancies per workforce. Also, since 2019, about 4 million persons of working age have exited the labour force.
Several variables influence this, including demography and motivation to work. If demography is obvious, then an incentive to work is undermined through the welfare channel, and from both sides.
Rich Americans were able to survive on rental income, which included dividends, interest, renting out houses, and selling shares at inflated prices. This primarily applies to those over the age of 50 who retire earlier than they would under other circumstances.
The second group is recipients of social assistance or "helicopter money," whose distribution policy was the most inadequate from 2020 to 2021, although "echoes of craziness" can still be heard.
Although the US government has considerably tightened fiscal support, lowering budget subsidies to pre-pandemic levels, this has primarily harmed the middle class, while the poor continue to get assistance, albeit in reduced amounts.
Subsidies at the federal and municipal levels were comparable to income from the main low-skill employment in 2020-2021. This diminished the inclination and motivation to work among low-skilled employees, intensifying the lack of personnel and, as a result, earnings at the "lower level".
To a lesser extent, this labour-force disparity still exists today.
One of the structural reasons for inflation in the United States is a supply-demand imbalance, which occurs when demand is disproportionately high but not covered by labour productivity and the number of employees.
Given the current structure of the economy and labour productivity, the demand now corresponds to more than 160 million employees, but only 155 million are employed, indicating a gap, which is indirectly corroborated by the number of vacancies.
Because it is impossible to produce millions of jobs because there are no eligible candidates, the only feasible way to absorb imbalances is to intentionally lower demand.
The Federal Reserve's monetary policy
Estimates of the Fed's monetary policy trajectory have shifted dramatically in the last month.
Earlier in January 2023, the market expected the Fed's cap rate to be about 5%, with a possible rate reversal in early autumn; currently, the expectation is at 5.5-5.75%, with a likely rate reversal around the end of 2023.
A significant shift in expectations along the monetary policy trajectory is due to stronger macroeconomic data, which indicate a "struggle" for the achieved heights and a high degree of resilience of the US economy against the backdrop of a potential reversal of inflation (in the direction of increase), which contradicts the basic monetary theories on which the Fed bases its solution.
Numerous elements established such a configuration of the risk model earlier (in autumn 2022), where the chance of crisis processes from December 2022 should have grown strong, and the crisis processes themselves were indisputable, but it did not turn out.
At the very least, the labour market and consumer demand remain quite strong, while industry and corporate investment are showing a limited negative trend.
On the surface, consumer demand at the macro and per capita levels is now higher than at any time in US history, resulting in some distortion of monetary models.
Certainly, strong consumer resilience comes at the expense of depleted savings and high loan rates, both of which might have long-term negative effects, but the basic foundation, which is income in real terms, tends to expand.
An overheated labour market (labour demand far exceeding available skill), continued robust consumer activity, and limited factory activity all have a direct impact on inflationary pressures (with a tendency to pick up since December).
All of the foregoing, with a high probability, will necessitate additional Fed moves beginning in March. At the end of January, the market calculated that the possibility of a rate increase to 5.25% at the March 22 meeting was zero; now, the probability is 26% (up from 18% a week earlier). A rate of 5.5% in mid-June was unimaginable at the end of January, but it is currently the main possibility (56% chance).
But why are the current tendencies risky? The American economy's margin of safety is incredible and beyond any expectations; nonetheless, this provides the perception of invulnerability, allowing the Fed carte permission to take more aggressive activities, including through political pressure.
Given the impact lags of 6-9 months and the long time of high rates, the delayed negative effect, as well as the system's stress, is developing.
According to companies reporting, negative patterns have emerged in Q4 2022 statistics. Although the damper's function and the accumulated strength are high, the risk factor is changing toward a too-tight and overly long tightening policy, which will provide a more permanent trigger for a system failure.
What is the break direction? Over-crediting enterprises that are currently being backed by bank lending, but high-interest rates further diminish resilience.
Defence spending in the United States
According to Census, defence spending in the United States reached an all-time high of $204 billion (in new defence orders), and capital goods spending reached a record high of $173 billion for the year.
Armoured vehicles of various types, planes, ships, defence spacecraft, missiles, small guns and ammunition, communications and navigation technology are examples of capital goods.
Equipment and equipment, electronic components and supplies (e.g. computers, monitors, projectors, etc. utilized for defence purposes), food, medicines used in the army, and any other circulating items are NOT considered capital goods. It also excludes infrastructure costs and the building of capital assets such as military bases.
Taking into account equipment, equipment, and items of circulating / short-term worth without provisioning and building, the annual cost is $ 200-$ 210 billion. These expenditures solely include the military-industrial complex in the United States.
The largest and most significant item of expenditure is for defence aircraft and spacecraft, which costs almost $70 billion each year (again another maximum).
Expenses climbed by 65% at par compared to 2015, a 14% increase for the year, however, this indicator is quite volatile and requires a long period of analysis. Orders have more than doubled from the beginning of 2000, but compared to 2011 (under the old military policy), the increase is just 20% in 11 years.
There is no deflator in this case since pricing for defence items is classified and no one knows how prices and purchases have changed in actual terms. Thus far, the trajectory has been consistently climbing since 2016, as it did from 2004 to 2011.
There have been rather intense directives for the US military-industrial complex since April 2022, but this is not to suggest that a "transition to a new normal" has occurred. Rather, a planned progression with no clear "jump" points.
Consumer confidence in the EU
In 2022, the gap between expectations and reality is an aberration. The drop in consumer confidence in the EU-27 countries from February to September 2022 was the most substantial in the indicator's history (since 1985).
Consumer confidence began to fall in June 2021, culminating in a collapse in February-March 2022. Many events of detrimental influence on consumers have occurred in modern European history:
Nonetheless, the 2022 crisis outperformed all prior ones (1.3 times the COVID crisis and 1.8 times the 2009 crisis). At the same time, there was the virtually little reflection in actual consumer spending, despite the fact that consumption had fallen in all preceding crisis periods.
The biggest negative consequence was recorded inflation, which undermined Europeans' well-being in terms of both current income and accumulated savings. This sparked concerns regarding employment.
Yet, there was no collapse, and macro data did not reflect expectations. Consumer expectations rose from October 2022 to February 2023 as inflationary pressures eased, recouping 35% of the losses from the 2021-2022 crisis.
Retail sales indicate a recovery beginning in October 2022, industrial activity since December, and the service sector since November, but the dismal trend in construction persists.
The situation is still in limbo, but an unmanageable catastrophe has been avoided.
Banking industry in the United States
According to the most recent US banking sector figures, the three-month lending momentum has been declining since December 2022, indicating a frontal impact via the interest rate channel and a shift in investment and consumer circumstances.
It is worth mentioning here that US commercial banks are not the final agents for loan issuance, as is the situation in Russia, where banks control over 97% of the loan portfolio structure.
Loans are also issued by mortgage structures and financial organizations in the United States, and government institutions participate in student loans.
For example, commercial banks issued only $2.5 trillion of the population's mortgage debt, whereas mortgage structures issued the remainder. Commercial banks account for only $2 trillion of the $4.8 trillion total debt in consumer credit, while the state accounts for another $1.5 trillion through school loans.
Nonetheless, because the connection between commercial bank lending and total lending by all organizations is close to 0.9-0.95, it is valuable for recognizing trends. Weekly reports, as opposed to aggregated information, are published once a quarter.
Hence, from November to December 2022, there is an evident breakdown of the rising momentum in lending, whereas from May to September 2022, the three-month change in lending was on average twice as high as in the period from 2011 to 2019 and nearly three times greater than in 2017-2019.
Peaks in 2020 are related with emergency subsidized company lending under anti-covid state policies, and in 2010 with a change in securitized consumer loan accounting approach.
Rates have now reduced considerably, particularly in commercial lending, while mortgage lending continues to expand. Lending to consumers is slowing.
The reason for this is the rise in loan interest rates, which occurs with a large lag from the Fed rate, and a decrease in corporate investment activity.
This is a clear indication of future issues as a result of the Fed's rapid tightening of monetary policy.
For those who continue to believe
TikTok has made $200 million more from in-app purchases than Facebook, Instagram, Snapchat, and Twitter combined, according to the vice president of analytics platform Apptopia.
In related news, the United States House Foreign Affairs Committee voted to give the president the authority to ban apps that "represent a security risk." First and foremost, the law was proposed to provide the Joe Biden administration with the opportunity to prohibit the usage of TikTok in the country, which is utilized by over 100 million Americans.
For those who still believe in the free market and believe that the Chinese are to blame because there is nothing to spy on US citizens through ByteDance apps or Huawei routers, we remind you that Congress has long debated a ban on selling farmland to the Chinese, as this also threatens national security.
Congressman Randy Feenstra openly declares, "China should be prohibited from purchasing our farms because American agriculture belongs to American farmers."
That is, the rationale isn't because of the tainted Chinese seedlings or the actual food threat, but simply because.
Remember the rule. When a certain volume is reached, any foreign enterprise that is not subordinated to American capital suddenly begins to undermine security.
Yet, if non-market tactics damage US companies somewhere, this is toxic state protectionism and unfair competition. Such countries will receive a low Doing Business rating, and local liberal economists will begin to proclaim that US farmers are a godsend, because competition breeds quality.
Thank God, Italy/Europe is likewise protecting its interests in this manner, right? ??
PS
In return, because of national security concerns, China has directed its firms to refuse contracts with representatives of the Big Four (PwC, KPMG, EY, Delloitte).
Accountants and bloggers are the first targets in the intensifying trade war between the world's two largest economies.
THE END OF THE REPORT
Stay tuned.?
Regards, Negorbis.
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