If Only We Could Blame China

John Mauldin


I regularly read Niels Jensen’s monthly letter, and this month’s edition is exceptional. Longtime readers will know that he has been featured in Outside the Box several times over the years. Today, Niels challenges the widespread belief that the steep drop in commodity prices is all about the economic slowdown in China. He also questions whether China is in fact more a victim than a villain of the recent plunge in global equity markets. He arrives at the conclusion that high and rising debt levels amongst corporates in emerging markets, in combination with a strong US dollar – particularly when measured on a trade-weighted basis – is a more likely cause of the fall-off. This is a very nonconsensus view, but it’s one that I found fascinating to seriously think about. And you probably should, too.

Will the current turbulence in global markets lead to a repeat of 2008, as many have suggested? Niels’ take on that question is interesting and convincing; but rather than spill his beans, I’ll turn you over to him.

I finish this quick introduction in a very cold and snowy Chicago – quite the contrast from the weather we’ve been enjoying in Texas. For the past two days I have been speaking about and in meetings discussing portfolio design, which is a topic I don’t often write about but do get a lot of questions about.

I’ve thought hard the last few years about how we should structure portfolios, especially our core positions, given my view of how the world is going to transform over the next 10 years. How can we make certain we’re in the markets at the right times and not in there when we don’t want to be? Or at least be reasonably sure? I’ve begun sharing my ideas with senior investment professionals around the country, and they and I think I may really be on to something special. I will be sharing these ideas in private and then making them publicly available within the next few months.

Working on the new book, it’s a challenge to try to describe not only how the world will change in 20 to 25 different areas but also how we should invest in the meantime. This process of thinking more long-term but accepting that we live and invest in a short-term world has gotten me to reconsider what to many of us has been a basic assumption. Is it possible that we are diversifying the wrong parts of our portfolios? Maybe… Coming soon.

It’s time to put on the jackets and scarves and gloves and brave the rush-hour traffic from Wheaton into downtown. In snow and ice. I can’t tell you how much I’m looking forward to it. At least I’m not the one driving. And yes, I will be very buckled up and padded…

Your getting more excited about the future analyst,


John Mauldin, Editor
Outside the Box
JohnMauldin@2000wave.com

 

If Only We Could Blame China


Niels C. Jensen, Absolute Return Partners

“When you combine ignorance and leverage, you get some pretty interesting results.”

– Warren Buffett
 

One thing we are exceptionally good at in the West is to blame China for pretty much anything that goes haywire. If you believe various commentators, it is all China’s fault that global equity markets have caught a serious cold more recently and, before that, China was blamed for the extraordinary weakness in industrial commodity prices. They have weakened – or so the argument goes – because China’s growth is not quite what it used to be, and commodity producing countries are over-producing as a result.

Whilst entirely correct that China’s GDP growth rate has indeed slowed substantially, perhaps someone should consider whether China is as much the consequence as the cause; whether China is in fact a victim rather than a villain? Let me explain.
 
The recent history of commodity prices

Commodity prices peaked in early 2008 (per the Bloomberg Commodity Index), only to fall dramatically as the Global Financial Crisis (‘GFC’) took its toll. Between 2009 and 2011, a substantial part (but not all) of those losses were recovered again, but since early 2011 it has been pretty much one way traffic. I do note, though, that in the early stages of the post-2011 fall in commodity prices, oil did not participate at all, as oil prices were pretty much flat between April 2011 and June 2014.

Phrased slightly differently, commodity prices have fallen well over 50% since April 2011, but oil prices have only participated in that rout since June 2014.
 
Energy (broadly defined) accounts for only about 31% of the Bloomberg Commodity Index, so there is definitely a bigger story unfolding here.

I suggest you take a quick look at chart 1. As you can see, commodity prices have fallen out of bed pretty much across the board. Anything from sugar to iron ore is down significantly, and it is really hard to blame the fall in sugar prices on China, even if I try my best. China is largely self-sufficient on sugar and is not a major player in international sugar markets (chart 2), so what is going on?
 



Rising corporate leverage in emerging markets


One theory – and the one I subscribe to – is that many commodity producing countries have chosen to ignore the fact that, not that long ago, virtually the entire world suffered from the GFC and have continued to pile on debt, as if there is no tomorrow. You may wonder why that is. I am sure there is more than one reason, but attractive borrowing conditions (low interest rates) have to be one of them.

The net result today is that whilst corporates in developed markets have not added to pre-crisis debt levels, and in many cases actually reduced overall debt, corporate debt levels in EM countries are at an all-time high (chart 3).
 


 
Interest rates are currently low on either side of the Atlantic, but U.S. bank regulators are not coming down as hard on U.S. banks, as regulators over here are on European banks. Adding to that, the fact that many commodities are priced in U.S. dollars has made the USD an obvious choice of currency for borrowers in emerging markets, many of whom are commodity producers.

By drilling one level further down, it becomes apparent precisely how much total USD lending to corporates in emerging markets has actually grown.

Before the GFC, USD lending to non-bank corporates in emerging markets totalled about $1.5 trillion. As of the latest count, it now stands at $3.3 trillion (chart 4).
 


The rising leverage across emerging markets has begun to worry the central bankers at Bank for International Settlements (‘BIS’). As Jaime Caruana said, when he gave a speech on the topic at the London School of Economics in early February:

“Increased leverage would be less of a concern, if debt was used to finance productive and profitable investments.”

However, as he also pointed out, profitability of EM corporates has been declining in recent years and is now below that of DM corporates (chart 5).
 


 
And it doesn’t stop there. The combination of falling oil prices and a steep fall in the value of most EM currencies v. USD will have a knock-on effect on sovereign creditworthiness too. As many oil companies are state owned, and as most countries with large state owned oil companies depend on oil revenues to finance the government budget, low oil prices translate directly into large public deficits and hence falling sovereign credit ratings.
 
The sinners

So here is what I think is actually happening. Because:

• commodities are the single biggest export article of most EM countries;

• many corporates have borrowed a lot in U.S. dollars in recent years; and

• the U.S. dollar on a trade-weighted basis has been very strong more recently (chart 6);

servicing the rapidly growing mountain of debt has proven a great deal more expensive than expected. Corporates have simply been forced to sell their commodities at increasingly deflated prices to service their rising debt. What many thought were exceedingly good borrowing terms now prove to be anything but, once currencies are taken into account.


 
Obviously, if the commodity in question is priced in U.S. dollars, the corporate involved will also generate income in USD, but that income has fallen steadily as prices have declined, so it is only a partial hedge.

I alluded to the link between rising leverage and falling commodity prices in the January Absolute Return Letter (which you can find here), where I wrote the following:

Almost all of the increase is due to a rise in corporate debt, and much of it has been borrowed in U.S. dollars as a result of the extraordinarily benign borrowing conditions in the United States since the outbreak of the GFC. As the Fed has now embarked on a cycle of rate hikes, which is likely to drive the dollar to new heights, and because commodity prices tend to be very negatively correlated with the dollar, I would expect the fall in commodity prices to continue well into 2016.

[...]

The combination of rising debt servicing costs and falling commodity prices is outright poisonous for the many EM companies that make a living out of exporting commodities to the rest of the world. If the U.S. dollar continues to appreciate (as we expect it to do) and commodity prices sink to new depths, the overall conditions for EM exporters can only deteriorate further.

Let’s just leave it at that. No need to elaborate any further.
 
 
A word on the link between China and oil

Up to this point, readers would be forgiven for thinking that I hold China free of any responsibility regarding the current slowdown in global economic activity, but that is not correct. China’s problems are just very different and have little to do with falling commodity prices. It is faced with a decapitated banking industry, which has been far too willing to lend to all kinds of investment projects – good and bad. At the same time, the Chinese growth model has been driven by investments and exports, whereas the growth in consumer spending has been relatively modest.

A few numbers to support that statement: As recently as 10 years ago, exports and investments constituted 34% and 42% respectively of Chinese GDP, i.e. less than a 1⁄4 of Chinese GDP came from the combination of consumer spending and government spending. By comparison, consumer spending accounts for over 70% of U.S. GDP.

By 2014, investments had grown to 46% of GDP, whilst exports had fallen to 23%. The further growth in investments has been funded by rapid credit expansion in China’s banking industry, which has grown from $3 trillion in 2006 to $34 trillion in 2015 (source: Hayman Capital Management, February 2016). That is a shocking amount of credit in a $10 trillion economy.

Now, the Chinese leadership face a big challenge. They must restructure the banking industry whilst at the same time seek to change the growth model. I can think of quite a few things that can go wrong in that process. Having said that, China is a user of commodities, not a producer and stand to benefit from lower commodity prices.

Informed sources tell me that Chinese GDP is growing at 3-4% per annum at present – not at 6-7% as claimed by official sources, but neither at 1-2%, as some pessimists have suggested more recently. The slowdown in Chinese economic growth is to a large degree down to the problems in the banking industry that I alluded to above. Non-performing loans are rising at no more than 1-2% if you believe official numbers, but the true growth rate in non-performing loans is more like 5-10%, or so I have been told.

The economic slowdown in China has certainly had some impact on oil prices, but one shouldn’t overstate China’s role in setting the price of oil. After all, China ‘only’ accounts for 16% of global GDP, and we have been through economic slowdowns of a magnitude similar to that of China before, without it having had the same dramatic impact on oil prices. I can only conclude that the steep fall in oil prices appear to be a supply problem, and have little to do with economic problems in China.

One additional point. Oil is widely known to be a very inelastic commodity, which explains precisely why oil prices have fallen as much as they have. A relatively modest slowdown in economic activity – not only in China but across the world – combined with higher than expected supplies, has created an imbalance between supply and demand, and the price has behaved exactly like the textbook prescribes.

So what precisely does the textbook say? Chart 7a provides a graphical illustration of the effect on price, should demand for a ‘normal’ commodity change modestly. In chart 7b you can see the effect the same level of demand change has on price, assuming that both supply and demand are inelastic. Not surprisingly, the price move is much more dramatic.




 
However, before you conclude that, in the current environment, oil prices can only go one way, and that is further down, let me share with you an observation that was pointed out to me recently (source: Frank Veneroso, January 2016). Monthly crude oil production numbers suggest that U.S. oil production has fallen nearly 400,000 barrels per day more than what the weekly numbers have suggested – and which nearly everyone follows – implying that the global oil market surplus is less than most estimates, and is likely to fall fast as the year progresses.

I therefore maintain my long-term bullish view on oil prices. Most of the weakness is now behind us, but I will admit that prices can go anywhere in the short term.
 
However, when we enter 2017 (and perhaps even earlier), inventory levels will at least have stabilised, and oil prices will begin to creep upwards again. Shale will prevent us from seeing oil prices at $100+ anytime soon, though.
 
What it all means

Regular readers of the Absolute Return Letter will know that, back in January, I listed the EM crisis as one of my leading candidates for ‘story of the year’ in 2016, and I pointed out how it could quite possibly negatively affect asset prices world-wide. That the story has unfolded this early in the year has admittedly taken me by surprise, but the fact that it has unfolded at all has certainly not.

After the significant damage that the GFC did to the financial system across DM countries, both banks and their regulators are constantly on their toes to avoid another calamity, and they are now tightening credit conditions in emerging markets. Total credit to EM corporates actually fell in the third quarter of last year – for the first time since 2009.

This has created a rather bizarre situation. Where common sense would suggest the supply side to cut back when prices fall and follow the logic in chart 7, the exact opposite has happened. Suppliers of various commodities (not only oil) have actually increased production as prices have fallen – presumably to service their rising debts. There is a first time for everything, I suppose.

Having said all of that, this is not the first time that a crisis has hit the emerging markets. In 1997-98 the so-called Asian crisis did substantial damage to equity prices as well as commodity prices, and the ultimate saviour back then turned out to be the combination of low commodity prices – in particular low oil prices – and very competitive foreign exchange rates.

I see no reason why the present combination of low oil prices and attractive foreign exchange rates shouldn’t invigorate economic growth across emerging markets, just as it did it back then. After all, the fall in oil prices this time has been even bigger than it was in 1997-98 (chart 8).
 


 
EM equities could quite plausibly end up being the bargain of the year, although I am concerned about corporate leverage in many EM countries. One would therefore have to step carefully.

Finally a general observation: This is not a repeat of 2008, as many have suggested. An EM crisis is not likely to do nearly as much damage to the financial system in our part of the world, as the GFC did. Why? Because the banking system in DM countries have only limited exposure to corporates in EM countries. Recession? Possibly. 2008 all over again? No.


Britain and the EU

The Brexit delusion

David Cameron will struggle to win a referendum on Britain’s EU membership. If he loses, the result will be messy at best and at worst disastrous
.         



THE referendum on Britain’s membership of the European Union that David Cameron has called for June 23rd will be not only the most crucial event in this parliament but the most important in Europe in years. It will determine the prime minister’s future, for a start: it is hard to see him staying in office if he fails to win his campaign to remain in the EU. It may be decisive for the future of the United Kingdom, as Scottish Nationalists have said a Brexit would trigger another vote on Scottish independence. And the departure of one of the heavyweight members would have a huge impact on the future of the EU.

The referendum was called after Mr Cameron completed his promised renegotiation of the terms of Britain’s membership at a marathon EU summit in Brussels that ended late on February 19th. In all four areas where he demanded change, he won concessions that could prove useful, even if they do little to swing the result of the referendum.

Yet it is hard to portray these relatively small reforms as the fundamental change in Britain’s relationship with Europe that Mr Cameron once promised. Nor did he secure the “full-on” treaty change he once said he needed. As a result, his deal suffered a predictable trashing in Britain’s Eurosceptic press and from many backbench Tory MPs. This was a blow to Mr Cameron. But the referendum will be decided not on the details of his deal but on the far bigger issue of whether voters believe that Britain is better off in or out of the EU.

On this, a heavier blow for the prime minister came when six of his 29 senior ministers confirmed, after a special cabinet meeting on February 20th, that they would campaign to leave. Besides such usual suspects as Iain Duncan Smith, the work and pensions secretary, their number included Michael Gove, the justice secretary and a close friend of the prime minister.

And on February 21st came the biggest setback to Mr Cameron, when Boris Johnson, the popular mayor of London and aspirant to the Tory leadership, announced that he too would campaign to leave.

Even before these leading Tories had come out, opinion polls suggested the outcome of the referendum would be close. Since Mr Cameron first promised an in/out referendum in a speech at the London office of the Bloomberg news agency in January 2013, there has usually been a clear lead for staying in (see chart 1). As worries have grown over Europe’s economic woes and its migration crisis, the gap has narrowed. The adverse reception of Mr Cameron’s Brussels deal and the decision of Mr Johnson to throw his weight behind the leave campaign may shift opinion further.
.

Belatedly business and the financial markets have woken up to the rising danger of Brexit. This week sterling slid to its lowest level against the dollar in eight years. Bosses of many of the biggest companies in Britain have come out strongly in favour of remaining in. Yet the chances that Brexit may happen look greater than at any time in the past five years. And that makes it worth dwelling on what Brexit would entail—and how it measures up to the promises of would-be leavers.

An infernal article
 
The merits of the claims of the leavers are hard to judge because nobody can be sure what relationship a departing Britain would have with the EU. There is no precedent aside from Greenland.

It left the club in 1985, but it is tiny and remains a dependency of Denmark, which is still in the EU. The assumption, now confirmed by Mr Cameron, is that a vote for Brexit would trigger an application to withdraw under article 50 of the Lisbon treaty.

Article 50 provides that the EU will negotiate a new agreement with the withdrawing country over two years. That can be extended, but only by unanimous agreement. The article also specifies that, when agreeing a new deal, the EU acts without the involvement of the country that is leaving. To get a feel for the negotiating dynamic, imagine a divorce demanded unilaterally by one partner, the terms of which are fixed unilaterally by the other. It is a process that is likely to be neither harmonious nor quick—nor to yield a result that is favourable to Britain.

Indeed, the incentive for other EU countries is not to act with generosity. A decision to leave will be seen by many as a hostile and destabilising act for a union that is already in deep trouble. Voters across Europe are disillusioned with Brussels. Populist parties in France, the Netherlands, Italy and elsewhere are watching the Brexit debate closely. The EU will be desperate to show that a decision to leave does not have a painless outcome.


The immediate effects of a Brexit vote are likely to be bad. Prolonged uncertainty over Britain’s new relationship with the EU will discourage investment, especially foreign direct investment, of which Britain is the biggest net recipient in the EU. This is particularly worrying for a country with a large current-account deficit that must be financed by capital inflows.

Fears about the current account, Britain’s credit rating and Brexit have been drivers of the pound’s recent fall (see chart 2).

The longer-term effects of Brexit are also likely to be adverse. Most studies suggest that economic growth would suffer. A detailed analysis from the Bank of England in October found that EU membership had benefited the British economy. Attempts to model the consequences of Brexit point to economic damage. Two American banks, Goldman Sachs and Citigroup, recently warned that growth and the pound would fall further after a vote to leave the EU.

The trickiest issue for a post-Brexit Britain would be how to maintain full access to the EU’s single market, the world’s biggest. This is crucial since almost half Britain’s exports go to the rest of the EU. It matters greatly for the fastest-growing component of exports, services (including financial services). It will not be simple.

Norway and Iceland have access to the single market through their membership of the European Economic Area (EEA). But they are obliged to observe all the EU’s single-market regulations without having a say in them, to make payments into the EU budget (in Norway’s case, around 90% of Britain’s net payment per head) and to accept free movement of EU migrants. As a Norwegian minister once put it, “if you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway.”

Switzerland, which is not in the EEA, has negotiated bilateral agreements that give access for goods but not most services. It has to keep to most single-market rules, contribute to the budget and accept free movement of people. The Swiss have been warned that, if they try to implement a 2014 referendum demand for limits on the latter, their trade agreement with the EU will lapse.

Countries such as South Korea and, now, Canada, have free-trade deals with the EU that do not require observing all its rules, paying into the budget or accepting migrants. But such deals do not circumvent non-tariff barriers, nor do they cover financial services. Moreover, the EU has or is negotiating free-trade deals with America, China and India, from which a post-Brexit Britain would be excluded. The EU has 53 such deals. Britain would have to try to replicate them, a huge challenge given its lack of trade negotiators and the length of time even simple trade talks take.

Heading for the Brexit
 
The Brexit lobby responds with three arguments. The first is to assert that both sides have a strong interest in a free-trade deal. This is true but any deal is unlikely to cover services. The second is to claim that, because Britain runs a big trade deficit with other EU countries, they need the British market more than Britain needs theirs. This is a fallacy: Britain accounts for only 10% of EU exports, while the EU takes almost half of Britain’s. Moreover, most of the British trade deficit with the EU is with just two countries, Germany and Spain—yet a trade agreement must be endorsed by the other 25 members too.

The third argument is that a post-Brexit Britain could strike new free-trade deals swiftly. Yet experienced trade diplomats are doubtful. Tough negotiators like the South Koreans are unlikely to offer Britain the same deal they gave the EU. America, China and India have made clear that they would be more interested in a deal with the EU than one with Britain alone.

When it comes to opening China to more trade, say, the negotiating clout of the world’s biggest market far outweighs Britain’s alone.

The next issue is regulation. The leave campaign claims that EU red tape hobbles Britain’s firms and strangles growth. Yet studies by the OECD, a rich-country club, find that, despite being in the EU, Britain’s product and labour markets are among the rich world’s least regulated. Moreover, a post-Brexit bonfire of market-unfriendly rules is fanciful. Britain led the charge for environmental rules, for example. The biggest interventions in the market, such as tight planning laws and a new living wage that will reach £9 ($13) an hour by 2020, are home-grown.

Immigration policy, on the other hand, would surely change post-Brexit. Although libertarians who want to leave favour more, not less migration, most Brexiters do not. Indeed, the big selling-point of their campaign is to restore British control of the frontiers by stopping free movement of people. It will be hard to do this and keep full access to the EU’s single market; it may also compromise the position of 2m British citizens who live in other EU countries. But the bigger point is that immigration curbs would do economic damage. Studies find that immigrants are net contributors to the economy because they pay far more in taxes than they take out in benefits.

Brexit would also have implications for the survival of the United Kingdom. The Scottish National Party is campaigning to stay in. If the leave side wins thanks to English votes, which is quite possible, the SNP will demand another independence referendum, which it expects to win.

Northern Ireland is also troubled by Brexit: Britain’s economic, trade and political relations with Ireland depend heavily on both belonging to the EU. This helped underpin the peace process in Northern Ireland.

Then there are the implications for the EU’s place in the world. As opinion polls have shown, voters in other EU countries agree with their governments in wanting Britain to stay in. Besides its size, global reach and free-trade instincts, Britain is a useful counter to the dominance of Germany and France. And, as the biggest military power in the EU, it is central to the club’s foreign-policy and security clout.

Less clout if it’s out
 
The growing role of the EU in global diplomacy, ranging from the imposition of sanctions on Russia through a nuclear-weapons deal with Iran to action against piracy off Somalia, would be severely diminished were Britain no longer in the club. The fight against terrorism would also be harder. It may be possible to try to replicate the police, security-service and judicial co-operation built up within the EU to fight terrorism, but it would take time and might not work as well.

Brexiters answer that NATO, not the EU, is the guarantor of the West’s security. A post-Brexit Britain could still co-operate with the EU on security issues, including the European arrest warrant and exchanges of information. They also see no reason why leaving the EU should upset either Northern Ireland or the union with Scotland. Mr Cameron disagrees. In Brussels he said firmly that Britain would be safer and stronger, not just more prosperous, in the EU. In the coming weeks, he will make domestic and national security a large part of the argument for remaining in.

The strongest argument for Brexit is that it is the only way to restore sovereignty to Parliament and escape the jurisdiction of the European Court of Justice. Mr Cameron’s plan to counter this with an act that reasserts parliamentary sovereignty will not convince many, for the ECJ would still stand supreme. In a world with a network of international treaties and obligations, sovereignty is not a completely binary matter; as Mr Cameron put it this week, it would be possible to regain the illusion of sovereignty but without real power.

The conclusion is that the purported benefits from Brexit are uncertain and may prove illusory, while the risks are much greater if voters choose to leave. Similar sentiments led Britons to vote to stay in the European project in 1975, and Scots to remain in the union in 2014. And yet the outcome in June seems more uncertain.

That is partly because the leave side has had a good few weeks. But it is also because voters will be influenced not by a cool calculation of costs and benefits but by their general view of Europe. And in the midst of a huge refugee crisis and stuck in the economic doldrums, Europe does not look inviting.

Referendums are always unpredictable: a sudden shock in the markets, or even a terrorist incident, could swing voters. There is all to play for.


More Than 30 Blocks of Fiscal Irresponsibility

by: The Burning Platform

"Democracy is a pathetic belief in the collective wisdom of individual ignorance. No one in this world, so far as I know -- and I have researched the records for years, and employed agents to help me -- has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby." - H.L. Mencken, Notes on Democracy

I've written dozens of articles about the 30 Blocks of Squalor over the years. The 30 blocks are essentially from 69th Street to 39th Street encompassing the wretched potholed route from unsafe Upper Darby through the killing fields of West Philly. The fine union government workers in the Streets Department have consistently maintained Chestnut Street in a constant state of disrepair. Not that drivers notice.


Car in pothole


When there is an accident on the Schuylkill Expressway in the morning I'm forced to run the 30 Blocks gauntlet down Chestnut Street. I've had to do it a few times in recent days. The expletives flowed in waves as I hit four unmarked craters in the center lane. These were not the common everyday West Philly potholes that pock the landscape like it's the moon. At least if you see a local resident fishing in the pothole, you can avoid it.


Potholes


These four separate craters were man made, or to be honest, created by a bunch of government union drones, not refilled with blacktop or marked with an orange cone. The question is whether this is utter incompetence, blatant indifference, spite or a business transaction between government drones and local tire dealers. Luckily, government traffic engineers have been too swamped to properly time the lights on Chestnut Street for the last 20 years, so no one can travel faster than 15 mph anyway.

Government lessens the pain of their ineptitude through their ineptitude in another area. They call that a win win in Philly. As the light at 57th and Chestnut remains on blinking yellow for a week, it makes you wonder what pressing issues are occupying the fine highly compensated union Streets employees.

I've now been navigating the crumbling ghetto of West Philly for the last ten years. I can without equivocation state I have not seen one new private business open its doors on Chestnut Street, in Mantua, or any other area I travel in West Philly during the entirety of those ten years. The existing businesses - nail and hair salons, fast food joints, bars, liquor stores, porn video outlets, smoke shops, car washes, more bars, and hysterically tax return offices (earned income tax credits) - haven't invested a dime in keeping up their appearances. Maybe they used all their spare cash to sure up the bars on their windows and the roll down steel gates necessary to keep the upstanding neighborhood honor student juveniles from having a little fun.

It appears there is an existential shortage of paint, hammers, garbage bags, wedding rings, and employed upstanding men taking responsibility for the children they father in West Philly. There is plenty of yellow crime scene tape, as West Philly accounts for a significant portion of Philadelphia's 280 annual murders (up 13% in 2015). Houses originally well built in the 1950s and with some upkeep would still be fine homes, are in disrepair, with collapsing porches, dilapidated gutters and roofs, crumbling sidewalks, boarded up windows, and satellite dishes on every one. The lucky end units usually have a mural of black people doing great things, with trash, garbage and overgrown weeds underneath and black people not doing great things shuffling along the streets.

Derilect buildings

As you witness the crumbling infrastructure of West Philly, with water mains bursting on a regular basis, streets sinking, houses falling down during heavy rainstorms, boarded up rat infested hovels housing drug addicts, and schools resembling prisons, it leaves you pondering how it came to this and why the fifty year War on Poverty left the people in these neighborhoods mover impoverished. I don't blame the people stuck living in West Philly. I blame the corrupt politicians who have run the city for the last sixty years.

Liberal solutions based upon welfare handouts, union government workers, idiotic solutions sold by slimy politicians and high taxes have combined to create a morass of uneducated, unmotivated, unmarried people who live in squalor created by the very politicians they have been voting for over the last six decades. The city has been under the complete control of the Democratic Party the entire time.

The only things built in West Philly in the last ten years are government boondoggle projects using taxpayer money. There is a new Social Security Administration building so it's easy to apply for SSDI because you're overweight and depressed. There are other government social services buildings to dole out various forms of welfare to the plantation recipients. The welfare slaves don't even notice their chains.

The government slave owners provide the bare minimum of sustenance to their ghetto slaves in return for their unquestioned voting support in elections. Obama received 98% of West Philly votes in the last election. There is no need for private businesses, new jobs, marriage (less benefits), personal responsibility, sense of community, education, or self respect. Government knows best and has all the solutions, until they run out of producers to tax into oblivion.

I've previously written about the $24 million 683 parking spot garage built on top of a perfectly fine ground level parking lot at the Philadelphia zoo, totally paid for by taxpayer funds and government debt. At least it was built at a 30% union construction premium. I drive by this testament to government pork every work day. It is closed in the morning. It is closed at night.

It is empty the entire winter. It is unoccupied at least 75% of the time during a given year. It will never be paid off by the minimal parking fees collected.

The privately owned parking garages in Center City are gold mines. Central Parking is highly profitable. This government created white elephant was unnecessary. The zoo gets busy on a few nice weather weekends all year. They had sufficient parking and overflow parking. It was built because the broke Federal government and the even more broke PA government forked over $16 million of taxpayer funds to create some temporary union construction jobs. It's a complete waste of taxpayer money.

And then there is the ongoing saga of the Section 8 gated estate called Mantua Square, a $28 million, 101 townhouse, 8 store front testimonial to Keynesian idiocy that sits in the middle of an Obama Keystone Zone. As you cross the bridge on 34th Street to enter the Mantua section of West Philly, there are beautiful murals on the bridge. There are murals of colorful flowers along the entire bridge.


Manta Square


I guarantee you they are the only flowers you'll ever see in Mantua. Weeds, diseased barren trees, garbage and crumbling sidewalks is what you get in West Philly, along with an occasional dead body. Mantua Square was one of Obama's shovel ready projects funded by his $800 billion porkulus package in 2009. Every dime came from taxpayers. It was touted as a game changer for Mantua. We were told businesses would open in the 8 pre-built retail spaces and other businesses would follow. A glorious revitalization would materialize due to brilliant government apparatchiks spending your money.

It is now 5 years later and not one storefront is occupied by a single business. Not one black entrepreneur has used their Philadelphia public school education to create a viable business and the jobs that would follow. Of course, no one living at Mantua Square would apply for a job anyway.

They would lose their welfare benefits and free housing. Plus it's only a short walk to the local church handing out free food every Thursday morning. The best part is that union construction workers spent the last six months replacing the facing of all 101 townhouse units due to shoddy union construction in the first place. No biggie. Just another couple million for the taxpayers to fund. The motto of government selected union construction firms in Philly is: "We're slow, we're incompetent, but at least we're the most expensive".

Did I mention this is gated Section 8 housing, with each unit costing over $250,000, when the median value of the hovels surrounding it is $36,000? The cars parked around this government white elephant include BMWs, Cadillacs, Lexus, and Ford F150s. I also see garbage strewn on the sidewalks, but as I pass by at 7:30 am on the way to my job I don't see anyone rushing out of their luxury townhouses because they are late for work.

The neighborhood is still a dangerous, drug infested, decaying shithole because one off government created projects do not change the culture or the people. More welfare promotes more dependency. Young black men get murdered in that neighborhood. A young child was raped on the way to school in that neighborhood. The school across from Mantua Square has been muraled, but the kids inside are unruly and uneducated.


Murals


Every public school in the city has metal detectors to cut down on the in school murders. They can do that out on the streets, where it belongs. And despite six decades of failed policies, the politicians, teacher's union, and liberals who run the city insist more taxpayer money will fix everything. One problem. They've run out of other people's money. Maybe the money spent on useless parking garages and Section 8 estates should have been spent replacing water pipes, streets, and encouraging businesses to open in the city through lower taxes and regulations.

I stumbled across an article in the Financial Times the other day revealing why Philadelphia's infrastructure is crumbling, with absolutely zero possibility of reversing the downward spiral. I find it fascinating a foreign publication had to uncover the ugly truth, while the liberal rag Phila. Inquirer is completely silent on the issue. They just spout the mantra of how the Feds and PA need to give Philadelphia more money. It's always for the children. The hundreds of billions poured into the public education system in this country over the last decade has been a complete waste of time, mainly because a huge portion of the money doesn't go towards education, but bloated pensions and administration costs.

More mediocre teachers, more government control, more social engineering, more free breakfasts and lunches, more catchy slogans and more promises have achieved steady declines in SAT scores across the board. The next solution is to phase out SAT scores. Measuring failure isn't allowed in our politically correct, trophy generation, safe spaces world. Reporting declines in scores on a test that has been an accurate predictor of college success for generations is a micro aggression against the intellectually stunted morons being matriculated through the government run public education system. The $14,000 to $20,000 per student per year spent by the taxpayers across this country just isn't enough according to those of a liberal ilk. The children would be smart if we just upped the ante by another $2,000 per kid. They'd hire more below average education majors into the teacher's union. That's a can't miss solution.


SAT Scores' Decline


If you think the national scores are atrocious, and they are, wait until you see the scores from the Philadelphia School District. The students who took the SAT from Philadelphia public schools "achieved" these averages:

Reading - 398 (PA average was 480)

Math - 405 (PA average was 483)

It gets even better. Only the cream of the crop even took the exam. There were 25,768 students in the Phila. public school 11th and 12th grades. Only 5,172 students even took the exam, or 20%. Based on their scores, they probably wouldn't know how I arrived at 20%. To paraphrase George Carlin, when you see how stupid the 20% SAT takers are, just imagine how stupid the 80% who didn't take the exam must be. The SAT score predicts your possibility of achieving a passing grade in college.

Based on the scores of the Phila. students, less than 10% of high school seniors are capable of succeeding in college. To prove how warped our higher educational system has become, there were 8,439 graduates and 54% of them enrolled in college. If you were wondering where the hundreds of billions in taxpayer funded student loans are going - here's your answer. It's getting doled out to functional illiterates with zero chance of succeeding in college. There's a 100% chance you will end up paying for the billions in student loan defaults.

Despite a $2.8 billion annual budget, with over $1 billion coming from the State and Feds, the Phila. public school system is a complete and utter disaster. It is so bad the State had to seize control a few years ago by forming a commission to manage it. The buildings are dilapidated, rat infested, filled with mold, and need to be patrolled by police. Teachers are assaulted, principles fake test scores, students brawl, the learning materials are pitiful and little or no learning occurs. It begs to question, where did all the money go? Considering there are only 8,400 teachers and 300 principles, one wonders what the other 9,000 district employees actually do.

There are 199,000 public school students, but only 134,000 are in the Phila. district schools. The other 65,000 are in charter schools. The 16 to 1 student to teacher ratio equals the national average. There were 212,000 students in 2003 with less teachers. More government employees were hired even though student enrollment declined 6%. The teacher's union doesn't care about the children. They care about getting their teachers as much as possible, and they've done a phenomenal job getting below average teachers gold plated benefits and pensions. The government unions use their voting power over the Democrat politicians to shakedown the taxpayers.


Education held hostage cartoon


It's a perfect storm of governmental incompetence, union greed, political corruption, parental disinterest, societal disintegration, and poor life choices, creating the downfall of Philadelphia and other urban enclaves around the country. The Phila. public school system consists of 80% minorities (60% black, 20% hispanic). Over 75% of the population in West Philly is black.

Over 71% of the black kids in West Philly are born out of wedlock. Only 17% of all households are occupied by married couples, while 40% are single mother households. The black men of West Philly are the primary culprits for this ongoing cesspool of ignorance, dependence, crime, and hopelessness. The disregard and scorn for the institution of marriage is a major reason for the median household income wallowing at $26,000, over 50% below the national average.

You get more of what you incentivize and the warped welfare policies in this country incentivize the people of West Philly to not get married and not work. So they don't. The best method to succeed in life is through higher education. It leads to higher lifetime income. Children from married households do better in school. Married couples also have a much better chance of producing higher household income. Marriage increases the odds of success tremendously for the married couple and their children. The residents of West Philly are caught in an inescapable cycle of poverty, exacerbated by the government welfare policies supposed to help them.

The Financial Times article details why spending on essential infrastructure needs has been ignored and why the future is even bleaker. Government worker pension funds across the nation are in deep trouble, with no chance of honoring their promises. Public pension plans have promised to pay out $4.7 trillion more than they have on hand. Every U.S. citizen would have to pitch in $15,000 to pay every government worker's promised pension. It's not gonna happen.

Black Rock, the world's largest money manager, expects 85% of U.S. public pensions to fail over the next three decades. Certain state pensions are ridiculously underfunded, with Illinois only able to cover 22% of its promised payments, Connecticut only 23%, and Kentucky only 24%. The Central States Pension Fund, which manages almost $18 billion for 400,000 workers in 37 states recently was forced to cut benefit payments by as much as 61%. Retirees currently getting monthly checks for $3,000 will only get $1,180 now.

This will happen to every government pension fund in the country because math is hard. Politicians promised government union workers more than they could ever deliver in order to secure their votes. Any government worker counting on these promises from corrupt politicians should acquire a taste for cat food and get used to setting their heat at 55 degrees in the winter. The City of Philadelphia has one of the worst pension schemes in the country. It is mathematically unsustainable, but no politician or union boss would ever utter those words to the citizens of their city. They'll just lie until its too late.

And it's even worse than the published numbers. According to its actuaries, the City pension owes government workers $10.5 billion, with only $4.8 billion of assets. The annual return assumption of 7.5% is ridiculously overstated. With bonds and stocks priced to deliver 0% returns over the next ten years, the pension is really underfunded by at least $8 billion and not the reported $5.7 billion. The retirement payouts to the 64,000 current and former government employees will eventually be slashed dramatically. It's just a matter of time.

According to FT:
The fund lost almost 20% in 2009 in the midst of the financial crisis. Overall, however, it has performed well, returning 7.4% a year on average since 1995, making its huge deficit all the more surprising. The pension contributions are eating up more and more of the city's budget, leaving less money to spend on services such as the fire brigade, police and recycling. The cost of pension contributions has increased from 6% of the city's budget to 15% over the past decade.
The contractually required pension contributions are on automatic pilot to consume 20% of the city budget over the next five years, and the plan will still be underfunded by 60% to 70%. The average pension plan in the U.S. is "only" underfunded by 25%. Rather than deal with reality, city politicians have funded the pension deficits with higher sales taxes and cigarette taxes, further punishing their poorest citizens. As pensions account for an ever larger share of the city budget, the infrastructure of the city and schools will continue to crumble. Businesses and the producer class will continue to flee the city as taxes are relentlessly raised to honor union worker contracts. The downward spiral will accelerate.

FT was flabbergasted by the ridiculous nature of a plan created by corrupt politicians and greedy unions:
Despite the strain the pension fund puts on the city's services, the scheme paid out a bonus to its members last year. Under the city's rules, when the fund performs better than its target, some retirees get a bonus. In 2014, the scheme returned 15.7%, double its target. The bonus payout is one of the few topics Mr Dubow seems reluctant to discuss -- notably whether it is controversial to pay bonuses to retired members when the scheme has less than half the money it needs for those actively paying into it. He cautiously responds that this is a requirement of the fund and will not discuss the matter further.

Heads the union workers win, tails the taxpayer loses. When the market does well select high level retirees get bonus payments, but when the market performs below expectations there is no penalty for those same retirees. The fiscal debacle destroying Philadelphia was willfully constructed over decades by corrupt politicians, incompetent bureaucrats, greedy government unions, and a foolish citizenry who believed the lies and were too ignorant to do the math. A city run by welfare redistributionists eventually runs out of other people's money. The wisest citizen in Philadelphia history understood the danger of creating a welfare culture 250 years ago. He was a big supporter of education (founded the University of Pennsylvania) and lifting yourself up by your bootstraps to succeed in life. Too bad his wisdom was not heeded.

"I am for doing good to the poor, but...I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed...that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."  
- Benjamin Franklin


Gold And Silver - Charts Reviewed

By: Michael Noonan
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In last week's commentary, February Heralding End Of Down Trend?, we stated: The
significance of February is its decided change in market behavior on the monthly and weekly charts." We are seeing even more evidence to support that premise, and all that is required is to observe the next corrective reaction to see where, at what level, price tests prior to resuming the start of an uptrend that began last December.

We noted that the monthly bar for February [See first chart], was wide range to the up side with a strong close, and it marked the potential for an important change in market behavior that could mean December 2016 may be the final low of this protracted 6 year correction.

The current weekly chart added yet more gains for gold, and it is rightly attracting a lot of attention. People are always in a hurry to have someone say the bottom is in and a bull trend is underway. That is not how markets work. There were many who called bottoms for gold in the last failed lower swing lows and saying higher prices would soon follow. We were not among them because there was no subsequent market activity to confirm a low, and price made now four more lower swing lows since the failed swing low in June 2013.

"This time, it's different," and that may be, but we still need to see a correction that makes a higher swing low, and the correction should have certain characteristics that typify a temporary correction to be followed by another leg higher, as opposed to simply another continuation move lower in a bear trend.

The fact that last week extended the recent gains for gold gives more credence to last December possibly marking the beginning of a turnaround that will start an up trend. Last week's high, up to the 1,300 area swing high failure from January 2015, will not be as easily exceeded to the upside.

Throughout all of last week, there were no signs of supply [selling] entering the market to prevent the gains made. Positive signs are showing up with greater frequency than has been evident in past gold rallies. The daily chart will start to show signs of correction or continuation, and it is where there will be more focus for near-term price development and what it means.


Weekly Gold Chart


We have stated on many occasions that wide range price bars, particularly when accompanied with sharply higher volume, will usually be controlling subsequent price movement within the wide bar's range. That was certainly true of the mid-February climatic rally as price traded within that range over the next 14 trading days. Friday rallied higher, but it looks more like a stopping day than one arguing for further upside continuation.

Chart comments note the comparison of the bar ranges for the two highest volume spikes.

Friday's volume spike shows a substantial effort to move price higher, but there was no payoff for all the effort exerted. The range was relatively small, price closed under the opening and under the mid-range point of the bar, and just slightly higher than Thursday.

This is a great example of why market-generated information is the most reliable and most current.

The odds, or probabilities, favor Friday as marking a possible turning point, at least for the short-term. Moving averages and almost every other type of mechanical trading tool would lag on making such a determination.

We practice what we preach by having been consistently buying physical silver over the past few weeks. Physical gold and silver have no third-party counter risk, and there are no margin calls when owning and holding the physical. We have not made any buy recommendations for the gold paper futures market simply because the risks from the long side are not small, and there has been no confirmation of a bottom to justify going long against an established down trend.

It has not paid to chase gold rallies in the past, as all have failed. At some point, and Friday cold be that point, a retest correction will take place. The manner in which any retest correction unfolds will speak volumes about the character or health for a change in trend behavior. If the nature of the next correction shows buyers taking control, that will mark an opportunity for taking long positions to speculate in the paper futures market.

We will keep a pulse on how the next correction develops. For now, keep buying and taking control of physical gold. Overall market and economic conditions will worsen as risks in all paper markets cease to make any sense.

Daily Gold Chart


Silver does not even come close to conveying the level of potential change in trend as does gold.

Last week did not even rally above the last swing high, so technically, silver remains entrenched in a bear market. The highest trading volume in the past three years was from two weeks ago.

For all of that selling effort, there was no downside reward or payoff for the sellers.

That high volume range lower was totally erased with last week's activity, and that bar may become notable as a reference point for a potential end of correction because exceptionally high volume bars result from controlling factors in the market with the public responding.

It is almost always a transfer from weak to strong hands in market positioning. Still, a change in direction is a process with singular events standing out indicating a change is developing.

The important money to be made will come from buying and holding the physical metal itself with no third-party counter-risk.


Weekly Silver Chart


The failed swing high from last October continues its impact on the market, first in the failure itself, then the climatic ending rally in February. [See Charts Only from Feb 20th, 8th chart, daily. It shows the March contract and the climatic volume, and it serves as an example of how high volume surges can be controlling in market activity.]

We see another volume surge from Friday, labeled as a failed retest. The location of the close is around mid-range the bar telling us sellers were present and still controlling price behavior around the pivotal 16 area. Last week, we put a ? on the horizontal line that had been resistance in December and January, asking if that line would now become support. It held perfectly when briefly touched, last Monday.

Our expectations remain for a reaction lower from last week's highs as a retesting process for silver in what appears to be the end, or near the end of the manipulated correction.


Daily Silver Chart


The real reason Donald Trump is winning: No one thought it was possible

Political science said Trump would lose. Did GOP elites trust the theory so much they forgot to do anything to make it come true?

By Daniel W. Drezner

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Donald Trump is now favored to win the GOP nomination for president, and it’s not close. All the polling suggests that Trump will win almost every Super Tuesday state this coming week.
Prediction markets have also swung behind the billionaire. Trump skeptics remain, and given his polarizing effect on Republicans, some skepticism is probably warranted. But the idea that a winnowing field will help a non-Trump alternative surge to victory seems less plausible by the day.

If Washington has a comparative advantage in anything, it is in postmortems. Should Trump continue Making America Great Again all the way to the nomination, let alone the presidency, there will be plenty of autopsies about how and why it happened. Some will point to the frustration that many Republican-leaning voters feel toward the GOP establishment over illegal immigration, trade policy and myriad other issues. Others will note Trump’s symbiotic relationship with the media, which lets him exploit coverage of his bluster to drown out any other candidate’s perceived momentum. And it’s quite possible that Republican Party leaders actually prefer Trump to a candidate like Ted Cruz.

These explanations cover a lot of ground, but I want to propose an additional, somewhat unorthodox hypothesis. Trump is winning because no significant Republican coalition seriously tried to oppose him when there was still time for it to work. And the reason no powerful Republican coalition emerged to stop him is that the GOP believed all the analysts who said Trump had no chance. In other words, the political science theories predicting that someone like Trump was highly unlikely to win a major-party nomination were so widely believed that they turned out to refute themselves.
Let’s start with the part of my hypothesis that’s easy to prove: how little serious opposition Trump faced within the Republican Party. The New York Times said his popularity last summer evoked “barely concealed delight” from Jeb Bush’s campaign, which thought it could position Bush as the sensible alternative to the businessman’s bombast. One top GOP operative wrote in the Wall Street Journal in September that there was no reason for Trump’s rivals to attack him at a debate, because “wasting time attacking somebody who won’t get the nomination is just that: a waste of time.” According to Politico, only $9.5 million in super PAC advertising — 4 percent of the $238 million spent by outside groups this election cycle — has been aimed at opposing Trump. Since GOP strategist Liz Mair created the anti-Trump Make America Awesome super PAC in December, she’s raised a whopping $10,351.77 for her efforts.
Yes, a few Republican elites have pushed back. Both the New Hampshire and South Carolina GOP chairs blasted Trump after he proposed banning Muslims from entering the United States. National Review organized an entire issuewith much fanfare, dedicated to opposing Trump. And Fox News’s moderators grilled him aggressively during the first GOP debate.

But as important as conservative media stalwarts might be, mainstream political science suggests that elected party officials matter more. Very few have endorsed Trump, but neither they nor their super PAC benefactors have spoken out against him much, either.

While the field of candidates was crowded, Trump posed what economists call a collective action problem. It was in everyone’s general interest for someone to attack Trump — but it wasn’t in anyone’s specific interest to do it or to draw Trump’s fury in response (ask Bush, whom Trump mocked mercilessly until he finally quit). So everyone hoped to benefit when a candidate went after Trump — only no major candidate ever bothered with a sustained attack. Even this past week, as the likelihood that anyone could stop Trump dwindled further, the remaining contenders seemed more intent on attacking each other, issuing snarky news releases about their rivals’ inability to win Nevada and ignoring the guy who did, though Sen. Marco Rubio (Fla.) did spend most of Friday making fun of Trump in a rather Trumpian manner.

I am not saying that Mitch McConnell and Paul Ryan have been combing through back issues of the American Political Science Review or even “The Party Decides,” the 2008 book that argued that party insiders continue to exercise significant control over the nomination process, despite reforms in the 1960s and 1970s. But there is now a whole cottage industry of political scientists and poli-sci-curious columnists who write about presidential campaigns for the kinds of serious outlets that politicians read. And what have these people been saying?

When Trump entered the race, FiveThirtyEight’s Harry Enten wrote, “Trump has a better chance of cameoing in another ‘Home Alone’ movie with Macaulay Culkin — or playing in the NBA Finals — than winning the Republican nomination.” In July, John Sides argued in The Washington Post that Trump’s surge was a product of media attention and that media scrutiny would be the effective antidote. In August, political forecaster Nate Silver declared that “Trump’s campaign will fail by one means or another.” In September, the New York Times’s Nate Cohn labeled Trump “an extreme long shot.” Bloomberg View’s Jonathan Bernstein said in September that a flailing Rick Perry still had a better chance of winning than Trump. After Perry dropped out, Bernstein re-upped his theory in October.

By November, even as Trump continued to poll well, auxiliary hypotheses emerged about how his support in surveys was suspect, his ground game was weak and his unfavorable ratings would lead to a low ceiling once voting started. In December, Cohn wrote again that Trump was unlikely to win. And Silver said, “The most difficult hurdles between Donald Trump and the Republican presidential nomination are still to come.” (I, too, made this argument again and again on The Post’s website.)

Armed with that analysis, GOP insiders issued very similar pronouncements. In August, Mitt Romney’s onetime campaign manager, Stuart Stevens, dismissed Trump, arguing in the Daily Beast that “all that we know about politics has not evaporated because Donald Trump says he’d like to be president.” Politico’s surveys of GOP operatives and activists repeatedly showed them writing off Trump’s chances. In August, one New Hampshire insider said, “Trump is generating a lot [of] controversy, but he is not taken seriously as a potential president.” At the beginning of 2016, numerous Republican elites told Politico they did not think Trump would be the nominee. Barely two weeks ago, an update was headlined, “Insiders: Hard road ahead for Trump.”
 
It is easy to mock these assessments now, but these are smart people who grounded their analyses in previous campaigns and in how political scientists analyzed those elections. It was not difficult, using this logic, to think of Donald Trump as a more obnoxious and racist version of Herman Cain.

The theories about how major-party candidates secure a nomination employed quality political science — but they have some flaws that Trump is illuminating. The first is that there are not a lot of data points on modern nomination fights with primaries, caucuses and superdelegates. Even if the theories were largely correct, they are based primarily on post-Watergate campaigns with no incumbent. That’s only 13 cases.

The second problem is that social science theories are, by their nature, reflexive. They try to explain human behavior, but humans can, in turn, read about these theories and adapt to them.

We know from reporting on how both parties are attempting to better use data to reach voters that Republicans have paid close attention to political science theories about campaigns. If GOP decision-makers read these analyses about Trump, they might have concluded that they did not need to do anything to stop him, because he would inevitably fail anyway.

That conclusion would have been wrong, as voters in 12 states are poised to demonstrate Tuesday. Most of the political analyses concluding that Trump would not win were based on variations of “The Party Decides.” But that book argues that the reason insurgents are rarely successful is that party elites coalesce around an establishment front-runner, giving that person a commanding edge in resources, news coverage and endorsements over any alternatives before the voting starts and before most of the public is really paying attention.

In other words, party leaders actually have to do something to stop an insurgent. The whole reason smart analysts believed that Trump had no chance was because they thought GOP leaders would eventually strike against him. But that didn’t happen.

Looking backward, political victories always seem inevitable. As the political class moves from denial to anger to bargaining to depression and acceptance, there will be plenty of autopsies claiming that Trump’s political genius was unbeatable. But the rise of Trump was very resistible. That should haunt Republicans who fear what a Trump nomination would do to their party and their country. And if he goes on to win in November, it could haunt all of us.