10-11-17 BUSINESS BY CARLSON-Return From VIENNA

It’s great to be back in Minnesota after a week visiting the Vienna University School of Business & Economics (VU) in Austria. VU invited me to give a research seminar for faculty and graduate students there. Then I led a 4-day short course on business and public policy issues for a group of business executives from Austria and surrounding Central European countries like Hungary and Bulgaria. I led that course as part of a Carlson-VU joint MBA program. The executives I worked with will visit Carlson in May to finish their program and then graduate. This joint MBA program is outstanding: great executives drawn from regional manufacturing, banking and services firms; great faculty from VU and Carlson; and a great locale –Vienna is a beautiful city full of ancient churches, imperial palaces, bustling restaurants and the Blue Danube winding through it all. Here is where you can learn more about the Carlson-VU program: https://carlsonschool.umn.edu/degrees/master-business-administration/executive-mba-vienna.

There are at least a couple of connections between goings on in Vienna this week and the US economy –no, really there are. Here’s one. Vienna is home to the Organization of Petroleum Exporting Countries (OPEC). And OPEC’s current leader is more than a little concerned with US independent oil producers in Texas and North Dakota. Here is where you can read about that concern: https://www.reuters.com/article/us-opec-us-oil/opec-considers-second-meeting-with-u-s-independent-oil-firms-idUSKBN1CF1R5. In fact, OPEC Secretary General Mohammed Barkindo (from Nigeria) voiced a not-so-veiled threat to those US producers to meet with him and agree on reduced production levels…or else. Those US producers have been stubbornly productive and efficient in the past three years, which is a big reason the price of oil dropped from about $100/barrel in late 2014 to as low as $25/barrel more recently. This week, the price is about $50/barrel. OPEC wants it closer to $75 in 2018, but the nearly 10 million barrels now produced by those US producers is stifling that. Barkindo wants to meet the producers and get them to cut back production. Otherwise, he’s threatening to turn on the OPEC spigots, flood the market, watch the oil price drop, and drive the independents out of business. It’s a no-win situation for producers in Texas and North Dakota. If they cut production in response, they may be violating US antitrust laws –participating in an OPEC-led conspiracy to fix prices higher than the “market” would otherwise produce. If they don’t cut production and OPEC makes good on its threat in 2018, then there will be tougher times on the Bakken in North Dakota and on the Permian in Texas. But Americans will see low gas and heating oil prices, which should be a boost to economic growth nationally. I’m betting that OPEC’s threat is empty and we’ll continue to bump along with oil in the $45-55/barrel range.

Here’s another connection between Vienna and the US economy. This Sunday, Austrians will go the polls to choose new members for their parliament and a new chancellor to lead those members. Here’s where you can learn more about the parties, leaders and issues they are debating: http://blogs.lse.ac.uk/europpblog/2017/10/04/austria-election-preview-sebastian-kurz-and-the-rise-of-the-austrian-anti-party/. The center-right OVP (Peoples Party) is leading pre-election polls and will likely lead the next government. Their leader will become the youngest democratically-elected head of government in Europe (or pretty much anywhere else that I can think of at the moment): 31-year old Sebastian Kurz. Kurz’s challenge will be in finding a suitable coalition partner to assure his majority. One likely partner is the center-left Socialist Party (SPO), but Kurz and SPO may not get on well enough to make that happen. A newer, far right-wing populist, anti-migrant, European Union-skeptic party called the Freedom Party is another possible partner, but their membership will come with a price that Kurz, a committed European Union supporter, may not be willing to pay. Here is why all of this matters. Austria will assume the presidency of the EU Council from July-December 2018. Here is where you can learn about the presidency, which rotates each six months: http://www.consilium.europa.eu/en/council-eu/presidency-council-eu/. EU Council presidency for Austria in 2018 means that Kurz and his coalition policies will matter not just for the 8.7 million who live in Austria, but for more than 300 million living throughout the EU, especially the more than 65 million that live in the UK. During Austria’s 6-month presidency, we can expect to see the crucial last round of negotiations determining whether the UK exits the EU in March 2019, either with a “soft” Brexit that permits some free trade and migration or with a “hard” Brexit that isolates the UK completely. That outcome will affect US foreign policy and the US dollar/euro exchange rate so important for US exporters…many of whom are here in Minnesota. I’ll bet you never thought Vienna was so important.

There are interesting business developments here in the Twin Cities. Monday saw an announcement from Minnetonka-based UnitedHealth Group (UHG) that they would start selling healthcare insurance to Minnesota employers in 2018. Here is where you can learn more about that announcement and its implications for our state: http://www.startribune.com/unitedhealthcare-wants-to-cover-more-minnesotans/450156433/. It’s a big deal, made possible by state legislation passed earlier this permitting for-profit health insurers to sell policies here for the first time in decades. Until now, UHG had only indirectly participated in the Minnesota health insurance market through an alliance with another healthcare insurer and provider, the non-profit firm, Medica. UHG says it will continue the alliance with Medica in 2018, but I don’t see how that alliance will last when one ally is also a direct competitor. And UHG is a really big competitor with more than $200 billion in sales likely in 2017 –that’s the same as the GDP of Portugal. Another for-profit health insurer, Aetna, is sizing up the Minnesota market. Their entry should be good for competition and the lower prices as well as higher quality that competition brings…in the short run.

Puerto Rico’s struggles have been part of the news since Hurricane Maria wreaked havoc there about three weeks ago. Recent news has reported on efforts by many US mainland businesses trying to restart operations in Puerto Rico. They include many Minnesota businesses with substantial manufacturing facilities: Medtronic, 3M, Boston Scientific, Abbott (buying St.Jude). In fact, many high-tech and pharmaceutical firms from the US mainland have manufactured there for decades. Why Puerto Rico? The answer is easy: taxes. Since at least the 1940s, the federal government has given Puerto Rico tax breaks to attract business investment and raise standards of living on the Commonwealth. It was dubbed Operation Bootstrap, and the operation worked. Between 1950 and 1980, per capita gross national product grew tenfold in Puerto Rico, and disposable income shot up 1,600 percent. Here is where you can learn more about those policies: https://www.cnbc.com/2017/09/26/heres-how-an-obscure-tax-change-sank-puerto-ricos-economy.html. In the 1970s, a particularly attractive new tax break called Section 936 (of the tax code) eliminated federal corporate taxes on any income repatriated from a Puerto Rican subsidiary to its US mainland parent. That tax advantage brought Medtronic, 3M and many other high-tech manufacturers. But what Congress giveth, Congress can taketh away. And they did so with Section 936 over a 10-year phase out. Many US mainland companies sold out or simply closed down operations, both of which contributed to Puerto Rico’s downward economic spiral and mass migration to the US mainland. Medtronic, 3M and other Minnesota companies have remained but on a scaled back basis. Now, they are struggling to get reliable power, transportation, and communications set up to resume operations. In fact, lobbying by these companies with millions in plant, property and equipment on the line may be some of the most effective leverage for a Commonwealth government needing billions of dollars from the federal government to clean up and start re-building.

Now that limited medical and recreational use of marijuana is permitted in several states, investors are throwing money at a burgeoning growing, manufacturing and distribution business that some think could reach $50 billion in sales over the next decade. But what’s missing to date? There are no financial and marketing media outlets for cannabis in the US…until now. Green Market Report (GMR) claims to be the first all cannabis, all-the-time media outlet for all financial and marketing outlet. Here is where you can see GMR’s content: https://www.greenmarketreport.com/. Now, this is still an iffy venture, especially when it involves a substance that is illegal for most uses under federal law and in a majority of the states. But GMR is charging forward with regular columns covering such important issues as which soda brand is the favorite among cannabis consumers: Coke or Pepsi (Coke, which may make sense given its own cocaine-laced origins). And the direction of a Marijuana Index tracking the value of US stocks with substantial exposure to the cannabis business: https://marijuanaindex.com/. GMR is also reporting on what appears to be lively mergers and acquisitions among cannabis producers, thus, bringing a whole new meaning to “greenmail” deals. Only in America, well part of America right now.

Check out today’s edition of BUSINESS BY CARLSON by listening back below…

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