Italy’s referendum holds the key to the future of the euro

On December 5, Europe could wake up to an immediate threat of disintegration

by: Wolfgang Münchau



After Brexit and Donald Trump, prepare for the return of the eurozone crisis. If Matteo Renzi, Italian prime minister, loses his constitutional referendum on December 4, I would expect a sequence of events that would raise questions of Italy’s participation in the eurozone.

The underlying causes of this extremely disturbing possibility have nothing to do with the referendum itself. The most important was Italy’s economic performance since it adopted the euro in 1999. Total factor productivity, the portion of economic output not explained by labour and capital, has fallen in Italy by about 5 per cent since then whereas in Germany and France it went up by about 10 per cent.

The second source was the failure by the EU to construct a proper economic and banking union after the eurozone crisis of 2010-2012 and to impose austerity instead. If you want to know why Angela Merkel cannot be the leader of the free world, look no further. The German chancellor could not even lead Europe when it mattered.
The combination of those two factors are the biggest causes for the incremental rise in populism in Europe. Italy has three opposition parties, all of which favour exiting the euro. The largest and most important is the Five Star Movement, a party that defies the usual left-right classification. The second is Forza Italia, Silvio Berlusconi’s party, which has turned rabidly anti-euro after the former prime minister was forced out of office in 2011. And the third is the separatist Lega Nord. In democratic countries, it is common that opposition parties eventually come to power. Expect that to happen in Italy too.

The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.

In France, the probability of a presidential election victory by Marine Le Pen is no longer a remote risk. Of all the candidates that have declared, she is the best prepared. There are some who could beat her, like Emmanuel Macron, the former reformist economics minister, who declared his candidacy on Wednesday. But he may not make it to the final round of the elections as he lacks a party apparatus.

If Ms Le Pen became president, she has promised to hold a referendum on France’s future in the EU.

If that referendum were to lead to Frexit, the EU would be finished the next morning. So would the euro.

A French or Italian exit from the euro would bring about the biggest default in history. Foreign holders of Italian or French euro-denominated debt would be paid in the equivalents of lira or French francs. Both would devalue. Since banks do not have to hold capital against their holdings of government bonds, the losses would force many continental banks into immediate bankruptcy. Germany would then realise a massive current account surplus also has its downsides. There is a lot of German wealth waiting to be defaulted on.

Can this be prevented? In theory it can, but it would require a series of decisions taken in time and in the right sequence. For starters, Ms Merkel would have to accept what she refused in 2012 — a road map towards a full fiscal and political union. The EU would also need to strengthen the European Stability Mechanism, the rescue umbrella, which is not designed to handle countries the size of Italy or France.
Is this even remotely likely? Think about it this way: if you ask the German chancellor whether she wants commonly-backed eurozone bonds, she will tell you no. But if she has to choose between eurobonds and an Italian exit from the euro, her response may well be different. The answer will also depend on whether you ask before or after the German elections next autumn.

My central expectation, however, remains not a collapse of the EU and the euro, but a departure of one or more countries, possibly Italy, but not France. In the light of recent events, my baseline scenario is now firmly on the optimistic scale of reasonable expectations.


The Year the World Felt the Might of China’s Commodity Traders

Bloomberg News 

  • Surging metal prices linked to jump in hedge-fund transactions
  • Cash pours into materials as alternative to stocks, property
The Chinese speculators shaking up global commodity markets are switched-on, flush with cash and probably not getting enough sleep.

For the second time this year, trading has exploded on the nation’s exchanges, pushing prices of everything from zinc to coal to multi-year highs and sending authorities scrambling to deflate the bubble before it bursts. Metals brokers described panic earlier this month as the frenzy spread to markets in London and New York, prompting wild swings in prices that show no signs of abating.

While billions of yuan have poured in from herd-like Chinese retail investors who show little regard for market fundamentals, brokers and traders say even more is coming from an expanding army of deep-pocketed hedge funds. They’re chasing better returns in commodities as stocks and real estate fade, often using algorithms and trading late into the night, when markets in London and New York are most active.
 
“There is no doubt that the price moves and the bigger volumes worldwide are being driven by the Chinese, and by professional speculators and financial players,” said Tiger Shi, managing partner at brokerage BANDS Financial Ltd., which counts several of those funds as clients.

“The western hedge funds and institutional investors don’t really know what’s going on. Often they were used to trading macro factors or Fed policy, but now they find they have fewer advantages.”



Shi, previously head of metals in Asia at Jefferies Group LLC and Newedge Financial Inc., estimates that China may have more than 5,000 hedge funds active in commodities. At least 10 manage assets of more than 10 billion yuan ($1.4 billion).

The use of algorithmic trading, in which computers execute multiple orders in milliseconds, is turbo-charging volume and volatility, according to Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management Co. About a third of activity on Chinese exchanges is executed by automated commands, which generates more volume and greater momentum in the global markets, Shi estimates.

A recent example was on Nov. 11. Copper in Shanghai jumped by the most since trading began in 2004 amid a surge in volume. On the London Metal Exchange, it gained as much as 7.6 percent, before sinking 1.7 percent in the Asian evening. The gap between the day’s high and low was more than $500, the widest in five years, and the intensity of the swing was just as big in New York futures.



“I can recall only two other occasions in my career where there was such panic and devastating price action in copper but this market today is far less transparent,” Matthew France, head of institutional sales for metals in Asia at Marex Spectron Group, said in an e-mailed report on Nov. 14. “The machine component in the market is now so much bigger as is the onshore retail and fund involvement on the Shanghai Futures Exchange and OTC options.”


The country’s biggest hedge funds include DH Fund Management Co., Shanghai Discovering Investment Co. and Shanghai Chaos Investment Group. Officials for all three declined to comment for this story.

Over less than two weeks this month, the value of daily transactions on China’s three commodity exchanges more than doubled to peak at $226 billion on Nov. 14. Sparked by speculation that government reforms are helping reduce oversupply of raw materials amid signs of improving demand, Chinese money is pouring into commodities as investors look for better returns than other assets including stocks or real estate, according to Fu at Lianzhan Global Macro Fund Management.

“The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading,” Fu said by mobile phone from Hong Kong. “But at the same time, we’ve got too much money there. There have been no returns from investment in industries. The stock market is neither dead nor alive. Investment in real estate also got curbed.

So all the money is rushing into commodities.”

The Bloomberg Commodity Index has returned 8.8 percent this year compared with a 7.2 percent drop in the Shanghai Composite Index of equities, and the government has imposed measures to cool the country’s real estate market.

“Commodities market volatility is liquidity driven, as money from commercial bank wealth management products and private banking accounts flow into the market seeking higher return,” said Li Yulong, chief investment officer at Jyah Asset Management, a mutual fund which overseas more than 9 billion yuan.

Chinese traders are often most active during the night session, when trading also typically peaks on the LME and on Comex in New York. On almost two-thirds of the past 30 trading days, copper trading was heaviest between 9 p.m. and 11 p.m. in Shanghai, bourse data show.

Analysis of volume and open interest suggests they typically hold contracts for only a few hours.


 
 

Similar to the last frenzy in April, the government-owned exchanges have stepped in to cool trading by raising fees and margins, or cutting the number of new positions allowed daily.

Volume and turnover have since come off their highs but prices are still swinging. Copper is poised for its biggest monthly advance in a decade in London and Shanghai. Zinc rose to its highest in more than nine years, while lead jumped to the most in five years on the Shanghai Futures Exchange amid record volume.
 
“The massive and unprecedented surge in Chinese trading volume in base metals over the past month -- but especially since the election -- has put LME metals traders on red alert,” Tai Wong, director of commodity products trading at BMO Capital Markets in New York, said in an e-mail. The price moves caused by Chinese traders make “a strong argument that the Middle Kingdom is once again the center of the world, at least for metals,” he said.


— With assistance by Martin Ritchie, and Winnie Zhu


Gray Champion Assumes Command: Part II

By: The Burning Platform


In Part One of this article I discussed the arrival of Grey Champions in previous Fourth Turnings; their attributes, deficiencies, and leadership skills; and why Donald Trump is the Grey Champion of this Fourth Turning - whether you like it or not. Now I will try to make sense of what could happen next.

"Our movement is about replacing a failed and corrupt political establishment with a new government controlled by you, the American people. The establishment has trillions of dollars at stake in this election. For those who control the levers of power in Washington and for the global special interests, they partner with these people that don't have your good in mind. The political establishment that is trying to stop us is the same group responsible for our disastrous trade deals, massive illegal immigration and economic and foreign policies that have bled our country dry.  
It's a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities. The only thing that can stop this corrupt machine is you. The only force strong enough to save our country is us. The only people brave enough to vote out this corrupt establishment is you, the American people." - Donald Trump
Make America Great Again


Seventy year old Donald Trump has assumed the Grey Champion flagstaff. In an increasingly chaotic world, normal working class Americans in flyover country were seeking a leader who could bring order, defeat the corrupt establishment, make tough decisions, and capture the zeitgeist of this moment in history. The ruling elite oligarchs and their fawning minions, occupying their strongholds in New York, California, Illinois, and D.C., are infuriated the peasants have dared to resist. In their secretive secure spaces, the elites are plotting with one purpose in mind - this uprising must be quelled.

They are now fanning the flames of discontent, funding professional protestors, and convincing the useful idiot college student millennials, Trump is dangerous to their future. It seems these mathematically challenged snowflakes have already forgotten about the $10 trillion of national debt and $1 trillion of student loan debt loaded on their backs by the Obama administration in the last 8 years. This is not to mention the $200 trillion of unfunded welfare liabilities awaiting them as they graduate with degrees in LGBT Studies and great jobs at TGI Fridays in their future.

As the legacy corporate mainstream media outlets hyperventilate over Trump going to dinner without informing them, while scorning and ridiculing his cabinet selections (even when he hasn't made them yet), this Fourth Turning chaotically churns towards its inevitable bloody climax. The current violence in the streets may be Soros funded domestic terrorism, but it still creates more anger, bitterness, and further unwillingness to compromise or meet in the middle.

This country is manifestly divided between red and blue, with the red geographically occupying 85% of the country and blue centered in the liberal urban bastions of corruption. There are multiple civil wars brewing below the surface, between the establishment and the people; left versus right; rural versus urban; Wall Street and Main Street; and the haves versus the have nots. It hasn't turned particularly bloody - YET.

It appears Trump's cabinet will be filled with establishment insiders. Many of his supporters will be disappointed. The daily minutia flogged by the 24 hour cable news propaganda machines is meaningless in the broad expanse of a twenty year Fourth Turning Crisis. Every president ends up with Washington insiders in their cabinet. At the end of the day, it's the president who sets the policy, decides what to prioritize, and sets the agenda for the nation. In the case of a Grey Champion assuming command in the midst of a Fourth Turning, events and his response to such events will dictate the course of the country and most likely the world for the next four or eight years.

The market reaction to Trump's ascendancy has a stench about it. On election night futures dropped 800 points, but markets turned positive the next morning and haven't looked back since. The stock market hovers at all-time highs. It's almost as if the big swinging dicks on Wall Street decided to send a message - they are still in charge. It doesn't matter who's in the oval office, Wall Street calls the shots. If you cooperate and do as you're told, the markets will ascend. If you attempt to implement any policy they don't like, a crash will be manufactured (ex. TARP rejection by Congress). The currency and bond markets are in turmoil across the globe. Something is clearly getting ready to blow.

You can ignore the day to day gyrations, as the three core elements of this Crisis - debt, civic decay, global disorder - will produce a chain reaction implosion during Trump's reign of power. The national debt is on automatic pilot to breach $1 trillion per year for as far as the eye can see. A $1 trillion infrastructure plan, rebuilding the military, building walls, massive tax cuts, trade wars and no spending cuts are a recipe for fiscal disaster. Trump's advisors seem to be following Dick Cheney's advice that deficits don't matter. Steve Bannon's documentary - Generation Zero - was based on the Fourth Turning, so you would think he would understand what's coming next.

Interest on the national debt was $433 billion in FY16. That colossal amount was with a near record low weighted interest rate of 2.2%. In case you haven't noticed the 10 Year Treasury rate has skyrocketed from 1.32% in July to 2.36% today. A 1% increase in rates across the yield curve will result in a 50% increase in interest on the national debt to $650 billion. Soc Gen's Albert Edwards believes the current bond route could drive the 10 Year Treasury rate to 3.25%. That would blow a hole in our annual deficits. Isn't leverage great?

US 10-Year Yield


The housing market was already rolling over due to high prices and stagnant household incomes.

With mortgage rates jumping by 1% and possibly more, housing bubble 2.0 meets pin 2.0. Auto loan defaults were already surging, as every Tom, Shaniqua, and Julio in America got a new vehicle with a low payment lease or 7 year 0% loan. Over 25% of all student loans are not being repaid. The stock market bubble has been sustained by corporate CEOs borrowing to buy back their stock at all-time highs. Their corporate earnings have been falling for several quarters in a row and now the interest rates on their record levels of debt are going higher.

In addition, the USD is now at a 13 year high, up 10% since May and 30% since mid-2014. This will further weaken the profits of our global conglomerates. Making America great again by bringing back manufacturing jobs will be DOA if the USD keeps rising. It just so happens earnings are falling with interest rates and currency rising, when stock market valuations are at record highs. The euphoria of the Trump victory will be short lived as the country officially enters recession and the stock market drops by 30% or more within the next year.

The civic decay already proliferating during and after the election will be exacerbated as bad debt wipes out financial institutions, corporations, and willfully ignorant consumer borrowers.

The lesson of 2008 has already been forgotten. Rather than rolling out his grand vision, Trump will be dealing with a financial crisis which will make 2008 look like a walk in Central Park. 

Will he follow the same failed policies used after 2008 - NIRP, QE, and saving Wall Street at the expense of Main Street?

Or will he level with the American people, allow Wall Street banks to go bankrupt, let the free market purge the system of trillions in bad debt, tackle the unfunded entitlement liabilities, and have Americans endure a Depression in order to reset our economic system? It will take a Grey Champion with a high level of moral fortitude and courage to demand such sacrifice from the citizens of this country.

With the left already trying to provoke a race war, once the Depression takes grip and the social safety net of entitlements begins to fray, the civic decay in the urban ghettos will reach a tipping point. Cities will burn, looters will run roughshod as police refuse to enter lawless neighborhoods, and commerce will grind to a halt.

If social justice warriors, black lives matter terrorists, or any other group of useful idiots decide to take their protests and violence into the red zones, outright civil war could break out. The Grey Champion is likely to clamp down on this civil disorder with the use of troops. Civil liberties will be trampled as the Federal Government attempts to maintain control. Fourth Amendment fans will not be pleased.

With rigged markets at record highs and the establishment still holding this Ponzi scheme of a country together, so they can extract a few trillion more before the collapse, the illusion of normalcy has lulled tens of millions into a false sense of security. Global disorder expands exponentially by the day.

The Middle East is a powder-keg; Russia and the U.S. are one mistaken shoot down from war; Europe is being overrun by Muslim hordes even as their insolvent socialist paradise goes bankrupt; NATO provokes Russia on a daily basis; Japan's decades long depression worsens; China's debt bubble approaches the breaking point; and currency wars are waged across the globe. Delusional Americans willfully ignore the facts because acknowledging them would require painful choices and accepting the consequences of decades of bad decisions.

As Trump focuses on filling his cabinet posts and preparing for his inauguration eight weeks from now, the forces of evil are gathering strength and preparing for battle. We are in the midst of the lull before the storm. Nothing has changed since the election from a debt crisis perspective. It seems the mainstream media pundits are purposely asleep at the wheel as The Obama administration has dialed the government spending up to 11.

Obama has made it his mission to reach $20 trillion in debt before he departs. At the current rate of debt accumulation, he will reach his goal by mid-December. The Obama administration has increased the national debt by $324 billion in the first 48 days of the fiscal year. That's a rate of $6.75 billion per day. The rate of accumulation last year was $3.3 billion per day. This is out of control, and not a peep from the propaganda media, or incoming administration.

US National Debt 1980-2019


The ongoing Soros funded protests in liberal urban enclaves across the country are setting the stage for a major confrontation in Washington D.C. on January 20, 2017. Obama continues to fan the flames of faux outrage from the left. Soros and his domestic terrorist co-conspirators are planning violent demonstrations in the midst of the inaugural celebration. Obama will order the police to stand down and allow the situation to get out of control.

Vandals jumpinmg on police car


Picture the 1968 Chicago Democratic convention. There is one major difference. There will be hundreds of thousands of Trump supporters who will not stand idly by and be abused by millennial snowflakes, BLM thugs, and feminazis. This event is likely to trigger clashes across the country. The gloves will be off and the situation could spiral out of control.

Those hoping for the Trump presidency to somehow derail this Fourth Turning are delusional.

Fourth Turnings never de-intensify. They build to a bloody crescendo, with the existing social order left in tatters and clear winners and losers. I think it is useful to describe this Fourth Turning in terms everyone should understand. J.R.R. Tolkien wrote his Lord of the Rings trilogy in the midst of the last Fourth Turning. It's not a coincidence the heroic figure of Gandalf the Grey saves the day during the Battle of Helm's Deep. He was the Grey Champion.

In today's parlance, Helm's Deep is occupied by normal working class Americans (aka the deplorables). George Soros is the evil Sauron, creating an army of Orcs with his immense wealth to destroy the good people of Helm's Deep and abolish their way of life. Through relentless propaganda, violent protests, and the creation of useful idiots through our government indoctrination camps (aka public schools & universities), Soros is attempting to conquer our society and turn it into a global socialist playground for himself and his oligarch cronies. They had us surrounded and were breaching the walls. Two weeks ago the battle seemed lost. Soros had his Orc General Clinton positioned for certain victory.

Helm's Deep


When the situation looked darkest, the Grey Champion materialized on the horizon with reinforcements indispensable in turning the tide. The feeling in flyover country when Trump ascended the podium to assume the mantle of the presidency was on par with the feelings of the Helm's Deep citizen combatants when they realized Gandalf the Grey had arrived to save the day. As we know, the victory at Helm's Deep did not win the war. Sauron regrouped and resumed his attack on humanity in short order. Soros is regrouping as we speak and girding his forces of evil for a final showdown. This war is still being waged. And the victor will not be crowned until the mid - 2020s.

Battle of Helms's Deep


The deplorables were in search of a prophet generation (Boomer) Grey Champion to lead them through this era of darkness, adversity and peril as this Fourth Turning careens towards its climax.

The Grey Champion doesn't have to be a good person, but they must lead and display tremendous confidence in their cause and path. Humbleness, thoughtfulness, graciousness and building consensus are not the traits of a Grey Champion.

Lincoln and FDR have many detractors, but during their Fourth Turnings, they most certainly led, casting aside impediments (often illegally), initiating conflict and enduring many dark days, with bleak prospects for a successful resolution. But they forged on despite the setbacks, failures, and tragedies. Both died on the doorstep of victory. Those of a libertarian bent, thinking Trump will restore Constitutional rights, will be disappointed, as he is likely to strengthen and expand government control of our economy, healthcare system, speech and communications.

As this Fourth Turning traverses obstacles towards its ultimate climax, the intensity will escalate to an earth shattering dimension. Bold decisions will need to be made, requiring a leader who displays incredible confidence, unflinching determination and inspirational leadership. Political correctness and cultural warfare gibberish will have no place in the coming trials. Trivialities will be disregarded; techno-narcissists will be forced to abandon their iGadgets and pick up a weapon; financial oligarchs will see their fortunes evaporate in the blink of an eye; revenge and retribution will be meted out in equal portions; and the possibility for worldwide annihilation will be ever present.

Winter has arrived, bitter winds are blowing and Spring is many years away. Grim times have befallen the planet. The prospect for a tragic outcome grows by the day. The storm clouds loom on the horizon. There will be no avoiding the coming tempest. Trump cannot defuse the banquet of consequences, decades in the making, headed in our direction. The best he can do is maneuver the country through this minefield of history without blowing the world up. There will certainly be financial chaos, widespread death, colossal destruction, and an all-out war to the finish. Let's pray the Grey Champion can lead us through this valley of death to a new High. There are no guarantees and our choices will matter.

Lightening Strike

"The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort - in other words, a total war.  
Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind's willingness to use it." - Strauss & Howe - The Fourth Turning


The Darker Side of the Dollar’s Rise

Expectations of better growth are also tightening financial conditions

By Richard Barley

President-elect Donald Trump speaks during a campaign rally in Hershey, Pa. Photo: Associated Press


Expectations of stronger U.S. growth as President-elect Donald Trump opens the fiscal taps have lit a fire under the dollar—with the greenback reaching a 13-year high measured by the ICE Dollar Index. But a stronger dollar, especially given its rapid rise, has already exposed weaknesses that have been ignored by investors. There could be more.

The shift has jolted investors into action. Last week they put $27.5 billion into global equities, while pulling $18.1 billion out of bonds, the biggest moves in two and three and a half years respectively, Bank of America Merrill Lynch notes. The result is higher yields and tighter financial conditions. The pain trade has been in emerging markets, where there has been a rapid negative reaction to higher U.S. yields and a stronger dollar.

A stronger dollar means weaker currencies for some struggling regions, notably Europe and Japan.

But tightening elsewhere could offset any gains these regions would get from rising exports driven by their weaker currencies.
From a growth perspective, there is a timing mismatch. If there is to be a fiscal boost in the U.S., it will take time to arrive, meaning the economic effect won’t be felt until later in 2017 and beyond.

The impact of tighter financial conditions could be felt more quickly: higher U.S. yields could affect mortgage demand and the housing market, and a stronger dollar threatens to crimp U.S. corporate profits.

That said, the move in the dollar and bond yields is doing some of the Federal Reserve’s work for it, meaning expectations that are being ramped up for tighter monetary policy may yet be a little overdone. While an interest-rate increase in December looks almost certain to avoid questions arising about the Fed’s credibility, the tone the central bank strikes into 2017 will be crucial.

The 2013 taper tantrum was caused in part by concerns that the Fed would tighten financial conditions rapidly. This can be a self-fulfilling prophecy, and tough words from central banks, coupled with the recent market moves, could create a similar dynamic. Already in some emerging markets, currencies have fallen and yields have risen more rapidly than they did during the tantrum.

Meanwhile, for the eurozone, times have changed, and 2017 looks like a tricky year. There are a elections in key member states such as France, Germany and the Netherlands. A constitutional referendum in Italy that could deal a blow to Prime Minister Matteo Renzi is coming up in two weeks. Some of the decline in the euro may reflect a higher political-risk premium, particularly after the surprise results of both the U.S. elections and the Brexit vote in the U.K. Investors won’t want to get burned again.

This risk had largely been ignored until recently. This has led to an unpleasant mix in Europe: German yields have risen, but Italian yields have risen further and faster. The last thing the eurozone needs is renewed fragmentation in bond markets. The European Central Bank is looking at changing how its bond-purchase program operates, but may face a tricky task in communicating any shift while keeping expectations of loose monetary policy intact. Markets aren’t good at reading nuanced messages, and the risk of a bad reaction is higher.

The story of 2016 is that investors aren’t great at reading the political runes. The lesson learned might be that caution is the best defense.


A Look Behind the Curtain of Trumponomics

The stock market senses a coming sugar high from tax cuts, but watch out for a destructive trade war.

By Alan S. Blinder

President-elect Trump in Grand Rapids, Mich., Nov. 7. Photo: The Washington Post/Getty Images


Since Donald Trump will be America’s next president, it behooves us to contemplate what Trumponomics might actually do to—not for—the U.S. economy. His campaign proposals were an odd mélange of slogans, like “build a wall” and “it will be great,” and reliable old saws of Republican economics, like massive tax cuts. Since we don’t know who will be whispering in his ear in the Oval Office (other than chief of staff, Reince Priebus, and alt-right chief strategist, Steve Bannon) the best we can do now is guess. ​

I’ll start with three easy ones.

Tax cuts. Congressional Republicans always want to cut taxes on the non-needy, and they are all too willing to bust the budget to do so. With Republican majorities in both Houses, pushing something resembling the Trump tax proposals through Congress should be a piece of cake.

The tax cuts will balloon the deficit, of course. But that’s something Republicans worry about only when a Democrat occupies the White House. Both President Reagan and President George W. Bush pushed through lavish tax cuts with no ways to pay for them. The good news here is that the Trump tax cuts will put the economy on a sugar high—which is probably why the stock market cheered and inflationary expectations rose.

Climate change. A second excellent bet is that the U.S. will cease being a positive force in the battle against global climate change and become an implacable foe instead. After all, the president-elect thinks the whole thing is a hoax. And it’s really easy to wield the wrecking ball here. All he needs to do is ignore the commitments made by President Obama, and the Paris climate agreement will be in shambles. Canada will become warmer, too.

• Infrastructure. Everyone expects the president-elect to propose a surge in infrastructure spending.

He’s a developer, right? Yes, but this is one place where Republicans in Congress may not be so willing to follow the leader. Remember, we have a big budget deficit which is about to be made much bigger by tax cuts. And doesn’t building infrastructure raise government spending? Try selling that package to the Freedom Caucus.

Now let’s turn to three major planks in the Trump platform that will be harder than he thinks, but where he can cause a lot of harm trying.

Health care. They say you can’t beat something with nothing. Are we about to try? Mr. Trump campaigned on repealing ObamaCare “on day one” and replacing it with . . . well, something great.

He mentioned health savings accounts, which may be great for the rich but are useless to the poor, and getting insurance companies to compete across state lines, which won’t accomplish much.

But not even Congress can scrap ObamaCare immediately. Yes, it can repeal the Affordable Care Act. But a mass of regulations implementing the law are on the books, and the U.S. has slow-moving administrative procedures for changing regulations. Unless Mr. Trump also repeals the rule of law.


That said, the new president and Congress can throw a huge monkey wrench into our health-insurance system by, for example, ending all the subsidies under ObamaCare. But do they really want millions of patients with serious pre-existing conditions to face bankruptcy, illness, or death? His Nov. 11 interview with this newspaper suggests not. But it will take money from somewhere to maintain the Affordable Care Act’s requirement that insurers accept customers with pre-existing conditions.

Immigration. When it comes to illegal immigration, the new president will have ample enforcement powers. After all, illegals have broken the law; they can be deported. But even if humanitarian and civil-liberty concerns don’t detain him, think about the gigantic budgetary costs and economic disruptions of efforts to find and deport 11 million people. For starters, who will fill the jobs now being done by millions of undocumented workers? And did I mention the ridiculous wall?

International trade. Mr. Trump wants to renegotiate Nafta. If he doesn’t get a “better deal,” whatever that means, he threatens to abrogate the treaty. Legal experts disagree over whether the president has the unilateral power to do so, but that won’t detain a man who’s so used to being sued.

However, some of his foreign-policy advisers might warn him about the perils of abrogating treaties.

The U.S. is party to lots of them—and will no doubt want to negotiate more.

Even without abrogating Nafta, U.S. trade laws offer the president ample tools with which to wreck trade with Mexico. Doing so would throw Mexico into a depression, thereby provoking more illegal border crossings. It would raise prices here and likely destroy more American jobs than it creates.

Throw in some slaps in the face toward China (branding it a currency manipulator, 45% tariffs, etc.), and you have the beginnings of a trade war that no one wants—except Vladimir Putin.


Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.


Donald Trump’s Choices in the Middle East

Shlomo Ben-Ami
. US Airtstrikes in Kobani

TEL AVIV – US President-elect Donald Trump has said a lot about foreign affairs, without really saying anything at all. His muddled statements offer little insight into what kind of foreign policy he will actually pursue, and there is not much reason to believe that, when his approach does become clear, it will be what the United States – or the world – needs.
 
Trump is a businessman, not a statesman. He thinks in terms of immediate profits and losses – a worldview that is exemplified in his declarations that US allies need to contribute more to security alliances. At a time of evolving challenges and growing threats, adhering to this narrow-minded, isolationist approach is unlikely to do anyone much good.
 
One region that Trump will not be able to ignore is the Middle East. The crisis in Syria, in particular, will draw the US in, though Trump’s choices there are limited. After all, America’s “moderate” jihadist allies are no more palatable than President Bashar al-Assad, and the so-called Islamic State is far from defeated.
 
Former New York City Mayor Rudy Giuliani, a close Trump adviser and possible member of Trump’s cabinet, has identified defeating ISIS as the administration’s first foreign-policy priority.
 
Trump has claimed that he knows “more about ISIS than the generals do.” But that is unlikely.
 
After all, the only way fully to defeat a movement that thrives amid chaos is to build strong and competent states, a task for which Trump lacks both the inclination and the patience.
 
If Trump opts for a purely military approach, he will find that every “victory” merely creates space for more violence and terror. While the conquest of Raqqa and Mosul by a US-led military campaign would improve America’s standing among its Sunni allies, it would also relieve pressure on the Russia-Iran-Hezbollah axis. Iran-backed Shia militias would unleash a killing spree against Sunni communities in Mosul after ISIS withdrew. The ensuing turmoil and pressure on Sunni populations would fuel more terrorism, whether associated with ISIS or with entirely new groups.
 
Whatever tack Trump takes in Syria, it will surely be influenced by Russian President Vladimir Putin.
 
Trump must cut America’s dependence on Russia in the Syria war, in order to resist Putin’s efforts to use his influence in Syria to gain leverage with regard to Ukraine.
 
Of course, Trump’s willingness to challenge Putin, for whom the president-elect has voiced admiration, is uncertain. But America’s security and military establishment, together with Republican senators like John McCain, are unlikely to allow Trump to “Make Russia Great Again” by surrendering both Syria and Ukraine. The surrender of Ukraine alone would embolden Russia to reassert itself in its supposed “sphere of influence,” potentially causing NATO to come apart.
 
Judging by his campaign statements, Trump might not be worried about the unraveling of NATO – or of any US security alliance, at least not yet. But the results could be disastrous, not least because a lack of US security guarantees and structures could spur nuclear proliferation.
 
Trump’s promise to suspend the Iran nuclear deal is particularly worrying. Iran has prepared Hezbollah to be a powerful proxy for precisely those occasions when it needs to strike back at Iran’s enemies. Moreover, suspending the nuclear deal would cause Iran to become a nuclear power in no time. In a region with no collective security architecture, terrorist groups could easily acquire their own primitive nuclear devices.
 
Given this, America’s estranged allies in the Middle East – Saudi Arabia, Egypt, and Israel – would be well advised to drop their opposition to the Iran deal, and instead encourage Trump to keep it in place. Likewise, Trump’s promise to reduce funding to foreign allies, as part of a broader “America first” strategy, should be tempering their joy at his victory.
 
Another estranged ally that could shape Trump’s choices in the Middle East is Turkey, which has pursued something of a détente with Russia in recent months. To salvage the bilateral relationship, Trump would have to sacrifice America’s partnership with the Kurds, whose militias in Syria and Iraq have been America’s most reliable allies in the battles for Mosul and Raqqa.
 
Turkish President Recep Tayyip Erdoğan may want ISIS defeated, but he wants to quell the Kurds’ ambitions of self-rule even more. Rewarding the Kurds for their help by backing their bid for statehood would be so unacceptable that, to prevent it, Erdoğan might even try to thwart the defeat of ISIS. Add to that opposition from Iraq, Syria, and Iran, and it is clear that Kurdish independence is not in the cards.
 
Palestinian statehood, however, should be. In his own erratic way, Trump has said as much, fueling hopes among some Palestinians that his election could end up working in their favor. But Israel’s fanatic settler movement has the opposite impression, viewing Trump’s victory as a license for the unrestrained expansion of settlements in Palestinian lands.
 
In the end, how Trump uses US leverage in the Israel-Palestine conflict – the only issue in the Middle East where the US enjoys such indisputable influence – might depend on events on the ground.
 
Specifically, a settlement-building spree might end up triggering a particularly fierce third Palestinian intifada.
 
But Trump should not wait for a crisis to impose an agenda on him. Instead, he should recognize that now, more than at any time since 1948, America’s estranged Sunni allies have a strong incentive to make peace with Israel and collaborate with it on regional security, and that such an arrangement could be legitimate only with the creation of a Palestinian state. Given that this would also support US reconciliation with the Arab peoples, thereby serving America’s national security interests, Trump should not hesitate to seize the initiative.
 
 


What Should Trump Do?—Your Questions Answered

By John Mauldin




This will be a shorter letter, in keeping with the need for holiday fun and relaxation.
 
However, last week’s letter with my thoughts on what Trump should do generated more responses than any other letter had in the last 17 years. As you might suspect, with a topic so controversial, not everyone agreed with me. But there were many good questions and comments and some thoughtful disagreements, so I want to address a few of those. And I will specifically go into why I seemingly deviate from core conservative principles regarding taxes. It’s all about debt and the consequences of debt – that’s the overriding factor for me. And I’ll try to make the case that there are times when we just have to make hard, even philosophically unpalatable, choices.
 
Some comments I will excerpt; others I will characterize in general terms; and where appropriate I’ll copy and paste whole comments. So let’s jump in.
 
 
Allen Jones · Univ. of Arkansas
 
Please explain further corporate tax rate of 15% on income above $100,000 with "no deductions period." Sounds like a 15% tax on sales. What do you mean no deductions? Are operating expenses deductions?
 

Allen, this was probably the most-asked question, and since you asked it most concisely, you get the recognition for it.
 

No, this is not a sales tax. It is a 15% tax on corporate income. That is normal GAAP accounting income. There are something like 3,400+ different, legal, congressionally mandated corporate tax loopholes and deductions. (I can’t find the exact number right now.) Many of those tax loopholes apply to only one company or one very small industry and are favors from a Congressman or Senator to their main constituents. So when I say no deductions, I mean get rid of every one of those loopholes. I know, I know – I will be goring practically every business’s ox in some way or other. And that’s the problem: Too many people think their industry deserves some breaks and one little loophole is not that big a deal, and the next thing you know there are 3400 of these puppies. And then you find General Electric paying less income tax than I do while making multiple billions of dollars a year.
 

I might be run out of Texas, because this would likely mean axing the oil depletion allowance, too. Normal depreciation would still apply. For those who are worried about R&D expenses, I would allow accelerated depreciation on R&D, because those are truly expenses, at least in my mind. But the point here is to have as few loopholes as possible (with the only exceptions to be those that clearly, directly create jobs). I will readily admit to not being an accounting expert, but I have looked at a few balance sheets.
 
Corporations would have to pay taxes on what they report to their shareholders or their bankers or even to themselves. Fifteen percent is not that big of a deal in the grand scheme of things. It is actually slightly lower than the current effective rate (depending on which source you go to). I think that under this plan we would actually take in more taxes because we would see corporations come from around the world and domicile here in the United St ates. And businesses would not go to such drastic lengths to avoid reporting income, so total corporate taxes would increase.
 
Glen Travers  -· London, United Kingdom
 

VAT is a drag on growth – look at UK and EU – as well as difficult for the unhappiest group in all our economies. This insidious tax is an admission of failure by politicians who promise reductions in income tax in return for proposing a “fairer” direct tax instead of controlling populist unaffordable promises.
 
 
Glen, I totally agree with you: a VAT will be a drag on growth. There was a lot of pushback from many readers on the concept of the VAT. So let’s use your question as a springboard into the subject.
 

First, if you asked me 10 years ago if I would ever even think about a VAT in the US, I would’ve said, “Not no, but hell no. Double hell no!” We were still at a point in 2006 where we could have brought the budget under control, got our hands around the entitlement problems, flatlined spending along the lines of Clinton/Gingrich, and dealt with both the deficit and the debt.
 

However, that is not what we chose to do. And now we find ourselves between the devil and the deep blue sea. The devil is the national debt, and the deep blue sea is the crisis that we are sailing into if we don’t figure out what to do about that debt.
 
The chart below goes through 2014, and if it were extended to the end of this year it would show national debt at $20 trillion.
 
 
At some point, Glen, debt in and of itself is a drag on growth relative to income. The economic literature is pretty consistent on that. A debt-to-GDP ratio of 40% is not an issue; but US government entities owe a total of $23 trillion, or over 120% of debt-to-GDP – and that amount is rising every year. We look a lot more like Italy than any of us would care to contemplate.
 

While I agree that a VAT is a drag on growth, that is not the problem in Europe. It is their debt, plus their sclerotic regulatory systems and ungodly heaps of rules and regulations that are destroying jobs and inhibiting new small businesses from starting.
 

As I keep preaching, when (not if) we have the next recession, the will balloon to well over $1.5 trillion and probably closer to $2 trillion. It won’t take long to get to $ trillion, and then we’ll be spending $600–$800 billion of taxpayers’ money just to pay the interest at what I think will be normal rates. Now, if you prefer to use the CBO’s projected interest rates, then add another $300 billion a year, pushing total interest outlays to $1 trillion a year. (The CBO is assuming a much stronger economy than I would at that level of debt.
 
If I am wrong, then the interest payments will be much higher…)
 

We have amassed well over $120 trillion in unfunded liabilities, and if we don’t get our entitlement spending under control, the debt is only going to get worse – much worse. That reality brings up the next, generalized question.
 
You Got to Know When to Fold ’Em
 
John, you know the only real way to solve the crisis is to cut spending across the board. Cut everything. You have to slash entitlements and defense spending and get rid of whole government departments. We have to learn to live within our budget. Stop being part of the mainstream and deal with the real problem: too much government spending.
 

(And there was also the Libertarian variation on that theme: Starve the beast; don’t feed it.
 

To everyone who voiced sentiments along those lines: I get it. I agree with you. If it were in my power, I would do it. But it’s not.
 

There’s a song running through my mind right now. It’s the chorus from Kenny Rogers’ classic song, “The Gambler”: “You got to know when to hold ’em, know when to fold ’em…”
 
Philosophically, I am still as much a small-government guy as I was back in the ’80s. A small-L libertarian. I want government to do only what is necessary to keep the game fair, do the things that we need to do as a group, which can mostly be done on the local level – and for God’s sake keep its thumb off the scales.
 

We fought those battles in the ’80s and ’90s and made huge progress – and we truly lost at a national level when the Republicans took over under Bush II. We Republicans became the party of big government. And while you can get many Millennials and Gen Xers to nod in agreement with the principle of a small government, for them that does not include doing away with government-assisted healthcare, which by definition means a pretty large government. And don’t even try to touch the hot third rail of Social Security.
 
Bush II actually tried to deal, just marginally, with relatively simple problems with Social Security and got slapped down by both parties.
 

Tell Boomers and others they can’t have their Medicare? Or their other “entitlements”?
 

The simple fact is, a majority of the voters in this country want Social Security and healthcare and expect healthcare to be provided to those who can’t afford it. They want pre-existing conditions to be ignored by insurers. And a whole slew of other things.
 

I do believe there is a way to get healthcare spending under control and put our entitlement problems on a glide path to being solved, even as we fully acknowledge that our demographics are working against us. But there is no way it can be done without money. It is going to take a great deal of government spending, no matter how you slice it. The government has only three sources of revenue: taxes, borrowing, and monetization. Borrowing money runs up the debt, and we are getting very close to the point where ballooning debt becomes debilitating. More on monetization later.
 

That means we have to somehow increase revenues if we are going to pay for all that needed spending and bring the debt under control. I don’t like it, but those are just the facts.
 

So then we come to the crux of the matter: How do we raise the necessary revenue in a manner that will still allow us to grow the economy as much as possible? I think the preponderance of economic literature suggests that consumption taxes are in general less of a drag on growth than income taxes.
 

Consumption taxes include value-added taxes (VATs) and sales taxes. Then there is a whole school of thought built around the so-called Fair Tax, which is a national sales tax that would be added on to all retail sales in addition to state sales taxes.
 
Proponents of the Fair Tax would then eliminate all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes.
 

I can go along with this scheme in principle, but in practice I think the equivalent of a 30% sales tax (which is what the Fair Tax would amount to when combined with state and local sales taxes) would send a lot of the economy underground. Just my opinion. When you can deal with your plumber or favorite restaurant for 30% less by paying cash, the temptation looms pretty large.
 

I’ve traveled all over the world, and those countries with high retail taxes or controlled exchange rates end up becoming cash societies to the extent possible.
 
The Argentines and the Greeks and the Italians are lifetime grandmasters at surviving in such an economy. Call me cynical, but at 30%, I think a lot of my neighbors would quickly master the game, too.
 

A VAT, or any of its sisters, has the advantage of being taxed at the business level on the incremental value added to products at each stage of production. It is thus a great deal harder to avoid, so everybody pays. Or almost everybody. It would actually capture a lot of the current underground economy.
 

So why not make the VAT large enough to get rid of all the other taxes, as the Fair Tax folks suggest? For me, it’s is a purely political decision. The VAT is a regressive tax. That means it generally falls more heavily on those with lower incomes. And progressives and liberals will hate that. So we have to come up with a compromise. That means we’re still going to have to have an income tax, but we need it to be as low as possible. My suggestion is 20% on all income over $100,000. (See last week’s TFTF for details.)
 

To make the VAT less of a regressive tax, I propose that we make it large enough so that we can eliminate the Social Security tax. That immediately gives all lower-income earners a 6% pay raise. Plus, it lowers business costs 6%. That takes away a lot of the regressive nature of the VAT.
 

Not starting to pay income tax until you clear $100,000 and not being taxed for Social Security doesn’t mean that those who make between $50,000 and $100,000 don’t pay taxes. They pay taxes in the form of the VAT, plus their local taxes; so their tax burden should not be a lot different than it is now, and they might even see something of a tax cut.
 

Remember, the object here is not just to cut taxes but to figure out how to get more tax revenue with the least possible pain to the overall economy. If your family has ever been faced (as mine has on several occasions) with a significant increase in expenses or decrease in income, you know you had to make some tough choices.
 
On the national level, too, somebody is going to have to pay more, and somebody is going to get less. I remember that when I was starting out in business in my 30s, there were days when I darkly joked, “I’ll pay what I have to, and everybody else will have to wait.” That included my wife and kids and what they wanted or even needed. Reality’s a bitch sometimes.
 

We have a reality to face up to now. And that is our national political process. We have to figure out where to get the money to pay for what our citizens say they want. If a Republican president and Congress do not enact legislation that gives voters something approximating what they feel they need, Republicans will be thrown out and Democrats will be given another chance. Let me tell you straight up that the economists advising the Democrats will not only give us a VAT, they will give us high progressive personal income taxes, and the corporate tax will not come down that much. They simply don’t buy my economic view of the world. They are neo-Keynesians through and through. Think Europe on steroids … even as we watch Europe getting ready to implode over the next four years.
 

There are a number of objections along the lines of, “If we do what you propose, it will hurt me. It’s not fair.” Well, in many cases I agree and sympathize with you. But at this point in the game, our whole political and economic situation is “not fair;” and we’re left with only difficult (but necessary) choices. One especially poignant objection came from a reader who had converted his entire pension plan to a Roth IRA, paid his taxes, and now I was, proposing a VAT that would make him pay his taxes again. He is quite right that this is unfair to him. But I don’t know what to do.
 
It is simply not possible to devise a system that is fair to everyone in every way. We have to make some tough decisions. The needs of the many must outweigh the needs of the few. And I say that with a full understanding that, as Ayn Rand discovered and explained, the needs of the individual are what give rise to the need and possibility for value judgments to begin with.
 

That is the problem with making decisions in a government that is as big and complex as the US system is. We have let its growth get out of control, and going back would be so unbelievably disruptive in terms of lives and fortunes and jobs and futures that the reverse trip is simply not possible. We can’t rewind the clock.
 
As The Gambler told us, “Every hand’s a winner and every hand’s a loser.” We have been dealt the hand we have, and we have to figure out how to play it to make it a winning hand. Folding is not an option.
 
 
What Happens If We Don’t Balance the Budget?
 
And thus we come to the heart of the matter with regard to my VAT proposal. If we don’t bring the budget deficit beneath the nominal growth rate of GDP (which is unlikely to go above 4% in the near future), our debt will explode during recessions; and we will ultimately face a debt crisis. Those never end well. The choices we will have at that point will be far fewer and even more stark.
 

Let’s wargame our situation for a few minutes. What will happen if we increase taxes and cut spending enough to get the deficit and debt under control? Getting there will take compromises along the lines of what Clinton and Gingrich did, but I truly hope we’re capable of them. With our debt as large as it is, we are going to be in a somewhat slower-growth economy; but if we get rid of enough shackles on growth and get the incentive structure right with the proper tax mix, the American entrepreneur can probably get us out of the hole we’re in without its getting too much deeper.
 

With the amazing new technologies that are coming along, we can probably get to a point where we can in fact grow our way out of our debt problem over the next 10 to 15 years.
 

What happens if we don’t? The more benign outcome is that we end up looking like Japan. We grow the debt to the point where we actually have to monetize it.
 
Perhaps not the end of the world but certainly not the high-growth, job-creating machine we would like our economy to be. The income and wealth divide would deepen, and if you think there was pushback in the last election, just wait. We might see even higher taxes and a slower-growth economy; and entrepreneurs, established businesses, and investors would just have bigger headaches. Remember, that’s the best possible outcome if we don’t deal with our deficit and debt.
 

What happens to the value of the dollar in that scenario? Six years ago I would have confidently told you it would go down. Now, as I observe the Japanese experience (and even though I recognize a number of differences between our economies), I suspect that the dollar might rise, not fall. Or rather, it wouldn’t fall relative to the other global currencies, and not nearly as much as my hard-money friends seem to think. We would truly find ourselves in a world for which we have no historical analog.
 

If the country with the world’s reserve currency starts printing money merely to service its debt because people don’t buy its debt, and in a world where most other major economies are also in trouble (as I logically assume they would be), then where are we?
 
And remember, this would be a future in which total global debt would be in the $500 trillion range and global GDP would top  $100 trillion. Monetizing $1–2 trillion a year (we are talking 10+ years out) – roughly the equivalent of what Japan is doing today – might be like spitting in the ocean. Money will be far more fungible and liquid and movable in the financial-technology world that we are evolving to. It would be the height of hubris to think we can know with any degree of certainty what would happen.
 

Now I don’t think the failure-to-act scenario will happen, but we’re in wargame mode, so we have to think the unthinkable. Maybe the world decides it wants another reserve currency or substitutes something new. We don’t know. Lots of things are going to be possible in 10 years that we have no clue about today. In such a scenario, the dollar could in fact lose a great deal of its purchasing power.
 
That would create a great deal of uncertainty and volatility, and I can see a global deflationary debt scenario unfolding, followed by massive monetary creation.
 
I guess the critical factor for me is that I can see no scenario where we don’t deal with the deficit and the debt and enjoy a positive outcome. It’s a binary choice to me.
 
So I choose to suggest what I think is the only politically possible thing to do; and that is to restructure the tax code, balance the budget with an increase in taxation, roll back as many rules and regulations as we can, hope we get the healthcare issue right – and then see what happens.
 

Let me end with a story. I was on a plane going from New York to Bermuda and had been lucky enough to be upgraded to first class. It was 1998 – just a few days after the resolution of the Long-Term Capital Management crisis. The markets had seen a rather harrowing time.
 

The gentleman who was seated next to me ordered Scotch as soon as the wheels were up and basically indicated to the stewardess to keep them coming. You could see that he was emotionally shaken. I engaged him in conversation after a few drinks, and when he found out that I was allied with the hedge fund business and coming from New York, he assumed I knew a lot more about the world than I did. It turns out that he was the vice-chairman of one of the largest banking conglomerates of the time. We all know the name.

 
He began to relate to me the deep background story of what had gone on for the past few weeks, culminating in that famous meeting called by the New York Federal Reserve, where the president of the New York Fed told everybody in the room to play nice in the sandbox. And to whip out their checkbooks. This gentleman had been in the meeting and knew the whole story. I knew I was hearing something special, so I just sat and listened and made sure the flight attendant kept bringing Scotches for him. He seemed to open up more with the downing of each one.
 

Finally, he turned and looked me in the eye and said, “Son, we went to the edge of the abyss, and we looked over. And it was a long way down. It scared every one of us to the depths of our soul.” And then he ordered another Scotch and laid his head back and tried to rest.
 

As I look back on that 1998 crisis, which we all thought was so huge at the time, it brings a smile. We were talking hundreds of millions that had to be ponied up by each of the big banks, several billions of dollars total. It was manageable within the private system. Just 10 years later, in the 2008 crisis triggered by the housing bubble, we were talking hundreds of billions if not trillions in losses, and the private system was not capable of dealing with it.
 

If we don’t handle our debt problem, the crisis into which we’ll plunge will resolve the debt in one way or another – and the ensuing turmoil will make 2008 look as minor as 1998 does today.
 

I do not want to my children to wake up in a world where we are frog-marched to the edge of the abyss and forced to look over. We still have the opportunity to secure the future for our children, but only if we seize the moment. If we don’t, it will be unusquisque pro se – every man for himself.
 

A few thoughts on investing in an environment like this (since investing in the economy is supposedly what this letter is mostly about). With all the current and emerging challenges we face, investing will still be difficult even if we deal with our debt issue, but those challenges will be far more agreeable than the extraordinarily difficult choices we’ll be left with if we don’t handle the debt. With the tools and strategies that we have available to us today and with even more powerful tools being developed for the future, I think investors who are properly prepared can figure out what to do in either scenario. But average investors who are expecting the future to look somewhat like the past? They’re going to be severely damaged.
 
Their retirement futures are going to be ripped from them. And they are going to be profoundly unhappy.
 

None of that has to be, of course. Things might turn out just fine. But I have a strong suspicion that the massive move we are seeing from active management to passive management strategies in the past year is going to turn out to be one of the all-time worst decisions by the herd. But that’s a topic for another letter.
 
Howard Ruff, RIP
 
 
I was truly saddened to learn this week that my old friend Howard Ruff had passed away.
 
He was 85 and suffering from Parkinson’s. Howard Ruff is a name that my younger readers (under the age of 40) will likely not recognize, but those of us who were around for the investment world of the ’70s and ’80s were certainly influenced by Howard. He was one of the true founders of the investment publishing world and was clearly the rock star in the ’70s and ’80s. His main newsletter was called the Ruff Times. This title was appropriate, as his first three books were Famine and Survival in America (1974), How to Prosper During the Coming Bad Years (1979 – NYT #1), and Survive and Win in the Inflationary Eighties (1981) – all solidly in the gloom and doom camp.  Howard believed (as of his 1979–1981 writings) that the United States was headed for a hyperinflationary economic depression and that there was a danger that both government and private pension plans were about to collapse. His mailing list grew to over 200,000 subscribers (unheard of for a newsletter at the time), and he had a following that was amazing. He was part of the hard-money crowd and rode the wave of gold and food storage, preparedness for the coming crisis, throughout the ’70s and into the ’80s. He made a series of remarkable calls, and people thought he knew what he was talking about. I think that sometimes even Howard himself did. (You can read a fuller reminiscence by our mutual friend Mark Skousen here. (Also includes a link to a New York Times piece on Howard.)
 

I remember the first time I saw him. I was at an investment conference in New Orleans (the “gold conference” which in its heyday would have 4,000 attendees and was founded by another legend, Jim Blanchard), and I noticed a small crowd (100 people or so) focused on an individual in a hallway. It was Howard holding court, answering questions, just being his entertaining self. And people leaning in to listen – enraptured. I saw that scene repeated at other times during that and other conferences, all throughout the ’80s.

 
And then things changed. The markets changed, and Howard’s message didn’t. His subscriber list began to shrink. The crowds got smaller (and older). You have to understand, Howard was a complicated man. He went through multiple bankruptcies and came back to make millions. He was passionate about everything he did. The business setbacks were simply opportunities to move on to something else. Onward and upward.
 
He was always upbeat.
 

He was a devout Mormon who had 14 children, 79 grandchildren, and 48 great-grandchildren at the time of his passing.
 

Sometime in the middle of the last decade I was speaking at an investment conference in Las Vegas. Howard called me and asked if he could come down from where he lived in southern Utah to give me a copy of his new book (which he wanted me to review). You can’t tell a force of nature no, so I told him to come on down. We agreed to meet at a booth on the exhibit floor in the afternoon. The floor was rather busy, and I was talking with friends and attendees at the back end of the aisle. I looked down the aisle and saw Howard walking toward me, and it wasn’t until he was about 10 feet from me that I realized that no one had stopped him to have a chat. Howard was still the same person, but the world had moved on, and he had not moved with it. I vividly remember thinking sic transit gloria. That lesson, the thought that it could happen to anyone, has been seared into my brain over the last 10+ years.
 

He wrote a biography in which he talked about his successes and failures, and we compared notes on his career and mine from time to time when we had opportunities to get together. I had jumped in near the beginning of the investment publishing business but on the management side, and I didn’t begin to really write my own material until the late ’90s. Howard was glad to mentor me and freely talk about his ups and downs.
 

He shared what he considered to be his biggest mistake. In the early ’80s, and certainly by the mid-’80s, he began to realize that inflation was truly not coming back and that gold might be challenged. But he had well over 100 employees and a subscriber base that would rebel if he changed his tune. Changing his message meant he would have to lay off scores of people, including many friends and family members, and he just couldn’t bring himself to do it.  “I knew it, in my heart, but I just couldn’t get myself to damage the company that badly.”
 

We had that conversation several times. I have had the unique advantage of being friends with a number of writers and publishers over the last 35 years. I’ve seen writers get big and then fade. Other seemingly stay on top of their game, riding the wave wherever it takes them. The biggest mistake that leads to downfalls is believing in your own investment magic (or, as we are wont to say in Texas, believing your own bullshit).
 
Howard was a true, one-of-a-kind marketing genius; and if he had changed his tune when he knew he needed to, he would have lost half his readers, but he would have built his list back up. The lesson: Be true to what you know and believe, and let the chips fall where they may. Don’t tell the people what they want to hear, Howard would say, but what you really think. Just make sure you believe it.
 

Howard was a friend to everyone he met, forever generous with his time and resources.
 
Those of us in the investment publishing world owe a great debt, whether we know it or not, to Howard Ruff. Your publishing business has Howard’s DNA buried deeply within it.
 
May he rest in peace.
 
Washington DC, New York, Atlanta, and Florida
 
I have rarely asked my readers to connect me with someone; but when I have, I have never failed to get that email address or phone number. So with that hope in mind, could someone please give me email and/or phone connections for both Matt Ridley and Bill Gross? You can send them to mary@2000wave.com. Thanks.
 

Week after next I will make my way to Washington DC and New York for a series of meetings and then to Atlanta for a Galectin Therapeutics board meeting. Then I’ll be home for the holidays. I’ll be in Florida for the Inside ETFs Conference in Hollywood, Florida, January 22–25. And then I’ll be at the Orlando Money Show February 8–11 at the Omni in Orlando. Registration is free.
 

It’s time to hit the send button. After writing such dramatic and emotional content, I think I’ll go watch the latest Harry Potter movie and simply be entertained. I am still utterly amazed that I can make a living doing what I enjoy doing – writing and thinking and talking. Every time I sit down at this computer to write my letter, I truly do think, “Dear God, don’t let the magic stop this week.” But then the real magic is you. It’s been 17 years, and I still enjoy every step of our journey together. Thank you.
 

Remember, I really do read your comments and take them to heart. So if you want to tell me something, go right ahead. In the meantime, you have a great week. It will be interesting to see how Trump transitions from showman to President, from a candidate who can say anything to “Oh my God I have to make decisions, and this is the real world.” Maybe I’m asking for the triumph of hope, but I believe he can.
 

Your whispering memento mori analyst,


John Mauldin