Will sanctions against Venezuela oil hurt at the pump (and how much)? Plus some encouraging signs in 2Q GDP numbers, light auto sales... and MORE!
American Opportunity
A/O Global Intelligence Weekly: Venezuela In Crisis; Obamacare Repeal; U.S. Economy Shows Some Strength

This week's news is the turmoil in Venezuela, new sanctions being imposed by the United States government, and the potential impact it could have on the American economy.

Today it was announced that Venezuelan president Nicolas Maduro has arrested two opposition leaders in reaction to (or at the very least, in conjunction with) U.S. sanctions being imposed on the Bolivarian-styled government after rigging recently held elections.  

At the moment, the sanctions are being imposed on Maduro himself, whose overseas assets were not immediately disclosed by the U.S. Treasury Department.  What was intimated -- and what should concern policy makers -- is the rumored extension of those sanctions to the Venezuelan oil industry, much of whose output directly flows into North American markets... and therefore, into the United States.

How bad could it be?  Gasoline prices have dropped significantly under the Trump administration, down to $1.91/gal on average -- their lowest levels since 2003 and down significantly from their high-water mark at $3.64/gal during the Obama administration.  Should the Trump administration seek to put pressure on Maduro's government to hold free and fair elections by placing sanctions on Venezuelan oil, prices could increase as much as $0.30/gal here in the United States in a matter of weeks, pinching budgets but not breaking bank accounts.

Significant international pressure has been brought to bear on the Maduro regime, including pressure from Vatican Secretary of State Cardinal Parolin and the Venezuelan bishops to reject efforts to rewrite the constitution.  At the moment, the currency of Azroth is worth more than the Venezuelan Bolivar.  For those who struggle to find Azroth on a map, don't bother -- it is a fictional landscape for World of Warcraft.  Yet the impact of Maduro's socialist policies are not fictional at all: bread lines, a lack of basic medicine, even such modern luxuries as toilet paper being hard to find.   

There's an joke making the rounds in socialist-run Venezuela where one is asked: "What did you use to light your house before candles?"  The answer?  Electricity.  

In the meantime, the protests continue unabated and the condition for working class people made worse daily by a socialist regime bent on staying in power at any cost.  Should the sanctions have the net effect of forcing Venezuela into default, the domestic crisis would only grow more acute... forcing Maduro to an endgame that a peaceful transition of power would preclude.

I would be remiss if I did not offer some thoughts on the U.S. Senate's failure to pass Obamacare repeal.  The good news is that last week's actions will not be the end of the debate. The President has asked the Senate to go back to work on new approaches to health care reform, and as we are just 1/8thinto President Trump's term, and there is still plenty of time for the debate. 

What is now needed is a clear statement of why we conservatives believe reform is necessary. Our message that Obamacare is “failing” is getting through, but I think we need more. Obamacare is socialized medicine, plain and simple. So why do we insist this is not the best solution? Because Obamacare prevents the free market from offering solutions for customers. 

We need to liberate the insurance industry to offer tailored insurance products that people want to buy, and on which companies can make a profit. This is not so radical. Even in Obamacare people pay premiums. Let’s enable the market to respond to the needs. 

Now some may argue that that many of our citizens can’t afford insurance, so the “rich” have to subsidize. First of all, the “rich” are often not really rich, and are being hit hard by the high premiums and surcharges. Second, we have to get rid of the fines imposed on persons who do not want to participate. The Supreme Court justified the penalties as “taxes”, which is bad enough, but really we all know a penalty for not doing what the government wants is not a tax -- it's a penalty. Conservatives know this is an overreach by government with bad implications for the future. What’s the next fine for not buying something they want you to buy? 

Health care now represents 17% of America’s Gross Domestic Product. That’s too much for any government to handle, socialist or otherwise. Let’s get the free market back in the game. If they can make a profit, they can offer insurance. We can address legitimate concerns, like making sure preexisting conditions or diseases don’t knock us out of coverage -- by statute -- without socializing the whole system.

More after the jump...

Joim American Opportunity

In some more encouraging news for the Trump administration, the United States just experienced its best quarterly growth since 2005, with a mildly surprising 2.6% posting after almost everyone (the Atlanta Fed being the notable exception) predicting a much more modest 1.6%.  Even thought the 2.6% posting in 2005 was later revised north to 2.9% later, the news last week had to be a sigh of relief for prognosticators.

Yet I have to add this much -- talking to folks on the ground?  Anecdotally, there is a palpable sigh of relief over the last six months among small businesses and farmers across the United States.  Investment in infrastructure is up, and there's a general sentiment that things are headed in the right direction.

One lead economic indicator that we should be watching moving forward are light auto sales.  Typically, if a family feels economically secure for the next five years?  They are going to move forward on a car purchase that will commit them to several hundreds of dollars plus insurance for the next five years. 

Those numbers thus far are strong... but leaning downward:
As you can see, there was a slight uptick in 2016 right up until the end of the year, where auto sales trailed off.  

Does that mean the anecdotal feeling of things moving in the right direction is misplaced?  Should there be reason for concern?

Such concerns would be seriously misplaced, according to those close to the auto industry itself.  What we are seeing here in the light auto industry market is a correction of a previous "mini-bubble" of sorts.  Truth be told, the slackening of inventory followed by low interest rates and a low labor participation rate means that these numbers are bound to drift south just a bit -- yet the fundamentals of the auto market are exceptionally strong as newer models with a slightly stiffer pricetag start moving into the market:
New vehicle (passenger cars and light-, medium- and heavy-duty trucks) sales growth in the North American Free Trade Agreement (NAFTA) region (U.S., Canada and Mexico) has outpaced its real GDP growth, suggesting a modest downward correction in new vehicle sales is due, according to David Teolis, General Motors' senior manager of economic and industry forecasting, who presented an outlook for global and U.S. vehicle sales during the symposium.

Mr. Teolis said pent-up demand for new vehicles — which had been a significant stimulus for sales growth — is largely exhausted and is not anticipated to be a major driver for sales over the short term, with rising new vehicle prices posing a deterrent to sales.

. . .

Year-to-date sales of used vehicles have increased more than 4 percent from the previous year, driven by an increase in the availability of automotive credit, according to Charles Chesbrough, senior economist and senior director of industry insights, Cox Automotive, said during the symposium.

The low unemployment rate and the recent increases in job openings and quit rates indicate favorable labor market conditions — which generally support more vehicle sales (new and used) and low default rates on auto loans, he said.
In short, unemployment is low and car prices are edging up slightly.  2018 looks to be a bang-up year for light auto sales and one that GM is retooling for and banking on.  If this is one of (if not the) key leading indicator for the modern economy, then watch out -- 4% GDP growth might be just around the corner after all.

Some news and articles we recommend for information and discussion purposes, none of which necessarily represent the position of A/O:

As always, American Opportunity is always looking for new resources and topics we can address in detail.  Please feel free to stay in contact! 


Jim Gilmore
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