The Great Reset: How Should We Then Invest?
– John Maynard Keynes
– Ray Dalio, founder, Bridgewater Associates, LP



100 Days of Chaos
Donald Trump and the Erosion of American Democracy
By Christoph Scheuermann
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With his attacks on judges, journalists and critics, U.S. President Donald Trump is chipping away at the foundations of democracy. Is the American Constitution strong enough to withstand the assault?
The man who has found himself on the United States president's bad side this week bears the quaint name of William Horsley Orrick, a 63-year-old who -- in his frameless glasses and side part -- has the classic look of a civil servant. Orrick is a District Court judge in San Francisco and on Tuesday, he blocked Donald Trump from penalizing those cities that provide immigrants special protections, such as making it more difficult for them to be deported.
Trump had ordered that federal funding be withheld from these so-called "sanctuary cities."
But with his ruling, Orrick has slapped a temporary stay on the order.
It was just the most recent defeat in the courts for the president, following the suspension of his travel ban targeting the citizens of several Muslim-majority countries -- and it didn't take long before the president went public with his rage. The ruling, Trump wrote in one of his early morning Twitter eruptions, is "ridiculous." He added: "See you in the Supreme Court!"
Trump has never made a secret of his intense disdain for the institutions that are necessary for a vigorous democracy: an independent judiciary, a critical press and a healthy opposition.
Essentially, Trump would be happy to do away with all of that, or at least marginalize it.
Following the ruling from San Francisco, he indicated that he is broadly dissatisfied with the federal judges there and threatened to curtail their power.
The president's anger with people who contradict him and institutions that stand in his way does not fade with time. On the contrary, the more resistance Trump is faced with, the harder he fights and the more deeply he believes that he is right. But in a democracy, it is necessary to establish alliances and build coalitions. The president, too, must defer to these constraints: He is reliant on Congress, his power over the states is limited and judges are independent.
Democracy lives from the ability to forge compromise, but that is a skill that Trump appears not to possess. As such, his first 100 days in office can be interpreted as an attack on the foundations of American democracy.
The independent organization Freedom House, which monitors the state of democracy worldwide, recently criticized the U.S. in its annual report due to the erosion of democratic ideals. Trump's approach to fundamental human rights, such as the freedom of opinion, was of particular concern to the researchers.
The Risk of Authoritarianism
"The institutions have become more vulnerable," says Steven Levitsky, professor of government at Harvard University. Levitsky has taken a closer look at the first months of the new administration and concluded that there is a risk that the U.S. could become more authoritarian under Trump's leadership. Levitsky speaks of "competitive authoritarianism," a kind of top-down democracy, in which the president controls state institutions and the media and the opposition is put at a structural disadvantage. Levitsky has been researching autocratic regimes for years and found that "periods of intense polarization are often followed by the collapse of democracy." And there is hardly any country in the West that is as deeply divided as the United States.
Trump exploited this polarization to get elected and is now doing the same in office. He is able to do so in part because his supporters have remained loyal no matter what he does. And the list of irregularities is long: He has essentially transformed the White House into a family fiefdom by installing his daughter Ivanka and his son-in-law Jared Kushner in the halls of power; he has refused to release his tax returns as has been standard practice for presidents since the end of the 1960s; and he has been decidedly half-hearted about separating himself from his business interests, allowing him to profit from decisions he makes in the White House.
The president's priorities were revealed particularly transparently in the tax plan that he presented Wednesday. The heart of the tax-code overhaul is a cut to the corporate tax rate from the current 35 percent to just 15 percent. It also calls for the elimination of the inheritance tax in addition to income tax cuts. Together, the cuts would cost the state $2 trillion in tax revenue every year -- an enormous hit to the budget for a tax reform that primarily benefits the rich. People like Trump and his family.
Worse, though, are the president's regular attacks on judges, journalists and his opponents. Trump goes after his critics with irascible fits of temper, yet he harbors admiration for autocrats. He has often praised the leadership of Russian President Vladimir Putin and one of his first visitors in the White House was Egypt's president Abdel Fattah el-Sissi. Furthermore, he could hardly congratulate Turkish President Recep Tayyip Erdogan fast enough following his victory in the recent constitutional referendum that brought the country a giant step closer to becoming a dictatorship.
'Going Bananas'
Trump's advisors and cabinet members are likewise scornful of all who would dare stand in the way of the president. Attorney General Jeff Sessions, of all people, recently criticized a judge in Hawaii for blocking Trump's travel ban for people from majority Muslim countries. "I really am amazed that a judge sitting on an island in the Pacific can issue an order that stops the president of the United States from what appears to be clearly his statutory and constitutional power," Sessions said. White House Chief of Staff Reince Priebus said simply that William Orrick and his court were "going bananas."
Trump and his team can feel encouraged by the results of a February survey which found that 51 percent of the president's supporters believe he should be able to override judicial rulings he doesn't agree with. When both the government and its people are united in their disdain for democratic institutions, it represents a clear danger.
Additionally, Trump behaves in ways that are unseemly for the head of state in a democracy.
He tells lies and insults people, he sells his intellectual shallowness as being a man of the people and he peddles his lack of composure as strategy. He is proud of his basest instincts and is open about his respect for enemies of democracy.
After 100 days of Trump's presidency, America is even more polarized than before. The fronts have become harder and the debates have become more aggressive, even if that hardly seemed possible following last year's campaign. Animosity between the Trump camp and the anti-Trump camp has deepened. The blustering narcissist in the White House has outdone even himself when it comes to driving his country even further apart and failing to live up to his critics' already low expectations.
After 100 days of chaos, Trump is the least liked of all modern presidents -- even George W. Bush enjoyed greater approval at the beginning of his tenure. For a man like Trump, who loves nothing so much as himself and who almost obsessively monitors -- and seeks to control -- his image in the media, such survey results are a painful comedown. There is reason for concern that he might feel tempted to become even more combative and aggressive in his attacks on his critics.
At His Fingertips
Harvard professor of government Levitsky says that American democracy is in no way immune to abuse of power. By today's standards, he says, the U.S. only became truly democratic in the 1970s after racial segregation had been largely overcome. Before that, authoritarian tendencies were widespread in the 11 states belonging to the American South, which had long been governed by Democrats. Blacks and poor whites were systematically discriminated against and the political opposition was oppressed.
The American Constitution is surprisingly vague regarding the limits of presidential power and he has the means at his disposal to deploy state agencies against the political competition.
Several of Trump's predecessors have used the FBI, CIA and NSA to spy on public officials, journalists and activists they didn't like. The executive has never been innocent. A firebrand in the White House who seeks revenge on his opponents has all the instruments he needs right at his fingertips.
A president's political power is limited by the system of checks and balances outlined in the Constitution and includes the Congress, the judiciary and the states. But the Constitution can only provide the population with limited protection from a vengeful president.
"We often think that checks and balances can save us and that the Constitution is unassailable," says Tom Ginsburg, a constitutional law expert at the University of Chicago. But how might Trump react in the case of a terrorist attack, a natural disaster or in times of war?
Would he take the opportunity to make a grab for power and weaken other institutions? He possesses the authority to do so.
There have been times in the past when Democrats and Republicans have cooperated to protect the common welfare and democratic institutions -- even in opposition to presidents from their own party.
In the 1930s, leading Democrats stood up to Franklin D. Roosevelt's efforts to shake up the Supreme Court due to the court's skepticism of the New Deal, the president's far-reaching reform package. In the 1970s, Republicans joined Democrats in supporting the impeachment of Richard Nixon.
Breaking with Democratic Norms
Those times, though, are long gone. The Congressional committees charged with investigating the Trump team's connections to Russia are dominated by Republicans, who are delaying the proceedings. The president is wary of having too much light shed on contacts between former advisers and Moscow and he is relying on Republican members of Congress for help.
Trump is a president who has broken with democratic norms. He casts doubts on the legitimacy of Barack Obama's presidency and demanded during the campaign that Hillary Clinton be locked up.
After the election, he made accusations of vote manipulation, saying millions of immigrants living in the country illegally had cast votes despite having no right to do so. He never offered proof for the allegations.
He has also inflicted wounds on democracy by regularly doing the exact opposite of what he promised during the campaign. The faith of the electorate in their political leaders, which was already low, will likely sink further -- and the desire for a strong ruler, who will impose his will on the system, will grow.
The first 100 days have revealed an immoral president without a plan, an unpoised leader with no interest in the political process. It seems unlikely that Trump will impose a state of emergency or strive for single-party rule: The U.S., after all, isn't Turkey or Venezuela. But he has set in motion the internal erosion of democracy and is taking advantage of its weaknesses.
As such, the only hope lies in his own incompetence.
"Were there a competent version of Trump, would the Constitution protect us?" asks the legal expert Tom Ginsburg rhetorically. His answer is chilling: Probably not.
Wall Street's Best Minds
Byron Wien: The Scary Signal of the Bond Market
The surprising drop in 10-year Treasury yield speaks volumes about challenges of a changing economy.
By Byron Wien
To many pessimists on the economic outlook, the drop in yields on the 10-year from 2.6% is a sure sign that the economy is weakening. After all, this expansion is almost eight years old and it is reasonable to expect a slowdown or even a recession. The disappointing employment report for March showing only 98,000 jobs were created may have been the first sign of trouble.
Others believe the uneven start of the Trump administration in putting its pro-growth agenda to work is a reason to buy bonds and avoid the risks of increased equity exposure.
One political factor that may be influencing interest rates is the concern that the new administration under Donald Trump may not get much legislation through Congress. The failure to repeal the Affordable Care Act was the first sign of legislative difficulties. Recent reversals of positions by the president include China as a currency manipulator, Nafta as a bad trade deal, involvement of the U.S. in Syria and Afghanistan, NATO as an obsolete alliance, Russian relations and renewing Janet Yellen’s term as Federal Reserve Chair. These reversals confused voters and investors on where the president really stands and diminished confidence in the positive pro-growth outlook. Some of his conservative supporters feel he is letting them down. This disappointment may be reflected in the lower interest rates and the modest stock market correction we have seen since March.
You would think that these higher debt levels would push interest rates up because they represent increased financial risk, but that has not happened.
We have actually been blessed by this decline in interest rates in the United States. In 2000, the total interest cost of servicing the federal debt was $360 billion, based on a blended interest rate on government bonds of 6%. Today, the blended interest rate is 2.1% and the total interest cost is $400 billion, only $40 billion more on a debt burden three times the size of its 2000 level. If interest rates on government securities rise 1%, the cost of debt service would increase almost $200 billion, offsetting most of the budget cuts being proposed by the Trump administration.
Why have interest rates declined when debt has increased and the economy is growing? I have long believed that at least part of the answer is the considerable expansion of central bank balance sheets.
The surfeit of liquidity around the world may be playing a role in keeping interest rates low.
Central banks in the U.S., continental Europe, the United Kingdom and Japan have increased their balance sheets by $10 trillion since 2008. In my opinion, as much as three-quarters of those funds found their way into financial assets, inflating price-earnings ratios and keeping interest rates low. Only one-quarter of that increase was invested in the real economies of those countries and regions that were the intended beneficiaries of the monetary expansion. Now many of the managers of that capital are risk-adverse and are searching for places to park their money until the outlook improves. That is why you have negative interest rates in Europe and Japan.
The upward pressure on interest rates will not come from the corporate sector. As reported by 13D Research, the “animal spirits” in corporate borrowing for projects that would increase growth have quieted down. The current capital spending improvement is largely caused by a rebound in the energy industry as the price of oil has risen. Corporations are flush with cash and do not need to borrow for new initiatives.
Also, capacity utilization is at 77%, revealing plenty of slack and unutilized manufacturing capability out there. In many industries no new capacity is needed.
The economic evidence supports the view that the U.S. economy is continuing to grow. The Economic Cycle Research Institute report, which aggregates a number of indicators, is at a cycle high, and I have found their studies reliable. Unemployment is low and wages continue to rise. The energy industry is reviving. Global leading indicators are rising sharply. The National Federation of Independent Business survey shows this group is optimistic, and they are responsible for creating most jobs. There are some signs of softening in the housing sector and retail sales, but based on current news, the economy seems to be accelerating rather than losing steam, so real GDP growth should be at least 2% in 2017 whether Trump gets his pro-growth agenda implemented or not. A recession would appear to be at least two years in the future.
Just as there has been little focus on the level of national debt and the financial burden it places on our future, you have not heard much recently about unfunded liabilities. Medicare alone represents $32 trillion in obligations over the next 75 years, although some economists believe it is as high as $45 trillion.
According to Strategas Research, Social Security obligations are $11 trillion over 75 years. At the state and local level, there is currently a $1.9 trillion negative obligation gap, about 10% of our present GDP. These projections indicate upward pressures on budget deficits everywhere.
The Trump administration’s economic program including tax reform is designed to be revenue neutral, meaning it will require no increase in the budget deficit, but recent Washington sentiment indicators show a willingness to run a modest deficit, considering the current excess of expenditures over receipts is less than 3% of GDP.
We are all complacent about these debt levels because they are refinanced so easily when the bonds mature and the servicing costs (interest rates) are low. While a coterie of economists continually wring their hands about the growing debt problem, their shrill complaints are not likely to inflame the public broadly until interest rates start to rise. The lack of public concern may be attributed, at least in part, to consumer net worth being in the best shape ever. This factor has risen from $60 trillion when the recovery started in 2009 to $95 trillion now. Despite the increase, we all know that net worth is far from evenly distributed. Twenty years ago, according to a study by Emmanuel Saez at the University of California at Berkeley, the bottom 90% of the U.S. population held 36% of household wealth and the top one-tenth of 1% held 7%. Today the bottom 90% hold 23% and the top one-tenth of 1% hold 22%. The inequality gap has grown wider in the new millennium.
In spite of the wealth disparity, inequality does not seem to be a major political issue at this time.
I have often argued that the world economies began to change significantly in 1980 and one implication was wealth inequality. In that year, the Japanese began to sell consumer electronics and automobiles in world markets and globalization began in earnest. Also in 1980, Apple introduced its first computer, which led to the internet and the smart phone and technology became an important productivity-improving force throughout the world. These two developments had a positive impact on world growth but also increased inequality. In 1980, the CEO-to-average worker compensation ratio was 30 times; today it is over 300 times, albeit down from a peak of 376 in 2000, according to the Bureau of Economic Analysis. This increase has roughly tracked the performance of the stock market since 1980. At the same time, according to the Bank Credit Analyst, the real income of the top 1% of the U.S. population has increased 54%, but is flat for the 90th percentile and below.
Given the combination of rising debt obligations with growing inequality, the economies of the major industrialized economies may be headed toward a dangerous point. Looking at one example, as a result of increasing longevity, the cost of supporting the population which will need assistance that cannot be afforded by the immediate family could be great. That may be one major unintended consequence of medical breakthroughs.
There are two ways to deal with the inequality problem. The first is increased redistribution, which, although not endorsed by me, is supported by Bernie Sanders and Elizabeth Warren.
The second is increased growth, which is the objective of the Trump economic program and would benefit people at all income levels. Right now, that growth initiative looks like it will be delayed. There are some who fear that Trump’s entire agenda is in doubt because of dissension in Congress on the part of both Democrats and Republicans. In addition, there are a number of problems that the new Trump administration must face beside the aging demographics. Only three-quarters of those attending public high schools graduate, and many of those who do lack the reading and quantitative skills necessary to hold a good job in today’s competitive workplace. Environmental problems like air and water pollution are increasing, but budget for the Environmental Protection Agency has been cut.
Globalization and technology continue to provide challenges to the economy; while these factors may increase growth and productivity, they do tend to displace jobs.
We are now on the brink of artificial intelligence invading the white collar workplace and reducing the number of jobs in health care and the legal profession. Economic progress appears to be associated with increasing the ranks of the unemployed or marginally employed.
Retraining those affected or finding alternative employment is one of the important challenges facing society today. Increasing real growth from 2% to 3% is going to be difficult, but necessary both to improve the standard of living and provide the resources to deal with future needs.
Taking a hard look at unfunded obligations, increased taxes may well be necessary over the long term, but we will probably not tackle these problems until a crisis is upon us. While this is usually how major challenges are dealt with, that crisis is coming, and one worry I have is that the new administration is already too overwhelmed by the immediate problems to be focusing much on the future. The irony is that interest rates are declining at the federal level when they should be rising in anticipation of future borrowing needs. The market is making new highs but there is plenty to think about. I find myself getting up in the morning before the alarm clock has rung.
Wien is vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.
Why Is JPMorgan Trying To Corner The Silver Market?
by: Simple Digressions
Buttonwood
Exchange-traded funds become too specialised
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