The Black Owl Report : An Executive Intelligence Brief

Briefing: Friday 28, May 2021

Lead: Capital Spending Historic Regardless of how it is sliced, it is strong

Additional Items we are watching. We were going through this month’s modeling forecasts in the ASIS and we saw some significant changes in a few of the models. Some of them • Malaysia Goes on Lockdown. Malaysia’s were picking up the surge in commodity prices (interpreting those Prime Minister has ordered at least a 2- increases as a surge in demand). week complete lockdown in the country as cases of COVID have spiked. This is nearly As we dove deeper, we discovered that there was some data supporting a total and complete lockdown, and that notion. anyone waiting on materials or services to get exported out of the country will see When you look at corporate investments in capital spending (equipment, further delays in the supply chain. machinery, improving facilities, etc.), it surged again in April (latest available). This is just one example of what is The chart below shows capital goods new orders through April and we can happening across Southeast Asia as the see that they are both higher on a nominal basis (blue line) showing the region gets its unexpected wave of COVID highest level of dollar spending in history and they are also up year-over- cases. Although total case counts look year at their highest level on record (going back to the 1990’s). nothing like they have in other countries like the US, Europe, Mexico, India, Brazil, etc., it is significant enough for the region that they are reacting in dramatic ways.

• Japan Extends State of Emergency . Japan has decided to extend COVID restrictions through at least June 19 th to help try and control an outbreak of the virus that has overwhelmed many hospitals.

The BBC was reporting that daily case rates have to fall below 100 in order for Even if we try to remove the impact of the on spending, we still the country to host the games in just five see that spending was 14% higher vs. April of 2019. weeks. They were 700 yesterday.

Some will argue that corporations have been taking their pent-up cash Now, Japan’s lockdown does not look like (since they weren’t spending it briskly between march of 2020 and at least what the US did early last year. Bars and through Q3 of last year) and they are now unleashing those war chests of restaurants are still open but their hours resources. of operation and sale of alcohol are going to be limited. We can see in some of the forecast models that machinery purchases are at the top of the list of spending. Robotics and spending on automation is But the Olympics are planned to go off as high right now because of a shortage of workers in many industries. expected – but there will be no fans in Knowing that recovery is in the offing, some industries are starting to spend venues and the movement of staff and on automation to be able to handle growth without using headcount to do it athletes will be highly restrictive. (or minimizing the need to dramatically add headcount).

And, as wages start to show some inflationary (even if it is Much could still happen between now and temporary), larger capital investments in technology make even more the opening of the games. sense when they can be done without sacrificing customer satisfaction. - KP

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US Domestic Economic Items

• Inflation Gauge Rises Faster than Expected. There is no way to slice it, inflationary showed their heads in April after today’s core CPE report. Sequential inflation increased 0.7%, the fastest monthly gain in inflation since October of 2001.

Against easier comparisons from last year, the core CPE was growing at an annualized rate of 3.1%. The Federal Reserve continues to say that this is a transitory inflationary condition, and indeed the “deflation” narrative is already being murmured in the halls of financial institutions. We’ll explain this later.

For now, and especially this weekend, consumers will get a taste of what it’s like to pay $5 for a gallon of gas in some markets and over $3 a gallon nationwide. Grocery bills are significantly higher than they were a year ago according to a few independent studies (granted, against easier comps due to the national lockdown).

Deflation rumors are spreading because many believe that adequate supplies of materials will return in short order, but demand destruction is ongoing. So, a company may be ordering significant numbers of items because they see significant demand for it at this time and supply chains are not delivering those products, but due to inflationary pressures demand for those items drops and significant supplies eventually get delivered (late). That could lead to significant discounting of those items later to try and move what might become inventory overstocks.

Although most of us don’t see a deflationary signal in the current outlook, most forecasts for PCE see the annual rate of inflation dropping back below 2.5% (the Fed’s target rate) by late Q3. That, most of us can agree on. - KP

Confidential – Armada Executive Intelligence Brief – Confidential - 2 - The Black Owl Report : An Executive Intelligence Brief • Just How Low Can They Go? Auto inventories were already trending down, but the inventory to sales ratio for autos has just hit a significant all-time low. The ratio is now at 1.025, average is a bit closer to 2.5 months of inventory on hand.

This should be of no surprise to anyone, but seeing this inventory to sales ratio so low, it should keep us all anticipating a return to normal once the global microchip shortage eases. There are tens of thousands of vehicles that have been built but are awaiting that critical piece before they can be delivered.

On a personal note, my daughter is purchasing a vehicle and she was told that it would be delivered about a week ago (three weeks after placing a deposit on the vehicle). The dealer said that they have inbound vehicles that are about to be shipped to the dealership, but a majority of them are already purchased and won’t ever hit the dealer lot. In fact, we don’t live far from one of the major production facilities for this particular automaker, and they joked that we could take a ride out by the airport and in an old, abandoned warehouse parking lot, could probably see her new truck waiting on a tiny part.

US auto sales are still trending near 18 million units a year, which would be among some of the strongest annualized rates of growth in history. And, used car sales are almost as brisk and ridiculous as the housing market. Used car prices according to the Producer Price index are 62% higher than they were a year ago and 25% higher than they were against April of 2019 prior to the pandemic.

Some automakers have begun to restart their supply chains as they get larger quantities of microchip supplies. That will get more of the tens of thousands of key suppliers back to work (for those that were idled during this time) and start to get it back in order.

Geopolitical Items

• Another Catch-22 on Suing China for COVID . I took a lot of heat mid-year last year (prior to all of the election upheaval) for quoting a ZeroHedge article that detailed China’s patient zero and the fact that she was a lab tech at the Wuhan laboratory. It was “mere speculation” on my behalf (that’s what I was accused of) that three lab techs were in Wuhan hospitals in November of 2019 with symptoms that now sound much like COVID. This would have been months before the supposed consumption of a bat in a meat market that launched the virus.

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In any event, bipartisan commissions in Congress have now opened up investigations that could lead directly to citizens being able to sue the Chinese Government over COVID-19. Regardless of how a person may have gotten COVID, if they got it and died from it, family members may be eligible to sue the Chinese Government if these bills end up being written correctly. It would open a legal floodgate unlike any we have seen since the aftermath of World War II.

I was wrong about one thing, I said at the time that the liability (for what is now as many as 7 million deaths worldwide) would be so significant that this situation would never be allowed to be pinned on the Chinese Government - because of the financial liability. It appears that the US Congress is trying to allow just that.

In a different development, there was interesting timing on the release of a Department of Energy briefing on the risks to the global community of a disruption in rare earth material supplies. The DOE estimated that the damage to the global economy and the cost to the United States would be felt “for years” if something happened to delay, stop, or redirect current rare earth material supplies.

China controls more than 85% of the world’s rare earth materials market, much of which is critical in high- capacity, quick charging batteries. It is central to the world’s push to zero emissions.

So, even if these proposals in the US Congress don’t end up in official legislation that pushes the Chinese Government to defend itself in international courts against potentially 500,000 death cases (from the US alone), watch for critical rare earth materials to possibly be scarce everywhere except in China. That would be one way for pressure to be exerted back on the US.

The potential ramifications of this are beyond comprehension.

Think about the amount of US debt that China holds, the number of companies that are interconnected and infused into both This is a big story, and could economies, etc. The connections and relationships are so in-depth that it defies our ability to reason through it. potentially get much larger depending on how these two There is no telling just how angry this will make the Xi Government pieces of legislation turn out. and what they might do in retaliation. But rest assured, it would not go without some form of retribution.

Just the threat of this legislation being debated on the floor of Congress and the implications of it alone is enough to elevate tensions between the US and China. This is definitely one of the bigger bi-partisan stories to keep an eye on. - KP

Confidential – Armada Executive Intelligence Brief – Confidential - 4 - The Black Owl Report : An Executive Intelligence Brief • Quick Comment on the Budget . There is so much media coverage of the President’s budget proposal which would reportedly increase spending to about $8.2 trillion a year by 2031 and push the debt-to-GDP ratio to nearly 120%. It also makes some assumptions on interest rates that they remain historically low during this period of time, an assumption that many think is risky.

There isn’t a lot of reason to cover the proposal in detail at this time. There is so much debate in Congress that will be ongoing, and we know that this proposal won’t likely even pull all of the Democratic support that it needs to muster without concessions. There is broad growing concern on spending, especially if another $1 trillion + bill is added into the mix.

We’ll hit this harder when there is something to actually consider. - KP

Supply Chain Items

• Next Surge is Coming . We got an update to the inbound cargo headed for the Port of LA, and it shows what we all expected – a wave of containers inbound. In May, it was difficult to find available container space on ships headed across the Pacific to the US.

If you could find capacity, it was often going to cost you 4 times normal rates to use it. Based on that, we knew that 4-6 weeks later those inbound cargoes would start to hit the US, and here they come.

Although port congestion is not a problem at the Port of LA at this time (based on their statistics of just 4.6 days of wait time and less than 9 ships at anchor), there are nearly 315,000 containers headed inbound over the next two weeks alone. We don’t hear the same from other ports. Nearby Port of Oakland is showing a much larger backlog and it is still having challenges in working through backlogs.

Impacts: watch for truck and rail capacity to tighten further as we head into the peak shipping season and especially over the next month. Prices will remain firm and despite some temporary easing of capacity, it could tighten right back up to near record levels over the summer as peak season merchandise blends with supply chains trying to get back in cycle. - KP

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Environmental Items

• Congo Risks “Limnic Eruption” . Last Saturday (May 22 nd ), a volcano in the Congo erupted killing 91 people and destroying more than 900 homes. The volcano could erupt again and some mandatory evacuation orders are starting to be issued. But it could be a very special situation that makes this even more dangerous than a normal eruption.

Here is an explanation of what the risk is from France24, called a “Limnic Eruption”.

“Orders on Thursday to evacuate , a city lying in the shadow of DR Congo's volcano, have shed light on a rare but potentially catastrophic risk -- a "limnic eruption," when volcanic activity combined with a deep can spew out lethal, suffocating gas.

The phenomenon first came to the world's attention in August 1984, when 37 people mysteriously died at in western Cameroon.

Scientists found that dissolved (CO2) gas in the depths of the lake had erupted, creating invisible clouds at the surface that were borne by into homes and fields, snuffing out life.

Two years later, more than 1,700 people and thousands of cattle died in , also in Cameroon, strengthening the belief that and volcanic activity can trigger these unusual events.

More than 600,000 people live in Goma, although the region's population is around two million, in addition to more than 90,000 people who live across the border in the Rwandan city of Gisenyi.

Both cities lie on the northeastern shore of , which is dominated by Nyiragongo, a strato- volcano nearly 3,500 metres (11,500 feet) high that straddles the East African Rift tectonic divide.

The much-feared volcano roared back into life on Saturday, spewing two rivers of lava over the next day that have claimed 32 lives and left around 20,000 homeless.

The evacuation order comes on the heels of a warning by the Goma Volcano Observatory (OVG), which monitors the pulse of Nyiragongo and the Nyamuragira volcano, 13 kilometres (nine miles) away.

In a technical note seen by AFP, the OVG said it saw worrying signs of activity by Nyiragongo that pointed to three potential outcomes.

In the first two scenarios, Nyiragongo would erupt again, sending renewed lava flows southwards towards Goma and Gisenyi, destroying buildings in their path before reaching Lake Kivu.

In both cases, the quantity of lava likely to enter the lake would not be enough to raise its deep- water by at least one degree Celsius (1.8 degrees Fahrenheit) -- a key condition for a limnic eruption .

Confidential – Armada Executive Intelligence Brief – Confidential - 6 - The Black Owl Report : An Executive Intelligence Brief But in the worst-case scenario, lava flows from Nyiragongo would combine with volcanic activity under the floor of the lake.

This activity could take the form of a "fissural or phreato-magmatic eruption under the lake and/or a large of 6.5 or 7 magnitude," the OVG said.

In this scenario, "a limnic eruption would take place and dissolved gas in the lake's deep water would rise to the surface, especially CO2, asphyxiating all living beings around Lake Kivu on the Congolese and Rwandan side."

"There would be thousands of deaths," the OVG said, spelling out the need for resources to carry out an "urgent exploration" of Lake Kivu.

The OVG also cautioned against the use of rainwater for drinking or washing food, given the ashfall from the volcano.” – France24

This would take on more of a humanitarian signature if the worst-case scenario were to take place. To a much lesser degree, there are some rare earth materials harvested in the Congo that help meet global battery demand. The volcano is not located near these mines, but any major disruption in the region could have a ripple effect on the global battery supply chain (again, if a worst-case scenario were to play out). - KP

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Business Cycle Indicators We Are Watching An Early Warning System for Cycle Changes

We use the following indicators as early warning devices; when they move, it typically signals a change in the current business cycle. We will continue to update these on a weekly basis as new data is available and specific, deeper-dive commentary on these factors will be included in the written portion of the briefing as changes occur.

Latest Prior Latest Prior Forecast Month Month Month Month Country Real GDP Current Manuf. Manuf. M/M Current Services Services M/M 2017 2.2% Month PMI PMI Change Month PMI PMI Change 2018 2.9% Global PMI Apr 55.8 55.0 0.8 Apr 56.6 54.7 1.9 2019 2.3% Eurozone PMI Apr 62.9 62.5 0.4 Apr 50.5 49.6 0.9 2020 (Est) -3.5% 2021 (Est) 6.5% US Apr 60.5 59.1 1.4 Apr 64.7 60.4 4.3 China Apr 51.9 50.6 1.3 Apr 56.3 54.3 2.0 Private Investment Canada Apr 57.2 58.5 -1.3 2017 4.4% 2018 5.1% Mexico Apr 48.4 45.6 2.8 2019 1.8% Japan Apr 53.6 52.7 0.9 Apr 49.5 48.3 1.2 2020 (Est) -16.4% Germany Apr 66.2 66.6 -0.4 Apr 49.9 51.5 -1.6 2021 (Est) 10.6% South Korea Apr 54.6 55.3 -0.7 Business Investment UK Apr 60.9 58.9 2.0 Apr 61.0 56.3 4.7 2017 4.4% France Apr 58.9 59.3 -0.4 Apr 50.3 48.2 2.1 2018 6.4% India Apr 55.5 55.4 0.1 Apr 54.0 54.6 -0.6 2019 2.1% Italy Apr 60.7 59.8 0.9 Apr 47.3 48.6 -1.3 2020 (Est) -12.8% 2021 (Est) 3.7% Taiwan Apr 62.4 60.8 1.6 Brazil Apr 52.3 52.8 -0.5 Apr 42.9 44.1 -1.2 Retail Sales Spain Apr 57.7 56.9 0.8 Apr 54.6 48.1 6.5 2017 4.7% 2018 4.4% Russia Apr 50.4 51.1 -0.7 Apr 55.2 55.8 -0.6 2019 3.6% Netherlands Apr 67.2 64.7 2.5 2020 (Est) 1.0% Ireland Apr 60.8 57.1 3.7 Apr 57.7 54.6 3.1 2021 (Est) 8.2% Greece Apr 54.4 51.8 2.6 New Housing Starts Poland Apr 53.7 54.3 -0.6 2017 1.2M ASEAN Apr 51.9 50.8 1.1 2018 1.3M Vietnam Apr 54.7 53.6 1.1 2019 1.3M 2020 (Est) .93M Australia Apr 59.7 56.8 2.9 Apr 58.8 55.5 3.3 2021 (Est) 1.7M Switzerland Apr 69.5 66.3 3.2 Hong Kong Apr 50.3 50.5 -0.2 Auto Sales (Annual) Singapore Apr 51.8 53.5 -1.7 2017 17.1M 2018 17.3M 2019 16.9M 2020 (Est) 14.4M 2021 (Est) 15.5M

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