What to look for in 2016

Recently, I read several articles that listed predictions, e.g. “Top Ten security Risks in 2016.”  Like everyone else who services Defense and Security industries, AMREL is always looking ahead to see what products and services will be in demand.

What I noticed is that none of the articles predicted the big stories of 2016 that have already happen, i.e. the crumbling stock market and collapsing oil prices.  Rather than make predictions, I decided to analyze these events and their implications for the year ahead.

 

Oil

As has been widely reported, oil prices have slumped because of Saudi Arabia’s aggressive campaign to wipe out fracking. Fracking and other non-traditional methods of oil extraction have resulted in unprecedented levels of North American oil production.  Fracking is expensive; oil needs to be around $60 or $70 a barrel for it to be economical. Saudi’s aggressive pumping of cheap oil has pushed it down the price of a barrel to around $30. This has caused a massive reduction of capital investments and extensive layoffs in the fracking industry, which is what Saudi Arabia wants.

 

Stock market

Why has cheap oil caused the stock market to decline? Obviously, oil companies are suffering from the Saudi campaign, and this is a drag on the whole market. Some argue that eventually the economic benefits of cheaper oil will become so evident than even the famously manic-depressive stock market will have to notice them.

However, the other possible cause of oil’s price decline is what is really spooking the financial markets. China drives the world’s economy, especially with its voracious appetites for raw materials. Nobody believes the Chinese government’s official statistics, so businessmen are always looking for indications of the true state of its economy. If oil prices are low, that means their economy is not demanding as much, which means that it is slowing down. That means a lesser demand for raw materials, and that means bad times for all.  Add to this that Brazil, a major supplier of raw goods to China, is having serious problems, and you got yourself a worldwide economic freak out.

 

What does this mean for Defense industries?

How will the Chinese government react to its economic slowdown? After all, the Communist Party has held onto power partly through China’s unparalleled economic growth rates. How will they placate their citizens who expect and demand upward mobility? The Party could enact political and economic reforms that will enable true transparency, genuine economic freedom, and an elimination of the near-surrealistic levels of smothering corruption.

Sorry about that last sentence. I needed a good laugh. What the Chinese leadership has done in recent years and will probably do in the future when faced with a discontented public is foment nationalism and beat the drums of war.

Educated Chinese still talk about the “century of humiliation” when Japan and Western powers carved up China like a roast turkey. Nationalistic pride is a raw nerve easily aggravated, especially when it comes to matters of territorial claims.

Consider:

  • China is heavily dependent on trade.
  • United States Navy is capable of enforcing choke points of China’s major trade routes in the South China Sea.
  • China has border disputes with virtually every one of its neighbors (not an exaggeration).
  • China is aggressively ramping up its naval capabilities.

The United States us fully aware of this situation and has tried to shift its military resources in the so-called “Pacific Tilt.”  Good news for Defense firms that supply Naval needs. No so good for those that supply land-based military needs.

I am not suggesting that there will be a war between a China and the US. Nobody wants that (it should be pointed out, however, that historically “what everybody wants” has very little to do with whether or not a war starts). But what it does mean is a build-up of military assets and equipment.

I am also assuming that the United Sates will be able to avoid further major land-based operations in the Middle East.  After the expensive, inconclusive wars in Iraq and Afghanistan, the American public simply has no appetite for another lengthy ground battle.

 

Three things to look for in 2016

  • California real estate prices. The phenomenon of cash-rich overseas Chinese investors buying up California real estate is so well known that it is practically a cliché. If the Chinese economy is really in trouble, and the threat of war looms large, expect the already insanely expensive housing market in the Golden State to heat up further as wealthy Chinese seek safe harbor for their assets.
  • Marines get busy. Satirist Tom Lehr says it best:

When someone makes a move
Of which we don’t approve,
Who is it that always intervenes?
UN and OAS,
They have their place, I guess,
But first send the Marines!

If America is serious about a show of force in the South Chinese Sea, expect to see Uncle Sam’s Misguided Children (USMC) conducting training missions on remote rocky atolls. Also, keep track of aircraft carriers, Unmanned Combat Air Vehicles, the DF-5 (Chinese ICBM) and other technologies that may be used in coming Pacific face-off.

  • Syrian peace talks. Just because we don’t want to fight a major land war in the Middle East, doesn’t mean that we won’t. Right now, the region resembles a live action version of the board game Risk. No sensible, rational person would want to get mixed up in this unholy mess. So, we can’t rule out US involvement.

The Russians are supporting the brutal Syrian dictator Assad. They are dragging their feet in the Syrian peace talks, trying to gain military advantage before any final settlement. However, the Russians have their own troubles. European sanctions against them for their Ukrainian intervention, low prices on their only economic asset (oil) and the fact that achieving a meaningful military intervention in the Middle East is like trying to sweep back the ocean with a broom are just few problems that might force them to negotiate peace in earnest. Keep in mind that the Russian government is unprincipled, sociopathic and thuggish.  This means they will be easier to deal with than the other players in the Middle East.

Speaking of unprincipled, thuggish, sociopaths, it looks like Iran has decided to play nice. The kerfuffle with the captured American sailors could have been a lot worse. Yes, Iran violated international law with the humiliating videotape of the sailors’ capture and forced apology. But this is nothing compared to the grand drawn-out comic farce it could have been.  Within days the sailors were released and all naval equipment was returned.

Please note the economic benefits of the nuclear deal will be slow in coming. The deal only removes some of the sanctions against Iran. Oil is at an all-time low. Iranian pumping infrastructure is old and rusty. The $100 billion dollars unfrozen assts that you may have heard about is an exaggeration; Iran owes a lot of that money to other countries. Money is a powerful motive to get along with your neighbors and curtail military actions.

Furthermore, the US is circulating rumors that Iran has withdrawn most of its forces from Syria. Other rumors indicate that Iranian involvement with Syria is deeply unpopular with the Iranian public.

The Syrian war is by far the most dangerous conflict in that part of the world (even more so than the Israeli-Palestinian one). A peace agreement, even a flawed one, would be an enormously stabilizing event. While it may be farfetched, it is not a possibility that can be dismissed out of hand.

 

AMREL’S role

We haven’t noticed any dramatic change in the nature of our purchasing orders. Whatever the Defense needs will be this year, we will meet them. For over 30 years AMREL has supplied customized rugged solutions to the Defense market.

While we are best known for supplying land forces, we also have provided equipment to the Navy, Coast Guard, and Marines.  They appreciate the durability of computer platforms in surviving humidity, salt fog, and other challenges of a marine environment. In fact, January’s Customization of the Month features a push-to-talk handheld that we did for the futuristic DDG. Read about it here. We don’t just sell rugged computers. We sell rugged customized solutions.

What do you think? Got any predictions you want?  Write editor@amrel.com.