The Temptations of a Resilient China

Stephen S. Roach

renminbi


NEW HAVEN – Another growth scare has come and gone for the Chinese economy. This, of course, is very much at odds with Western conventional wisdom, which has long expected a hard landing in China. Once again, the Western perspective missed the Chinese context – a resilient system that places a high premium on stability.
 
Premier Li Keqiang said it all in his final comments at the recent China Development Forum. I have attended this gathering for 17 consecutive years and have learned to read between the lines of premier-speak. Most of the time, senior Chinese leaders stay on message with rather boring statements about accomplishments, targets, and reforms, toeing the official line of the annual “Work Report” on the economy that is delivered to the National People’s Congress two weeks earlier.
 
This year was different. Initially, Li seemed subdued in his ponderous responses to questions from an audience of global luminaries that focused on weighty issues such as trade frictions, globalization, digitization, and automation. But he came alive in his closing remarks – offering an unprompted declaration about the Chinese economy’s underlying strength: “There will be no hard landing,” he exclaimed.
 
The all-clear sign from Li was in sync with official data in the first two months of 2017: solid strength in retail sales, industrial output, electricity consumption, steel production, fixed investment, and service sector activity (the latter signaled by a new monthly indicator developed by China’s National Bureau of Statistics). Meanwhile, foreign-exchange reserves rebounded in February for the first time in eight months, pointing to an easing of capital outflows.
 
At the same time, the People’s Bank of China took its cue from the US Federal Reserve’s rate hike this month, boosting Chinese policy rates by about ten basis points. The PBOC would not have taken that step had it been overly concerned about the underlying state of the Chinese economy.
 
But the icing on the cake came from the trade data – namely, annual export growth of 4% in January and February, following a 5.2% contraction in the fourth quarter of 2016. This underscores a key contrast between the latest and previous Chinese growth scares.
 
Call it the Trump effect: the revival of the global economy’s “animal spirits” in recent months has provided important relief for a Chinese economy that is still heavily dependent on exports.
 
Whereas earlier growth scares were exacerbated by chronic downward pressures from sputtering post-crisis global demand, this time external headwinds have given way to tailwinds.
 
But while the near-term prognosis for the Chinese economy is far more encouraging than most had expected, an eerie sense of denial, bordering on hubris, appears to be creeping into China’s strategic groupthink. With the United States looking inward, Chinese decision-makers seem to be pondering the opportunity that might arise from a seismic shift in global leadership.
 
I was repeatedly asked about the possibility of a China-centric globalization – reinforced by Chinese leadership in multilateral trade (the 16-nation Regional Comprehensive Economic Partnership, or RCEP), pan-regional investment (China’s One Belt, One Road initiative), and a new institutional architecture (the Chinese-dominated Asian Infrastructure Investment Bank and the New Development Bank). It’s as if China had been preparing to fill the void being left by Donald Trump’s “America first” US.
 
The Chinese are keen students of history. They know that shifts in global leadership and economic power are glacial, not abrupt. Yet I get the sense that they view the current circumstances in a very different light: Trump, the great disruptor, has changed the rules of engagement for what had long been a US-centric globalization. Many in China are now wondering whether this may be an opportunity to seize the reins of global power.
 
Anything is possible – especially in a world where uncertainty is the only certainty. But there is another lesson of history that the Chinese must bear in mind. As Yale historian Paul Kennedy has long maintained, the rise and fall of great powers invariably occurs under conditions of “geostrategic overreach” – when a state’s global power projection is undermined by weakness in its domestic economic fundamentals. Global leadership starts with strength at home, and China still faces a long road of rebalancing and restructuring before it reaches the Promised Land of what its leadership calls the “new normal.”
 
But here there is another important disconnect between the view inside China and perceptions in the West. The view from outside is that Chinese reforms, the means to rebalancing, have stalled over the past five years under President Xi Jinping. The same view prevailed under the prior ten-year leadership of Hu Jintao. But is this really the correct way to assess what is happening in China?
 
Results matter more than grand pronouncements. Since 2007, when former Chinese Premier Wen Jiabao laid down the rebalancing gauntlet for a Chinese economy that had become “unstable, unbalanced, uncoordinated, and unsustainable,” China’s economic structure has, in fact, undergone a dramatic transformation. The GDP share of the so-called secondary sector (manufacturing and construction) fell from 47% in 2007 to 40% in 2016, whereas the share of the tertiary sector (services) increased from 43% to nearly 52%. Structural shifts of this magnitude are a big deal. The key point missed by reform deniers is that China is actually making rapid progress on the road to rebalancing.
 
All of which brings us back to the questions raised at this year’s China Development Forum.
 
The combination of near-term resilience and an inward-looking US appears to offer a tantalizing opportunity for China. But China should resist the temptations of global power projection and stay focused on executing its domestic strategy. The challenge now is to realize the “tremendous opportunity” that Li touted in ruling out a hard landing.
 
 


Foundation and Empire: Is Donald Trump the Mule?

By: The Burning Platform


In Part One of this article I analyzed the similarities of Isaac Asimov's Foundation Trilogy to Strauss & Howe's Fourth Turning, trying to assess how Donald Trump's ascension to power fits into the theories put forth by those authors. Now I will compare Trump to the most interesting character in Asimov's classic - The Mule.

  The Mule
"A horse having a wolf as a powerful and dangerous enemy lived in constant fear of his life. Being driven to desperation, it occurred to him to seek a strong ally.  
Whereupon he approached a man, and offered an alliance, pointing out that the wolf was likewise an enemy of the man. The man accepted the partnership at once and offered to kill the wolf immediately, if his new partner would only co-operate by placing his greater speed at the man's disposal. The horse was willing, and allowed the man to place bridle and saddle upon him. 
The man mounted, hunted down the wolf, and killed him. "The horse, joyful and relieved, thanked the man, and said: 'Now that our enemy is dead, remove your bridle and saddle and restore my freedom.' "Whereupon the man laughed loudly and replied, 'Never!' and applied the spurs with a will." 
- Isaac Asimov, Foundation
Trump


I had not thought about the Foundation Trilogy for decades, until someone recently mentioned it in a comment on my website. They pondered whether Trump's arrival on the scene represented The Mule's advent during the decline of the Galactic Empire. Trump's numerous enemies would love to portray him as an evil mutant freakish warlord, bent on using his persuasion powers to mislead the populace into doing his bidding. I don't necessarily see Trump as The Mule, but as a disrupting factor, disturbing the best laid plans of the establishment and helping reveal the hidden agendas of the Deep State.

Seldon's science of psychohistory was outstanding at predicting the behavior of large populations but worthless in trying to predict what an individual might do. The emergence of the Mule, a mentalic mutant with an acute telepathic ability to modify the emotions of human beings, could not have been predicted by the Seldon Plan, focused as it was on the statistical movements of vast numbers of peoples and populations across the galaxy.

The Mule was the unpredictable variable in the equations of history and the greatest threat to the Seldon Plan. He disrupts the inevitability of the continued evolution of the First Foundation and potential early ending of the Dark Age. The Mule, through telepathic manipulation, defeats and takes over the Foundation's growing empire, which has become increasingly control-oriented and out-of-touch with the outer planets in its rapidly expanding realm of influence.

There are certainly parallels between Trump's arrival on the scene and The Mule's psychohistory defying disruption of Seldon's Plan. The Mule was described as a freak and the subject of derision.

This fueled his ambition to take over the galaxy. I believe Trump decided he was going to be president on April 30, 2011 during the Correspondence Dinner at the White House when Obama unrelentingly mocked and derided him in front of the corrupt Washington power establishment. This public ridicule from an empty suit community organizer president, who never worked a real day in his life, angered Trump to his core and propelled him to seek and win the presidency.

White House Correspondent's Dinner


The Mule enters the scene disguised as a clown named Magnifico Giganticus. Over time, he uses his psycho-manipulative abilities to sway the masses to his side and eventually takes over the galaxy. When Trump announced his candidacy, it was taken as a public relations stunt to further his faltering reality TV career. He has a magnificent gigantic ego. His persona was that of an irascible self-made billionaire with an enormous ego and hunger for the spotlight. He was the butt of many orange hair and orange skin jokes.

For the most part, he went along with the joke, as any publicity is good publicity when you are selling yourself as a brand. He put his name on buildings, Chinese made clothing, scam universities, and just about anything that would produce a buck. He became more famous for his TV show The Apprentice, and his tag-line "You're Fired", than for the billion dollar real estate empire he had built.

Like The Mule, Trump used the GOP establishment's disdain and underestimation of his persuasion abilities to capture control of the party from the out of touch elitist party hacks. At the outset of his candidacy I was among the libertarian minded skeptics who didn't take him seriously. I found him entertaining, but didn't think he had the gravitas to be president. I liked his rhetoric about not interfering in foreign conflicts, protecting our borders, enforcing the rule of law, repealing the disastrous Obamacare law, and his relentless trashing of the left wing mainstream media and Washington establishment.

I wasn't a big fan of his bloviating about inconsequential matters. As time passed I began to realize he was probably the Grey Champion of this Fourth Turning and the regeneracy towards the next phase would be his unexpected election to the highest office in the land. He was the only person capable of destroying the fetid pustule known as the Deep State.

Department of Deep State


The Mule's tormented childhood of alienation, combined with his mental ability to alter human emotions led to his desire for power, in order to exact revenge upon the human race which caused him so much pain. Trump's childhood was no walk in the park, but it was far from being tortured. His father did send him to military school at the age of 13 to instill some discipline in him. It does seem like his drive to succeed was spurred by a desire to prove himself to his father and be more successful than his old man. Unlike The Mule, his motivation is not revenge motivated, unless you consider it revenge upon Obama for the abuse he withstood during that dinner.

The Mule had the mental capabilities to turn antagonists into followers, converting feelings of animosity into those of intense loyalty. He could also stimulate feelings of pervasive fear and panic among his enemies. He used the subtle influence of the subconscious to conscript individuals to his cause. The Mule used his mental powers to disrupt Seldon's plan by invalidating his assumption no single individual could have a quantifiable impact on historical trends predicted by his theory of psychohistory. The Mule is a Grey Champion-like character rising to power at a crucial time in history as the disruptive factor to the best laid plans of over-confident elitists. The Mule uses his extraordinary cerebral abilities to conquer the unprepared and over-confident Foundation.

Mule


Trump has been underestimated every step of the way for the last two years. He has thrown sand into the gears of the political establishment, made up of both parties, and controlled by Deep State players used to getting their way. Trump was able to use his powers of persuasion to overcome the left wing media propaganda and motivate a large swath of disaffected Americans to come over to his side. The never ending barrage of misinformation and fake news spewed by the Deep State controlled media ignores the fact he won 53% of the white women vote, along with huge numbers of union workers from blue collar states like Michigan, Ohio, Wisconsin, Pennsylvania, and Indiana.

As documented during the campaign by Scott Adams, Trump's phenomenal power of persuasion overcame all obstacles thrown in his way by the crooked establishment. He had no support from the GOP power players, was despised and ridiculed by the horribly corrupt Democratic establishment machine, scorned and mocked by the fake news corporate media, and undermined by the surveillance apparatus at the behest of the rancid resentful reprobate occupying the oval office. Their pure unadulterated hatred for the man resulted in them becoming blindsided and baffled by his tactics, strategy, and Svengali-like ability to draw huge crowds of normal Americans in flyover country.

Trump has disrupted the ongoing Deep State capture of our political, economic, financial, social, and cultural systems as a once in a lifetime figure destined to govern during a time of domestic disorder, global upheaval, civil chaos and ultimately war on a grand scale. The looting and pillaging campaign of the ruling class, disguised as free market capitalism and democracy, has been put at risk by an uncontrollable unpredictable outsider who doesn't act according to their Plan.

The staged violent response by the billionaire funded left wing faux anarchists, fake news Russian conspiracy propaganda, and NSA/CIA/FBI campaign to discredit and/or overthrow the Trump presidency is the kind of response you would expect from a dangerous threatened animal backed into a corner. The establishment will not relinquish control without a bloody drawn out fight to the finish.

Since we know Asimov modeled the trilogy on Gibbons' The Decline and Fall of the Roman Empire, there has been much conjecture as to who The Mule represented. He has historical parallels with Attila the Hun, Tamerlane, Charlemagne and Roman Emperor Augustus. Based on the historical time frame in which he was writing (1941 - 1950), I think it is safe to assume he modeled some of The Mule's traits after Adolf Hitler. His disturbed childhood, trauma during the First World War, hypnotic ability to manipulate the emotions of the German people, boldness in attacking his perceived enemies, and attempt at world conquest, parallels much of The Mule's story.

Hitler


When I try to find parallels to our current situation and the role Trump is playing, I see the Foundation trilogy in a different light. Isaac Asimov was an intellectual. He had a PhD in biochemistry and was a life-long member of Mensa. He was a university professor for most of his life. Academics believe in theories and academic mumbo jumbo, as we can see from decades of academics running the Federal Reserve, destroying our currency and forcing millions into economic servitude.

Hari Seldon is an intellectual who creates the Foundation, made up of other academic intellectuals. Then he sets up a Second Foundation of even more talented intellectuals as a backup plan in case the Foundation fails. The true ruling powers on this planet always have a backup plan. You never know whether the leaders or organizations you support are really part of a bigger plan you have not considered. Keeping the populace off-balance, confused, and seeking unseen enemies is just part of the plan.

The inevitable decline of the Galactic Empire was entirely predictable by Seldon, as every empire in world history has ultimately declined. Whether the Roman Empire was ruled by a despot, wise man, or idiot, it continued its centuries long decline from glory to destruction. Empires are created by fallible men whose failings, weaknesses, and desires never change. John Adams foresaw the future of an American Empire two centuries before it became an empire.

The American Empire is in the process of committing suicide and a single individual, no matter how bold and resolute, will not be able to save it from its inevitable destruction.
"I do not say that democracy has been more pernicious on the whole, and in the long run, than monarchy or aristocracy. Democracy has never been and never can be so durable as aristocracy or monarchy; but while it lasts, it is more bloody than either. … Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide. It is in vain to say that democracy is less vain, less proud, less selfish, less ambitious, or less avaricious than aristocracy or monarchy. 
It is not true, in fact, and nowhere appears in history. Those passions are the same in all men, under all forms of simple government, and when unchecked, produce the same effects of fraud, violence, and cruelty. When clear prospects are opened before vanity, pride, avarice, or ambition, for their easy gratification, it is hard for the most considerate philosophers and the most conscientious moralists to resist the temptation. Individuals have conquered themselves. Nations and large bodies of men, never."  
- John Adams, The Letters of John and Abigail Adams

I don't see Trump as an evil Mule character in this Shakespearian tragedy, as it progresses towards its ill-fated denouement. I also don't see Seldon and his ensemble of elitist intellectuals as the saviors of the universe. I see The Foundation as the Washington and Wall Street elite who are the face of the establishment - Pelosi, Schumer, Ryan, McConnell, Yellen, Dimon, Blankfein, Immelt, Gates, Buffet, etc. The Second Foundation was hidden in plain sight, operating in the shadows, unknown to the masses, and controlling the galaxy from behind the curtain. They were the Galactic Deep State.

The Seldon Plan smells like a current day Soros Plan. Wealthy, highly educated, egotistical, hubristic, evil snakes who believe they are the smartest men in the world operate behind the scenes as the invisible government, manipulating the mechanisms of society and pulling the wires controlling the public mind. Soros, along with other shadowy smug billionaires, are not fans of populism.

They believe they are entitled to run the world as they choose, with no input or resistance from the ignorant masses. With the basket of deplorables rising up and electing Trump, the Deep State players are now openly fighting back and revealing their warped thought process. Elitist billionaire Ray Dalio recently revealed his populism fears and those of his fellow billionaires.

He doesn't consider himself a common man.

The People Don't Know Their True Power
Populism is a political and social phenomenon that arises from the common man, typically not well-educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the "establishment elites" in positions of power, and 4) government  not working effectively for them. These sentiments lead that constituency to put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually the economic and socially left versus the right), both within the country and between countries. These conflicts typically become progressively more forceful in self-reinforcing ways. 
In other words, populism is a rebellion of the common man against the elites to some extent, against the system. The rebellion and the conflict that comes with it occur in varying degrees. Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in response to this rebellion and conflict depends on how flexible and well established the system is. It also seems to depend on how reasonable and respectful of the system the populists who gain power are. Classic populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls.
Soros


Dalio, Soros and their fellow billionaires see populism as a threat to their wealth, power, and control of the world. But, it's much ado about nothing. It's like jockeying for the best seat on the Titanic as it sinks into the frigid ocean depths of the Atlantic. The American Empire is in shambles and no one can reverse its course at this point. I'll address that distressing situation in Part Three of this article.


Chinese Military Movements and North Korea

Reports suggest Chinese army personnel may be mobilizing.

 

There are reports from both Asian media and European sources of a significant Chinese military mobilization on the border with North Korea. We have not been able to confirm these reports. Still, we think it is important to bring them to your attention. The combination of their potential significance and the fact that they come from multiple sources, albeit unconfirmed, makes this development worthy of a brief alert.

The first report comes from Sankei Shimbun, a daily paper with one of the largest circulations in Japan. On April 9, the paper reported the movement of People’s Liberation Army (PLA) personnel toward the Yalu River, saying it was partly related to China’s reaction to U.S. missile strikes in Syria last Thursday. On Monday, a report appeared on Chosun.com, a subsidiary of Chosun Ilbo, one of South Korea’s main newspapers. This report said that 150,000 PLA personnel had been deployed and identified them as parts of the PLA’s 16th, 23rd, 39th and 40th Group Armies. Geopolitical Futures has received similar reports from European sources. The content of these reports is consistent, but so is their lack of substantiation at this juncture.
 
North Korean soldiers stand on a boat on the Yalu River in the North Korean town of Sinuiju, as seen from across the river from the Chinese border town of Dandong, on Feb. 9, 2016. JOHANNES EISELE/AFP/Getty Images

These reports come the week after U.S. President Donald Trump and Chinese President Xi Jinping held their meeting in Mar-a-Lago in Florida. GPF wrote at the time that North Korea had superseded trade as the major issue between the two countries, and speculated that Xi would attempt to move the conversation away from Chinese trade concessions to the United States toward a more proactive stance in managing the North Korea situation. We know the U.S. has dispatched a carrier battle group toward the Korean Peninsula, and we now have these unconfirmed reports about Chinese military movements.
 
At first blush, these reports could make sense in the context of our model, another reason we have chosen to alert our readers. If true, it would mean that the U.S. and China have reached some sort of understanding about how to approach the North Korean issue. It is, however, just as possible at this point that these are leaks designed to shape public perception of the situation or for some other purpose. GPF will continue to monitor this situation closely and will share any information and analysis with our readers as soon as we have it. In the meantime, we are watching.


Trump’s Dilemma

President Donald Trump's ability to make changes depends on whether his support rises or falls.

By George Friedman

Editor’s note: This week, in light of the Republican withdrawal of a bill that would have repealed and replaced the Affordable Care Act (Obamacare), we are republishing George Friedman’s piece from Dec. 16, 2016 about the constraints on the power of Trump’s administration. In that piece, George talked about how weak the office of the U.S. president is in general and how weak Trump will be as a president in particular. This past week’s legislative setbacks for the Trump administration are foreseen by this Dec. 16 piece. In addition, its insights are not just relevant for explaining the significance of that defeat. The piece describes the broader challenge Trump will be facing throughout the course of his presidency.

Donald Trump’s presidency will have geopolitical consequences. Most of the world wants to know what he will do. But that depends on what he can do. That, in turn, will be determined by the political dynamics within the United States as well as by counteractions of other nations. This is a case where politics rises to the level of geopolitics. Trump’s actions will be conditioned by the actions of other players, particularly in Congress. Trump, after all, will only be the president and his unilateral powers will be limited. For most of the things he wants to do, he needs Congress to go along. Therefore, the American stance toward the world will depend, for the moment, less on what Trump wishes than what Congress decides to do.

Trump has presented himself as a transformative leader, confronting a crisis in the U.S. with a radical new approach, both in policy and in political culture. Many presidents present themselves as transformative, but few are. In the 20th century, two were genuinely transformative. One was Franklin D. Roosevelt and the other Ronald Reagan. Both faced problems that the vast majority of Americans knew to be problems. Roosevelt confronted the Great Depression, Reagan the stagflation of the 1970s. Both also confronted significant geopolitical problems. Roosevelt had to deal with the emerging crisis in Europe and Asia, combined with his social and economic concerns. Reagan, in addition to an economic crisis, had to cope with the defeat in Vietnam and the subsequent relative increase of Soviet power.


U.S. President Donald Trump, center, Department of Health and Human Services Secretary Tom Price, left, and Vice President Mike Pence convene in the White House Oval Office after Republicans abruptly pulled a health care bill from the House floor, on March 24, 2017 in Washington, D.C. Olivier Douliery-Pool/Getty Images


It was clear that these problems originated in the prior political and economic culture and that being different on multiple levels from the conventional expectations of the past was essential.

Roosevelt’s decision to fund massively federal programs for the unemployed generated rage, as they ran completely counter to what was expected from a president. Reagan suffered the same public discontent. Early in his term, air traffic controllers went on strike despite laws banning them from striking. He fired them. Firing striking workers regardless of the law was considered unthinkable. He was vilified for the decision.

Walter Lippmann, one of the greatest columnists of the age, said of Roosevelt: “Franklin D. Roosevelt is no crusader. He is no tribune of the people. He is no enemy of entrenched privilege.

He is a pleasant man who, without any important qualifications for the office, would very much like to be President.” Roosevelt’s opponent, Herbert Hoover, called him a “chameleon on plaid” and criticized him for his “nonsense … tirades … glittering generalizations … ignorance” and “defamation.” Of Reagan, one commentator said he was “the end product of television politics. … It is a show and he’s a star actor.” Jimmy Carter accused Reagan of injecting racism into the campaign by using “code words like ‘states’ rights.’”

It is important to remember the venom in prior campaigns and to recognize the easy dismissal of the new. But Trump has a deeper problem. Roosevelt won about 60 percent of the vote and carried every state but Maine, Vermont, New Hampshire, Rhode Island and Pennsylvania. He blew Hoover away. In 1980, Reagan got 50 percent of the vote against Carter’s 41 percent (John Anderson was in the race and got the rest). Reagan also won every state except Georgia, West Virginia, Minnesota, Maryland, Rhode Island and Hawaii. It was another blowout.

Trump intended to be a transformational candidate. His problem was that he did not blow Hillary Clinton out of the water. Where Reagan and Roosevelt had enough muscle to force congressmen in their parties to vote with them, Republicans in Congress haven’t figured out whether they will want Trump’s support in the next election. The narrowness of Trump’s victory is not just an interesting footnote to history. It is a significant handicap to his plans, because while Republicans have a majority in Congress, their main concern isn’t settled.

What congressmen and senators want most is to be re-elected. To be re-elected, they need voters’ support. Congressmen are all peering two years in the future, trying to guess whether by then Trump will have developed support that they can use to win, whether he will stay where he is now, or whether his support will deteriorate. If they follow Trump and his support declines, re-election will be difficult in many districts. If Trump increases his popularity, supporting him will be a stroke of genius. This may be regarded as cynicism, or as faithfully representing your constituency, but that is what they are thinking.

And this is what foreign governments are considering as well. They are asking themselves whether Trump will be strong enough in Congress to carry out all his initiatives, or whether he will be paralyzed by a hostile Congress and poor political ratings. China, Mexico and Russia – as well as every other country – know that this election is not the end of the struggle, but the beginning.

Trump will need to substantially increase his positive ratings to demonstrate to Congress that he is trending upward. After an election, presidents normally have a honeymoon period of a few months, where they are given the benefit of the doubt. Roosevelt and Reagan didn’t need a honeymoon period – their numbers spoke for themselves.

If Trump doesn’t get the honeymoon, with some Clinton supporters coming over to his side at least temporarily, this will cause congressmen to carefully evaluate the mood in their districts.

They will have to make the difficult decision of whether to oppose Trump, and if they do oppose him, on what issues. Foreign governments will also be evaluating their options. It is not simply being president that makes you powerful, it is the support you have in Congress, and that depends on the support you have in the country. If he had blown away Clinton, he wouldn’t face this problem. Since he didn’t, he does.

And that makes Trump’s first 100 days far more important to him than to previous presidents.

He needs to demonstrate to his party that he can craft and pass legislation that will increase his popularity. He has to do this while making it clear to his supporters that he is not going to do what previous leaders did and ignore the promises he made during the campaign. This is hard to do.

Congressmen and senators who might lose in the next election if they support the measures that are closest to the heart of Trump’s base will resist. And with only a 52-48 majority in the Senate, it will be tough. It is always important to remember that in the American system, presidents have minimal power over senators and congressmen. Their greatest influence comes from popularity they can transfer to candidates from their party – at a price.

Trump has another deeper problem. Roosevelt and Reagan faced systemic problems that both hurt deeply and were not debatable. The core issue in the U.S. now is the decline of the middle and lower-middle classes’ purchasing power. The lower-middle class is priced out of homeownership.
However, a family with a median income can still afford a modest home. In my opinion, the crisis will not develop fully until those with a median household income are priced out. Many other measures exist, but I am using this one because homeownership is built deeply into our culture. I believe that over the next decade this terminal decline will take place, and at that point a president will be elected with numbers similar to those of Roosevelt and Reagan, powerful enough to take action, with a Congress fearful of angering him.

In my view, Trump identified the right problem too early. As a result, he ran a campaign focused on broader issues. But what he didn’t have is the ability to focus laser-like on the fact that the system has crippled half of society. He won those who had been crippled and those who feared being crippled, and it was enough to eke out a victory. Like Barry Goldwater, who made Reagan’s case 16 years too early, Trump has identified the key issue and mobilized a coalition that barely put him in power – the difference being Goldwater got trounced.

Trump’s coalition must be satisfied that he is a transformative president. But to do that, he is going to have to deal with Congress and in particular the fears of Republicans about his future, and therefore theirs. The problem that Trump has is that without early victories, later ones will be much harder to come by. Weakness begets weakness.

And this most assuredly will affect the international system. Countries around the world will behave very differently depending on if Trump strengthens or weakens. Some want a stronger American president. Israel is an example. Others, most assuredly including Russia, would like a president unable to act, giving them breathing room. The entire world – even beyond Washington, which is its own planet – will be looking at Trump’s first days and the polls that are sure to come. And for Trump, holding his own is not enough given that the election was so close.


If Stocks Wobble, Will Bonds Be There To Absorb the Blow?

Soggy stocks won’t necessarily mean surging bonds

By Richard Barley

Current market moves may reflect the passing of a surfeit of optimism on the part of U.S. equity investors about President Donald Trump’s administration. Photo: Evan Vucci/Associated Press


If stocks are hitting a sticky patch, are bonds bound to shine? That was certainly the case in the first half of last year, when sharp falls in equity markets helped push bond prices sky-high. But the backdrop is different this time around.

So far, March’s decline in stocks has been measured, with the S&P 500 only 2.3% off its peak, but persistent: the Dow Jones Industrial Average on Monday notched its longest losing streak in nearly six years. A correction in stocks, after a big run-up following the U.S. presidential election, would arguably be a healthy development.

The last sharp correction in the S&P 500 at the start of 2016 was certainly good for bonds.

Long-dated debt benefited in particular, with returns on Treasurys maturing in 15 years or more reaching 10% as stocks bottomed, according to Bank of America Merrill Lynch data.

The correlation between moves in stock prices and bond yields has been rising, suggesting the swing between risk appetite and risk aversion that has been a frequent feature of markets in recent years is back in play. And after the selloff in the wake of the U.S. presidential election, bonds have restored some of their ability to act as a shock-absorber when stocks get hit. But the bar for a big rally in bonds is higher than it has been.

Last year’s market moves were driven by several forces, including worries about China, falling oil prices and the threat of deflation. Central banks responded to that: the Federal Reserve paused its rate increases while the European Central Bank injected more stimulus. Inflation was well below target, and stuck at around zero in the eurozone. The stars were aligned for bond markets.

But since then inflation has picked up markedly and the global growth picture has improved too, particularly in Europe. The period of ultraloose monetary policy is coming to an end; the Fed appears more determined to raise interest rates. The current market moves may just reflect the passing of a surfeit of optimism on the part of U.S. equity investors about President Donald Trump’s administration. That is bad news for stocks but not necessarily a sustained reason for bond investors to party.

The real signal from bonds would come if short-dated yields started to decline too: that would show broader risk aversion and a reappraisal of the path of U.S. monetary policy. But it will take a bigger shock to investor confidence for that to occur. Unless that happens, soggy stocks won’t necessarily mean a sustained surge for bonds.


Catalyst for Chaos

By: Michael Pento 


Up until very recently, stocks had been humming along without so much as a minor speedbump and volatility was becoming a distant memory. However, it now seems prudent to once again remind investors that this extremely overvalued market is headed for an epic crash. The Cassandras, myself included, have been wrong about this warning for what seems like a long time. Nevertheless, much like those who warned of a housing bubble a few years before the bottom completely fell out, reality is destined to slam into the current triumvirate of asset bubbles, and those sounding the alarm will be proven correct again.

The governments' massive interest rate manipulation and record amount of new debt accumulation have engendered unprecedented equity, real estate and fixed income bubbles across the globe.

But what could finally be the catalyst that sets off the inevitable deleveraging and reconciliation of asset prices into motion?

A very good candidate for this is the eventual tapering of the Quantitative Easing (QE) programs currently underway courtesy of the European Central Bank (ECB) and Bank of Japan (BOJ). There is a very good chance that upon the announcement of a commitment to end the QE programs in either of these countries will lead to a sudden and chaotic surge in borrowing costs worldwide.

Of course, Wall Street cheerleaders will scoff at this notion; claiming that the Fed was able to begin winding down QE in December of 2013 and was done by October 2014, with nary a hiccup in stock prices.

But there exists a huge difference between the Fed's tapering of QE and potentially that of the ECB and BOJ.

When then Chairman Bernanke started to wind down QE, the U.S. Ten-Year Treasury was yielding around 3%. And, according to the BLS, the year-over-year rate of inflation was 1.5%.

Therefore, real interest rates were already positive and the nominal rate was above the universally-adopted central bank inflation target of 2%. Hence, the tapering of asset purchases did not cause yields to spike; and that quiescence of borrowing costs kept the stock bubble expanding.

Another reason for the temperance in Treasury yields was the commencement of QE programs from those very same countries. The BOJ and ECB started to print money right around the time of the Fed's termination of asset purchases. BOJ Head Haruhiko Kuroda began Japan's massive bond buying spree in April of 2013. Kuroda pledged to buy at least $1.4 trillion in assets back then and is still going strong with an additional 80 trillion yen each year.

In addition, the ECB President, Mario Draghi, announced he would do "whatever it takes" to drive down yields in the Eurozone in July of 2012; then followed up with an official announcement of QE in January of 2015. Draghi's money printing continues to this day and will amount to a minimum of $2.4 trillion worth by the end of this year.

It is important to note that although the ECB announced a quasi-tapering of assets from 80 billion, to 60 billion Euros per month beginning in March of 2016, it was not a genuine tapering in the least. Not only did Mr. Draghi extend the duration of his bond purchases by another three months, he also stated at his press conference that quantitative easing is open-ended and could extend well past the proposed end date of December 2017. Yet, despite this half-hearted and minuscule step towards tapering, the ECB still caused a doubling of German 10 Year Bund yields in the past month.

Most importantly, the major difference between the Fed's taper and the inevitable turn from the BOJ and ECB is the level of their respective real interest rates.

Japan's 10-Year Note offers a nominal yield of just about zero percent. However, as mentioned already, the BOJ has an inflation target of 2%. If Mr. Kuroda ever has the temerity to end his bond-buying scheme, borrowing costs in this bankrupt nation, which has a total debt to GDP ratio of around 600%, would have to abruptly surge over 200 basis points just to keep even with the central bank's inflation target. Alternatively, rates could surge given the fact that insolvent Japanese Government Bonds will be losing the only buyer willing to receive a guaranteed yield of zero percent.

This difference in real yields is particularly striking in Germany. An inflation rate of 2% isn't just a target...it's a reality. The 10-Year Bund currently yields 0.43%, and the February year-over-year rate of Consumer Price Inflation (CPI) is 2.2%. Therefore, real interest rates are currently a negative 1.77%. If the ECB were to seriously commit to ending its QE program, fixed income investors and speculators would panic to get ahead of the removal of Draghi's bids; and Bund yields could surge well above the rate of inflation in a very short period of time.

Therefore, it is a very credible assumption that the free market will rush to front run the offers from Draghi and Kuroda, and cause chaos in global bond markets.

But if Draghi were to actually taper it would leave only Japan and the much smaller Bank of England left in the money printing business. When Bernanke began tapering the ECB and BOJ picked up the slack and kept global borrowing costs in check. The ECB and BOJ won't be so fortunate.

The bottom line is whenever the ECB or BOJ decide it's time to turn off the air compressor that has been inflating asset bubbles extent within these economies, the likely outcome will be incredibly ugly. A smooth dismount from years' worth of unprecedented interest rate manipulation is impossible due to the historic distortion of asset prices and record debt levels caused by these officially-sanctioned counterfeiters.

If sovereign bond yields do not spike upon the mere utterance of the word taper from the BOJ or ECB, it will be due to investors' perception that deflation and depression are about to spread across the developed world. Why else would bond yields remain anywhere close to 0%? This is especially true give that investors also have to fear the potential outright selling of the gigantic hoard of sovereign debt held by these central banks.

In either scenario, (an inverted yield curve or surging long-term rates) the odds are high that the ending of this historic central bank interest rate manipulation will be the catalyst for currency, equity, fixed income and economic chaos to pervade across the globe. Intelligent investors understand that trillions of dollars' worth of negative yielding sovereign debt will not react well to an interest rate normalization campaign. But I'm sure the perma-bulls will keep on laughing...until it is too late.