Recession Watch

Growth is never by mere chance; it is the result of forces working together.”
– J.C. Penney
“Strength and growth come only through continuous effort and struggle.”
– Napoleon Hill

“We’re lost, but we’re making good time.”
Yogi Berra, 1925-2015, RIP (For a most moving and memory-laden tribute to Yogi, see The Lefsetz Letter.)
The Yogi Berra quote above, which was brought to my attention this week, seems an apt description of where the markets and the economy are today. Nobody is quite sure where we are or where we’re going, but we all seem to think we’re going to get there soon.
I think it’s pretty much a given that we’re in for a cyclical bear market in the coming quarters. The question is, will it be 1998 or 2001/2007? Will the recovery look V-shaped, or will it drag out? Remember, there is always a recovery. But at the same time, there is always a recession out in front of us; and that fact of life is what makes for long and difficult recoveries, not to mention very deep bear markets.
The problem is that our most reliable indicator for a recession is no longer available to us. The Federal Reserve did a study, which has been replicated. They looked at 26 indicators with regard to their reliability in predicting a recession. There was only one that was accurate all the time, and that was an inverted yield curve of a particular length and depth. Interestingly, it worked almost a year in advance. The inverted yield curve indicator worked very well the last two recessions; but now, with the Federal Reserve holding interest rates at the zero bound, it is simply impossible to get a negative yield curve.
Understand, an inverted yield curve does not cause a recession. It is simply an indicator that an economy is under stress.
So now we are in an environment where we can look only at “predictive” indicators that are not 100% reliable. Actually, most are not even close. Some indicators have predicted seven out of the last four recessions. Some never trigger at all.
Recession Watch
All that said, looking at data from the last few weeks suggests that we need to be on “recession watch.” Global GDP is clearly slowing down, and the data we are getting from the US suggests that we are going to see a serious falloff in GDP over the next few quarters. I want to look at the recent (very disappointing) employment numbers, earnings forecasts (and some funny accounting), credit spreads, total leverage in the system, and the overall environment where credit, which has been the fuel for growth, is under pressure. The totality of this data says that we have to be on alert for a recession, because a recession will mean a full-blown bear market (down at least 40%), rising unemployment, and (sadly) QE4.
The jobs report on Friday was just ugly. Private payrolls increased by just 118,000, which is about the minimum level needed for unemployment not to rise. Government payrolls added 24,000. There were serious downward revisions to the last two months, as well. August was taken down by 37,000 jobs, and July was reduced by 22,000. The last three months have averaged just 167,000 new jobs compared to 231,000 for the previous three months and 260,000 for the six months prior to that.
My friend David Rosenberg dug a little deeper into the numbers and noted:
Adding insult to injury and revealing an even softer underbelly to this report was the contraction in the workweek to 34.5 hours from 34.6 hours in August, which is effectively equivalent to an added 348,000 job losses.
So take the headline number, tack on the downward revisions and the loss of labour input from the decline in the workweek, and the "real" payroll number was [a minus] 265,000. You read that right.

He added: “Have no doubt that if the contours of the job market continue on this recent surprising downward path… [m]arket chatter of QE four by March 2016 is going to be making the rounds.”
While the unemployment rate remained at 5.1%, it did so largely because of a significant drop in the labor participation rate, which is not a good way to enhance employment. Further, the U-6 unemployment number is still a rather depressing 10%. Those are the people who are working part-time but would like full-time jobs, as well as discouraged and marginally attached workers. Very few part-time jobs pay enough to finance a middle-class lifestyle.
Earnings Recession
Leo Kolivakis of Pension Pulse has a downbeat earnings season preview, aptly titled “A Looming Catastrophe Ahead?
Analysts have been steadily cutting 3Q earnings projections, and those revisions threaten to make some richly priced stocks even more so. Thomson Reuters data shows analysts expect a 3.9% year-over-year decline in S&P 500 earnings. Expectations are falling for future quarters as well.
These expectations have some strategists talking about an “earnings recession.” Just as an economic recession is two consecutive quarters of falling GDP, an earnings recession is two consecutive quarters of falling corporate profits.

The headwinds are no mystery. China’s weaker import demand is hurting all kinds of companies, especially raw materials and infrastructure suppliers. Caterpillar (CAT) slashed its revenue forecast and announced 10,000 job cuts. That probably isn’t playing well in Peoria.
Accompanying the falloff in Chinese demand is an increase in the number of containers coming into the US as the strong dollar allows us to buy more and sell less. Not a particularly useful combination.
I love this quote from a Reuters story:
“How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market.
As we all know, it is every portfolio manager’s job to “drive the market higher.” Daniel evidently wants to do his part.
Sadly, despite our best efforts, the stock market faces an uphill climb. More from Reuters:
Even with the recent selloff, stocks are still expensive by some gauges. The S&P 500 Index is selling at roughly 16 times its expected earnings for the next 12 months, lower than this year's peak of 17.8 but higher than the historic mean of about 15. The index would have to drop to about 1,800 to bring valuations back to the long-term range. The S&P 500 closed at 1,931.34 on Friday [Sept 25].
Moreover, forward and trailing price-to-earnings ratios for the S&P 500 are converging, another sign of collapsing growth expectations. The trailing P/E stands at about 16.5, Thomson Reuters data shows. Last year at this time, the forward P/E was also 16 but the trailing was 17.6.
The last period of convergence was in 2009 when earnings were declining following the financial crisis.
The Energy sector is the biggest drag on earnings, meaning that we now see analysts everywhere calculating estimates “ex-energy.” I suppose this produces useful information, but if we are going to exclude the bottom outlier, shouldn’t we exclude the top outlier as well? Healthcare is carrying much of the earnings burden for S&P 500 stocks, but I have yet to see an ex-healthcare or ex-energy & healthcare estimate.
A funny thing about earnings: they’ve been going up for the past year, even as top-line revenue has not. Generally, those go hand-in-hand. What’s happening?
And for the answer I have a story. A few years ago I made an assumption as to how a new stream of income would be taxed. I made that assumption based on my knowledge of having had similar income in the ’80s and ’90s. It turned out the rules had changed, and I hit the end of the year owing what was for me a rather large sum, as I was also trying to finance and build my new apartment.
I told my tale of woe to my accountant, Darrell Cain, who obviously detected the distress in my voice. He smiled at me and said, “John, I have an elephant bullet.” He reached under the table and pulled out an imaginary elephant bullet. “This is a big bullet. But I only have one of them.
Once you use this bullet you can never use it again. If another elephant comes down the road, there will be nothing you can do.”
And yes, there were some one-time tax maneuvers that reduced my taxes to a manageable number. But as he said, those were a one-time option.
There is no way to prove it, but I think corporate accountants have been using up their elephant bullets this past year, as corporations want to be able to maintain the fiction that earnings are rising, so that price-to-earnings ratios don’t come under stress and cause stock prices to fall. You can move expenses from quarter to quarter, put off certain spending, recharacterize certain expenses one time, and so on. I deeply suspect we are going to find that some recent corporate earnings have been of the smoke and mirrors type.
Further, as I’ve written in previous letters, earnings forecasts are notoriously trend-following and typically miss the turns. If earnings are beginning to fall – and it appears they are – it is highly likely that earnings estimates will miss to the downside. If we slide into a recession at the same time, they will miss to the downside rather dramatically.
Is GDP Flatlining?
The Commerce Department will release its first estimate for 3Q US GDP on Thursday, Oct. 29.
By then we will be in the thick of earnings season and will already know how many companies performed.
In the big picture, income (corporate or individual) can’t grow unless the economy grows. GDP may be a flawed way to measure economic growth, but it is the best tool we have. Blue-chip estimates right now are that it ran at near a 2.5% annualized growth rate last quarter.
However, the Atlanta Fed has sharply revised their GDP estimate for the third quarter down to under 1%. (See chart below.)
Will economic growth come into harmony with income growth? We know they have to meet eventually. At present, it appears GDP will stay in slow-growth mode. That means it probably won’t be able to pull earnings up with it.

High-Yield – Rising Defaults
High-yield spreads have been tightening and interest rates have been rising for some time. This is starting to cause some distress in the high-yield (otherwise known as junk bond) market. My friend Steve Blumenthal has been following and timing the high-yield market for 20 years. He recently wrote the following, which I’m going to blatantly cut and paste as it clearly depicts the level of distress in the high-yield market. If credit becomes more difficult to get, then growth is going to come under stress as well. I note that corporations that I think of as issuing higher-quality debt are paying 10%. Thank you very much. Ten percent interest rates don’t seem to me to be very low.
Don’t take a lot of time to try and absorb the details of the following. What I want you to come away with is an impression of the distress that high-yield markets are facing. Quoting from Steve’s “On My Radar” blog:
Edward Altman, the New York University professor who developed the Z-Score method for predicting bankruptcies, says “Defaults will breach the historical high next year and the Fed is the ‘wild card’ that has the power to determine how quickly the current credit cycle ends.” (Bloomberg)
“We have blamed the wider Junk Bond spreads on Energy issuers, but last week there was a buyer’s strike.  If this continues, you can say goodbye to easy financing for M&A, which will remove one large pillar of support from stock prices.” (361 Capital)
  • Altice on Friday sold $4.8 billion of junk bonds to fund its $10 billion purchase of Cablevision Systems Corp., according to S&P Capital IQ LCD. When the deal was shopped earlier this month, Altice expected to sell $6.3 billion of debt, investors said. A 10-year bond was priced to yield 10.875%, compared with yields as low as 9.75% that were suggested by bankers initially, according to S&P Capital IQ.  
  • Olin on Friday sold $1.2 billion of bonds to pay for its pending acquisition of Dow Chemical Co.’s chlorine-products unit. Earlier in the month, Olin was expected to sell $1.5 billion of bonds, fund managers and analysts said. The annual interest rate on Olin’s 10-year bonds sold Friday was 10%, up from 7% expected earlier in the month, according to S&P Capital IQ.
  • Companies have announced $3.2 trillion of M&A this year, according to Dealogic, emboldened to merge by cheap debt and the long stock rally that began after the financial crisis.
  • That puts 2015 on pace to rival 2007 as the biggest year ever for takeovers. Issuance of junk bonds backing M&A deals hit a year-to-date record of $77 billion through Friday, according to data from Dealogic.
  • A souring of investors on junk bonds could limit the availability of financing for deals that require a lot of borrowing. Banks have been under pressure from federal regulators to reduce their loans to such companies, and a pinch in the bond market could leave those deals struggling for financing. (WSJ)
  • After investors snapped up more than $37.5 billion of bonds issued by junk-rated energy companies in the first six months of 2015, just $5.9 billion has been raised since then, according to data compiled by Bloomberg. (Bloomberg)
  • Junk-bond investors are bracing for a surge in corporate defaults that would exceed the most pessimistic forecast from credit raters as the Federal Reserve contemplates its first interest-rate increase since 2006.
  • A measure of distress in the market is suggesting investors have priced in a default rate of 4.8 percent during the next 12 months, according to Martin Fridson, a money manager at Lehmann Livian Fridson Advisors LLC.
  • That’s almost two percentage points higher than the pace being projected for June next year by Standard & Poor’s, the world’s biggest credit rater, as concern mounts that energy companies that loaded up on cheap debt are going to struggle to refinance.
  • “Unless there is a miraculous turnaround in oil prices there is likely to be a lot of defaults,” Fridson said. “The rating agencies’ approach isn’t capturing the fact that a large part of the economy is far out of step with the overall picture of the mark.” (Bloomberg)
  • On HY fair valuation from Martin Fridson this week: Now that the sector has sold off sharply, it’s finally at fair value, finds Fridson, chief investment officer at Lehmann Livian Fridson Advisors. He uses a model that includes current economic and market conditions to judge valuations. (Barrons)
  • Note that fair value can move to significantly undervalued as happened in 1991, 2002, and 2008. Recessions are a bear (no pun intended).

  • The S&P US High-Yield Corporate Bond Index posted a yield to maturity of 7.51% on Tuesday, up from a recent low of 6.21% in late February. Morningstar data shows that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has lost 3.6% in the past six months.

Reverse Deleveraging

Longtime readers know that one of my core beliefs is that massive debt levels have thrust  us into a fundamentally imbalanced world. I believe our next great crisis, whenever it comes, will result from too much of the wrong kind of debt.

Given what happened in 2008, you might think we would have collectively learned our lessons about debt. We have not. Like an alcoholic who wants to cure his affliction with another shot of whiskey, we seemingly have concluded that the way out of a debt crisis is to create more debt.

Does that sound insane? It is insane, but it’s also true. This chart explains:

At the end of 2007 the global stock of outstanding debt stood at $142 trillion. Then in 2008 the financial world fell apart. Everyone moaned and groaned about irresponsible lending to irresponsible borrowers. Never again, we said. I actually wrote that I expected to see the world deleverage. Boy, what an optimist.

Less than seven years later, in mid-2014, we had added an additional $57 trillion in global debt, and the data this year is going to show that we’ve hit another record high. All the talk about deleveraging was only talk. We didn’t deleverage; we re-leveraged and then some.

The chart above is from a February 2015 McKinsey Global Institute study called “Debt and (not much) deleveraging.” McKinsey is not an organization given to hyperbole, nor was it necessary in this case. Reality is bad enough.

Does economic growth justify higher worldwide debt levels? Not unless you think the world’s economy grew at a 5.3% annualized rate from 2007–2014. Debt levels grew at that rate. GDP did not grow at that rate anywhere except (possibly) China, where debt growth was in the double digits. Debt as a percentage of GDP is even higher now than it was in 2007: 286% vs. 269%. Using 2007 as a baseline is misleading, too. We now know that debt levels that year were excessive by any measure.

If we had too much debt then, we have way too much now.

What has enabled such a debt-fueled boom? Low interest rates. US corporations have spent about $1 trillion over the last 12 months on share repurchases and dividends in order to sustain their stock prices. Much of this money was borrowed. Rather than working for an old-fashioned profit increase, businesses resorted to financial engineering.

Who Are These Reckless Borrowers?

I said above that total debt grew at a 5.3% annual rate from 2007–14. Some types of borrowers added debt faster than others did, according to the McKinsey data.

  • Household debt grew 2.8% annually.
  • Financial sector debt grew 2.9% annually.
  • Corporate debt grew 5.9% annually.
  • Government debt grew 9.3% annually.
Banks and households missed their chance to deleverage – which means they will have trouble again in due course – but they at least kept their debt growth in roughly the same neighborhood as nominal GDP growth.

Incidentally, notice that the pattern reverses if we go back further to the 2000–2007 period. Then, household and financial-sector debt grew much faster than corporate or government debt did. That suggests the next crisis won’t look like 2008. However it breaks down, we are now in an even bigger debt bubble than we were in 2008. We are going to pay for it and eventually deleverage, but the process will look different this time. Which is why everyone is so focused on when the Federal Reserve will finally raise rates.

Working Out of Debt

Several years ago, when I was writing Endgame with Jonathan Tepper, I had a fascinating conversation with Kenneth Rogoff and Carmen Reinhart. They wrote the seminal book This Time Is Different, cataloging more than 250 financial crises in 66 countries over 800 years, looking for differences and similarities. You can read some it transcribed in chapter 5 of Endgame.

Among Reinhart and Rogoff’s findings is that it takes much longer to work off the excesses of a banking crisis than it does a typical business-cycle recession. The process can stretch out for years, with unemployment higher than normal and consumer demand sluggish the whole time. Sound familiar?

From Endgame (2011):

REINHART: [We] are still highly, highly leveraged as a nation. And the same can be said for most other advanced economies. So what I am getting at to your question, John, is that I think we are in for a period of subpar growth. And in a period of subpar growth… Yesou are not going to have the same kind of investment environment that we had in the run-ups to the IT bubble and in the run-ups to the subprime crisis. I think it’s going to be a different, more sobering environment.

ROGOFF: Slow growth is here; that just comes with this debt no matter what way you turn…. Some countries won’t tighten their belts soon enough, won’t figure out how to do it.... But with the slow growth, whatever way you turn, you tighten your belt. Barring certainly a great, unbelievable period of technology growth or a friend from outer space helping us out, we do face slow growth, as Carmen said.
I am not aware of any friends from outer space coming to help us out. If they arrive, I only hope they are more helpful than our friends from Washington, DC.

The working-out process will not be easy. Reinhart and Rogoff said 4+ years ago that after a banking and credit crisis it is typical to have 10 years of slow growth. Elsewhere they talk about how economies in this situation often bump up against a kind of growth “ceiling.” That matches what we see in the US right now.

Are we near the end of the process? I doubt it. If recovery from a banking crisis can take ten years and we are only seven years in, I expect (barring aliens) that we have a few more years to go. A slow, muddle-through recovery may not be exciting – but it’s better than the alternatives. As I noted at the beginning, I am quite worried about the possibility of a recession in our slow-growth, barely limping along at stall speed economy.

A few final thoughts: If we are entering a period of 1% or less growth – or God forbid, a recession – the Fed has few bullets left in its monetary policy gun. Can you actually take the world’s reserve currency to negative rates? Seriously?

A few more months of falling employment growth and the Federal Reserve will be seriously constrained with regard to raising rates. Even though all the talk from the various Fed presidents and governors the last few weeks has been about the high probability of raising rates this year, I don’t think it will take much for the Fed to decide to hold off just another month or three to make sure…

The only real weapon that the Fed thinks they have is another round of QE, but their own research has showed that quantitative easing wasn’t effective this last time. I have no idea what they think it would do next time, but they will feel they have to “do something.” Just for the record, I was talking with my good friend, interest-rate and Federal Reserve expert (he was a former Fed economist) Dr. Lacy Hunt, about what QE might look like the next time. I mentioned providing actual cash to individuals, and he let me know clearly that the Federal Reserve is by law not able to do that. At least the way we interpret the law today. They are also constrained as to the types of assets they can purchase.

I suppose it’s possible that you could get Congress to agree to expand the range of assets the Fed can purchase, but that would require an amendment to the Federal Reserve Act, and no one in their right mind thinks that Congress will actually take that Act up for revision, as the debate would be so contentious as to be almost impossible to resolve.

By the way, if the Fed initiates another round of QE, you can bet that other central banks around the world will double down and match. Try to get your head around another few trillion in various fiat currencies floating around in reserve accounts.

Gold, anyone? Just saying… Right now there is little love for the barbarous yellow relic, but that could change. Stay tuned.

San Francisco, Portland, New York, and Birthdays

The editor of Transformational Technology Alert, my close friend Patrick Cox, will be coming in Sunday, October 11, for a dinner and to meet a few of his readers before we head out the next day to San Francisco, where we will hopefully meet with Dr. Mike West of Biotime and then spend the next day at the Buck Institute, the premier antiaging research center in the world. I hop a later flight to Portland, where I will be doing a speech for Aequitas Capital. Then the plan is that we’ll somehow wind up in New York.

Sunday is my 66th birthday. The kids will be gathering in the evening for what I suspect will be a rather quiet birthday dinner. They say that the older you get, the faster time flies, and that has surely been my experience. There is never enough time in the day or week to get everything done that I want to. Including workouts, which I’ve been lax on this week because of travel.

I’ll close with one of my favorite poems from Dylan Thomas. Its theme seems particularly poignant this week:

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.

Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night.

Good men, the last wave by, crying how bright
Their frail deeds might have danced in a green bay,
Rage, rage against the dying of the light.

Wild men who caught and sang the sun in flight,
And learn, too late, they grieved it on its way,
Do not go gentle into that good night.

Grave men, near death, who see with blinding sight
Blind eyes could blaze like meteors and be gay,
Rage, rage against the dying of the light.

And you, my father, there on the sad height,
Curse, bless, me now with your fierce tears, I pray.
Do not go gentle into that good night.
Rage, rage against the dying of the light.

You have a great week. Speaking of not going gently into that good night, I intend to see The Martian later tonight. It has been getting rave reviews, and I do enjoy a Ridley Scott movie.

Your not feeling as old as the number suggests analyst,

John Mauldin

The Deep State

By Doug Casey

I’d like to address some aspects of the Greater Depression in this essay.

I’m here to tell you that the inevitable became reality in 2008. We’ve had an interlude over the last few years financed by trillions of new currency units.

However, the economic clock on the wall is reading the same time as it was in 2007, and the Black Horsemen of your worst financial nightmares are about to again crash through the doors and end the party. And this time, they won’t be riding children’s ponies, but armored Percherons.

To refresh your memory, let me recount what a depression is.

The best general definition is: A period of time when most people’s standard of living drops significantly. By that definition, the Greater Depression started in 2008, although historians may someday say it began in 1971, when real wages started falling.

It’s also a period of time when distortions and misallocations of capital are liquidated, and when the business cycle, which is caused exclusively by currency debasement, also known as inflation, climaxes. That results in high unemployment, business failures, uncompleted construction, bond defaults, stock market crashes, and the like.

Fortunately, for those who benefit from the status quo, and members of something called the Deep State, the trillions of new currency units delayed the liquidation. But they also ensured it will now happen on a much grander scale.

The Deep State is an extremely powerful network that controls nearly everything around you. You won’t read about it in the news because it controls the news. Politicians won’t talk about it publicly. That would be like a mobster discussing murder and robbery on the 6 o’clock news. You could say the Deep State is hidden, but it’s only hidden in plain sight.

The Deep State is the source of every negative thing that’s happening right now. To survive the coming rough times, it’s essential for you to know what it’s all about.

The State

Now, what causes economic problems? With the exception of natural events like fires, floods, and earthquakes, they’re all caused directly and indirectly by the State, through its wars, taxes, regulations, and inflation.

Yes, yes, I know this is an oversimplification, that human nature is really at fault, and the institution of the State is only a mass dramatization of the psychological aberrations and demons that lie within us all. But we don’t have time to go all the way down the rabbit hole, so let’s just talk about the proximate rather than the ultimate causes of the Greater Depression.

And here, I want to talk about the nature of the State, in general, and then something called the Deep State, in particular.

A key takeaway, and I emphasize that because I expect it to otherwise bounce off the programmed psyches of most people, is that the very idea of the State itself is poisonous, evil, and intrinsically destructive. But, like so many bad ideas, people have come to assume it’s part of the cosmic firmament, when it’s really just a monstrous scam. It’s a fraud, like your belief that you have a right to free speech because of the First Amendment, or a right to be armed because of the Second Amendment. No, you don’t. The U.S. Constitution is just an arbitrary piece of paper...entirely apart from the fact the whole thing is now just a dead letter. You have a right to free speech and to be armed because they’re necessary parts of being a free person, not because of what a political document says.

Even though the essence of the State is coercion, people have been taught to love and respect it.

Most people think of the State in the quaint light of a grade school civics book. They think it has something to do with “We the People” electing a Jimmy Stewart character to represent them. That ideal has always been a pernicious fiction, because it idealizes, sanitizes, and legitimizes an intrinsically evil and destructive institution, which is based on force. As Mao once said, political power comes out of the barrel of a gun. But things have gone far beyond that.

We’re now in the Deep State.

The Deep State

The concept of the Deep State originated in Turkey, which is appropriate, since it’s the heir to the totally corrupt Byzantine and Ottoman empires. And in the best Byzantine manner, the Deep State has insinuated itself throughout the fabric of what once was America. Its tendrils reach from Washington down to every part of civil society. Like a metastasized cancer, it can no longer be easily eradicated.

I used to joke that there was nothing wrong with Washington that 10 megatons on the capital couldn’t cure. But I don’t say that anymore. Partially because it’s too dangerous, but mainly because it’s now untrue. What’s now needed is 10 megatons on the capital, and four more bursts in a quadrant 10 miles out.

In many ways, Washington models itself after another city with a Deep State, ancient Rome.

Here’s how a Victorian freethinker, Winwood Reade, accurately described it:

Rome lived upon its principal till ruin stared it in the face. Industry is the only true source of wealth, and there was no industry in Rome. By day the Ostia road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt; and the carts brought out nothing but loads of dung. That was their return cargo.

The Deep State controls the political and economic essence of the U.S. This is much more than observing that there’s no real difference between the left and right wings of the Demopublican Party.

It’s well known by anyone with any sense (that is, by everybody except the average voter) that although the Republicans say they believe in economic freedom (but don’t), they definitely don’t believe in social freedom. And the Democrats say they believe in social freedom (but don’t), but they definitely don’t believe in economic freedom.

Who Is Part of the Deep State?

The American Deep State is a real, but informal, structure that has arisen to not just profit from, but control, the State.

The Deep State has a life of its own, like the government itself. It’s composed of top-echelon employees of a dozen Praetorian agencies, like the FBI, CIA, and generals, admirals, and other military operatives...long-term congressmen and senators...and directors of important regulatory agencies.

But Deep State is much broader than just the government. It includes the heads of major corporations, all of whom are heavily involved in selling to the State and enabling it. That absolutely includes Silicon Valley, although those guys at least have a sense of humor, evidenced by their “Don’t Be Evil” motto. It also includes all the top people in the Fed, and the heads of all the major banks, brokers, and insurers. Add the presidents and many professors at top universities, which act as Deep State recruiting centers...all the top media figures, of course...and many regulars at things like Bohemian Grove and the Council on Foreign Relations. They epitomize the status quo, held together by power, money, and propaganda.

Altogether, I’ll guess these people number a thousand or so. You might analogize the structure of the Deep State with a huge pack of dogs. The people I’ve just described are the top dogs.

But there are hundreds of thousands more who aren’t at the nexus, but who directly depend on them, have considerable clout, and support the Deep State because it supports them. This includes many of the wealthy, especially those who got that way thanks to their State connections...the 1.5 million people who have top secret clearances (that’s a shocking, but accurate, number)... plus top players in organized crime, especially the illegal drug business, little of which would exist without the State.

Plus mid-level types in the police and military, corporations, and non-governmental organizations.

These are what you might call the running dogs.

Beyond that are the scores and scores of millions who depend on things remaining the way they are.

Like the 50%-plus of Americans who are net recipients of benefits from the State...the 60 million on Social Security...the 66 million on Medicaid...the 50 million on food stamps...the many millions on hundreds of other programs... the 23 million government employees and most of their families. In fact, let’s include the many millions of average Joes and Janes who are just getting by.

You might call this level of people, the vast majority of the population, whipped dogs. They both love and fear their master, they’ll do as they’re told, and they’ll roll over on their backs and wet themselves if confronted by a top dog or running dog who feels they’re out of line.

These three types of dogs make up the vast majority of the U.S. population. I trust you aren’t among them. I consider myself a Lone Wolf in this context and hope you are, too.

Unfortunately, however, dogs are enemies of wolves, and tend to hunt them down.

The Deep State is destructive, but it’s great for the people in it. And, like any living organism, its prime directive is: Survive! It survives by indoctrinating the fiction that it’s both good and necessary.

However, it’s a parasite that promotes the ridiculous notion that everyone can live at the expense of society.

Is it a conspiracy, headed by a man stroking a white cat? I think not. I find it’s hard enough to get a bunch of friends to agree on what movie to see, much less a bunch of power-hungry miscreants bent on running everyone’s lives. But, on the other hand, the top dogs all know each other, went to the same schools, belong to the same clubs, socialize, and, most important, have common interests, values, and philosophies.

The American Deep State rotates around the Washington Beltway. It imports America’s wealth as tax revenue. A lot of that wealth is consumed there by useless mouths. And then, it exports things that reinforce the Deep State, including wars, fiat currency, and destructive policies.

This is unsustainable simply because nothing of value comes out of the city.