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A Red Letter Day for Global Trade


Brexit

July 24, 2016 is a day when two events impacting world trade became real – and create
a puzzle of after-effects. The implications of Brexit and the opening of a higher-capacity Panama Canal are going to ripple through a wide range of industries over the coming months and years.

At this writing markets are roiling around the world over Brexit. What’s puzzling is that there seemed to be almost no market adjusting in advance of the vote. What? Didn’t the polls continue to estimate the vote was too close to call? In those instances I always advise clients to be ready for either outcome and to take actions in advance to hedge, protect, and be ready to trigger pre-thought moves.

The EU is a key piece of the global economy. There’s no doubt it is weakened by this action. In economic forecasts recently I’ve been warning of the difficulty that arises when two major economic players are simultaneously at risk of recession. Britain and the EU may simultaneously dip after this action and the difficulties in Brazil, Argentina, Canada, and China could trigger a serious downturn.

The Canal? A longer-term but perhaps even more precarious situation. Panama took the low bid on the reconstruction of their overwhelmingly prime asset. The limitations to “Panamax” sized vessels limited shipping for at least the last 40 years of the century-old infrastructure. The rebuilding of the lock system enables very large container vessels through the “new” Canal.

Problems? Count em. Substandard concrete based on fracture-prone Panamanian rock. Poor design. Reliance on Spanish-built tugs that can only reliably operate in reverse, not forward. Not enough room in the locks for giant ships and the tugs at front and rear of the ships. Insufficient steel reinforcing in several areas of the new locks. And all that along in an El Nino-induced record drought that means that super-vessels don’t have enough water to float between the oceans.

One mistake. One super-ship into a lock wall and it all comes tumbling down. Planned volumes through the Canal like US grain into Asian markets are disrupted. China’s shipments to US East Coast ports. Months if not years of delays. Funding shortfalls that could topple the Panamanian economy.

Fiduciaries, leaders, directors, management? Sharpen up your implication thinking and start the discussions and actions now.

Image - Copyright: nerthuz / 123RF Stock Photo

Trouble to the South

A typical segment when I’m doing a forecast for a client is a listing of 50-50 possibilities in a 5-year or longer time frame. I find it expands perspectives, provokes thought, and prompts a discussion of impacts.
A situation that gets a lot of comment is the emerging crisis in Mexico. When a huge trading partner is facing loss of control of large areas of its nation it signals bad news to come. The current government in Mexico is facing the convergence of several forces:
The powerful drug cartels have not only gained control of several provinces but face up readily to federal troops. They have equivalent if not better armament and intelligence sources.
The wage gap vs. the United States continues to drive illegal border crossings. Much of the revenue paid by Central and South Americans now flows directly to the drug cartels. It’s a multi-billion dollar business.
A precipitous drop in oil field productivity. The country has already become a net importer of oil. A key source of revenue and economic base is fading away.
The Calderon administration is wavering on the use of force to fight the cartels. The cartels get media coverage on their own terms at will. Public perception is the government is impotent.
Some of the impacts:

  • Which party wins the next election? Will the US eventually be dealing with a cartel-controlled government?
  • When will the violence spill over the border? Will we see massacres of undocumented immigrants on the US side of the line? The deaths of 72 migrants recently hardly raised a ripple in the US press but how much longer will that last?
  • What is the long term effect on the Mexican economy? Will there be a leveling of income across the border or will the wage pressure continue to send a flood of immigrants north?
  • What is the effect on drug legalization deliberations in both countries? Will marijuana be legalized in both countries? Who will control the production and distribution?
  • When will the issue make its way into US politics and elections? Will a war being waged just south of the US border affect the next presidential election in 2012?