Strong Data and Conspicuous Bubble Excess

Doug Nolan

The analysis surrounding economic data is especially interesting these days. As always, there’s ample opportunity to pick and choose data points to support a particular perspective. I hold the view that economic activity is generally more robust than given credit for (especially in bond markets). The analytical community for the most part downplays economic strength. No reason to stir the Fed or the fixed-income markets. Besides, these days most economic data have minimal market impact. Beyond reports on consumer inflation and wage growth, little seems to garner much interest from Federal Reserve officials.

U.S. Manufacturing payrolls increased 36,000 (estimate 8k) in August, the strongest monthly gain since March 2012. Moreover, July growth was revised up 10,000 to 26,000. One must look all the way back to the 2010 recovery for a stronger two-month period of manufacturing job gains. And while overall August payroll gains (156k) lagged expectations (180k), it’s worth mentioning the much stronger number out of ADP. At 236,600 jobs added, August ADP was the strongest since March (255k). One must go back many years to find a stronger August report from ADP.

The US ISM Manufacturing index was reported Friday at a stronger-than-expected 58.8, the highest reading since April 2011. Prices Paid remained unchanged at an elevated 62, with Production up slightly to 61. New Orders were little changed at 60.3. Notably, Employment jumped 4.7 points to 59.9, the strongest reading since June 2011. Manufacturing strength was broad-based, with 14 of 18 industries reporting growth for the month. A Bloomberg article quoted Timothy Fiore, chairman of ISM’s factory survey committee: “Really, really strong month for manufacturing… We’re seeing a significant expansion.” And with an estimated 500,000 vehicles to be scrapped after hurricane Harvey, the auto manufactures no longer face much of an inventory issue. Ford and GM gained about 5% in three sessions.

A headline from a couple weeks back: “Japan Is Now the Fastest-Growing Economy in the G7.” With 4% annualized growth, and the “longest expansion in more than a decade,” the Japanese economy unexpectedly moved to the top of the growth leaderboard. It was short-lived. Canada’s GDP was reported Thursday at a stronger-than-expected 4.5% annualized (y-o-y up 5.3%), the strongest growth since Q3 2011. The expansion was broad-based, with Household Consumption up 4.6% and Exports surging 9.6%.

September 1 – Bloomberg (Carolynn Look): “In a month traditionally reserved for time at the beach, euro-area factories increased output at one of the fastest rates since 2011. A Purchasing Managers’ Index for manufacturing climbed to 57.4 in August from 56.6 in July, IHS Markit said… A surge in export orders, paired with robust domestic demand, put pressure on capacity and forced companies to take on more workers.”

The JPMorgan Market Economics global manufacturing index rose 0.4 to 53.1, the highest reading since may 2011. Germany’s PMI jumped to 59.3, just below multi-year highs. UK’s manufacturing PMI rose to 56.9 vs. a 55.0 estimate.

Data out of China continues to confirm (Credit-induced) expansion. The Caixin China Manufacturing PMI increased 0.5 to 51.6 in August, the strongest reading since February. Export Orders rose to the highest level since 2010. It’s worth noting that India (51.2), Mexico (52.2) and Brazil (50.9) all posted stronger manufacturing PMIs.

“Soft” data remain robust. “U.S. Consumer Confidence at Second-Highest Level Since 2000.” Conference Board August consumer confidence increased to a stronger-than-expected 122.9. Present Conditions rose to 151.2, the strongest reading since July 2001. European economic confidence jumped to the highest level since the summer of 2007. Meanwhile, German CPI rose to a stronger-than-expected 1.8% in August.

Ten-year Treasury yields rose five bps Friday to 2.17%. For the most part, however, global bond yields have reacted little to stronger-than-expected data. Treasury yields traded as low as 2.10% Friday morning on weaker nonfarm payrolls along with reports out of Frankfurt that the ECB may not have its final plan for winding down QE together until December.

To be sure, global central bankers have brought new meaning to the phrase “behind the curve.” Expectations have the ECB taking a gradualist approach to winding down bond purchases. Who knows if rates will ever be returned to a semblance of a reasonable level. Here at home, despite a 3.0% GDP print and a 4.4% unemployment rate, the market sees the Fed likely done raising rates for 2017 (36% odds of rate hike before year-end). And there’s still no end in sight for the Bank of Japan’s incredible securities purchase program.

The stronger the global economy, the more fixated central banks are on CPI. They define “price stability” as a steady 2% rise in an aggregate of consumer prices – even though it’s obvious that relatively stable CPI is not at all reflective of financial stability or overall pricing dynamics throughout the financial markets and economy. Somehow it’s gotten to the point where central bankers are determined to prolong a radical experiment in monetary inflation, with slightly below target CPI as justification.

The focus should instead be on the stability of prices more generally, certainly including securities and asset prices. It seems rather inarguable. Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.

Alan Greenspan fashioned an asymmetrical approach to rate hikes: slash them aggressively in the event of de-risking/de-leveraging in the markets, while raising them cautiously to ensure that markets were not at risk from tightening financial conditions. This was a Godsend to financial speculation. The Bernanke Fed took things a giant step deeper. The Fed was prepared to push back against any tightening of financial conditions. “Asymmetrical” doesn’t do justice. In the event of ongoing ultra-loose financial conditions and resulting asset price instability, the Fed (and their central bank compatriots) would sit back and completely disregard escalating monetary disorder (while clasping hands and repeating “CPI below target”).

Things turn crazy late in Bubble episodes – especially, as we’re witnessing, in the “Granddaddy of All Bubbles.”

August 23 – Financial Times (Joe Rennison): “Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns… The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields… Tranches with less exposure to defaults might only offer a 0.3 to 0.5% annual return but investors ‘lever’ the position by paying only a proportion of the deal value as collateral. While that increases the risk of safer tranches, investors are using less leverage than was case before the financial crisis, traders say. Leverage up to 20 times is now typical, pushing returns above 5%.”
August 28 – Wall Street Journal (Christopher Whittall and Mike Bird): “The synthetic CDO, a villain of the global financial crisis, is back. A decade ago, investors’ bad bets on collateralized debt obligations helped fuel the crisis. Billed as safe, they turned out to be anything but. Now, more investors are returning to CDOs—and so are concerns that excess is seeping into the aging bull market… Desperate for something that pays better than basic government bonds, insurance companies, asset managers and affluent investors are scooping up investments like synthetic CDOs, bankers say, which had largely become the preserve of hedge funds after 2008… The fastest growth this year has come in credit—the epicenter of the 2007-08 crisis. The top 12 global investment banks had around $1.5 billion in revenue in structured credit in the first quarter, according to Coalition, more than doubling since the first quarter of 2016. Structured equities are largest overall, a business dominated by sales of derivatives linked to moves in stock prices, with revenue of $5 billion in the first quarter.”
According to Dealogic, U.S. corporate debt sales have surpassed $1.2 TN y-t-d and remain on record pace. How much is demand for these debt securities driven by the popularity of various structured finance vehicles, including a rejuvenated CDO marketplace? How much leverage is accumulating when “up to 20 times is now typical” for “safe” tranches? How have years of ultra-loose monetary policy, along with Fed’s assurances to “push back” against any tightening of financial conditions, distorted the entire structure of the corporate debt marketplace?

Friday from the Financial Times (Kadhim Shubber), under the headline “This is What Watching a Bubble Feels Like… Behold the Madness:”

“’The OMG token sale, which raised $25 million, took place in July and initially one OMG token was worth around $0.27. Today, the value is at more than $11, giving a return of more than 40X to anyone who bought in at the ICO stage. Qtum raised $15.6 million worth of crypto in March. Its QTUM token was worth $0.30 initially, but today that price is above $17.’ That’s via TechCrunch, which says OMG and Qtum are the first initial coin offerings to breach a $1bn market cap. It dubs them ‘ICO unicorns’. Apparently the price rises are a ‘massive respectable return for those who speculated’. Never mind that ‘neither company has an actual product in the market right now’.”

August 29 – Bloomberg (Sho Chandra): “Unless you’ve been living under a rock, you’re probably aware that bitcoin and a number of other digital currencies have seen some pretty crazy runs this year. Bitcoin, the best-known digital currency, has surged 358%. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000% increase for ethereum. Bespoke Investment Group contrasted the rise in bitcoin with infamous bubbles such as the tech market in the late nineties. There’s almost no comparison. Tech stocks rose just over 1,000% over the entire course of their bubble, and bitcoin is already up more than twice that.”
August 30 – Bloomberg: “The rise of initial coin offerings in China has disrupted the social economic order and poses a financial risk, a domestic trade group said. Institutions have misled investors to raise funds through ICOs, the National Internet Finance Association of China, an organization endorsed by the State Council and top finance and banking watchdog, said… Unauthorized by regulators, some of the ICOs are suspected of fraud, illegal equity offerings and fundraising, the group said… ‘ICO projects have unclear assets, no investor suitability standards and gravely lack information disclosure and therefore have relatively high risks,’ the association said. ‘Investors should keep a clear mind, stay on high alert for frauds and report any wrongdoings to the police department.’”

The unfolding cryptocurrency Bubble has been feeding off ultra-loose financial conditions and a mindset of speculation that has become deeply entrenched (from years of free “money”). It’s become a full-fledged mania, although its significance will be downplayed by those pointing to the relatively small scope of the market. While not quite as outrageous, there are myriad indicators pointing to precariously loose monetary conditions and late-stage Bubble Excess (where market cap is quite meaningful).

Biotech stocks (BTK) surged 9.0% this week, pushing y-t-d gains to 37.7%. The Nasdaq Biotech index (PE 107) this week saw 10 stocks (out of 160) gain better than 20% and 43 rise double-digits. About any company in the process of developing a new cancer treatment saw its stock soar.

Biotech is not alone in indicating Bubble danger. The Morgan Stanley High Tech Index surged 2.6% this week to new all-time highs, boosting y-t-d gains to 28.7%. The Semiconductor index jumped 3.6%, increasing 2017 gains to 23.5%. The Nasdaq Composite rose 2.7% (up 19.6% y-t-d) and the Nasdaq100 advanced 2.8% (up 23.1%).

August 29 – CNBC (Andrea Riquier): “U.S. home price growth picked up steam in June as strong demand continued to buoy the market. The S&P/Case-Shiller 20-city index rose a seasonally adjusted 5.7% in the three-month period ending in June, compared with a year ago, the same rate of change as in May. The national index rose 5.8%, compared with a year ago, up from a 5.7% annual increase in May. Nine cities had stronger annual price growth in June than in May, and western metros remained on top, with annual price gains ranging from 13.4% in Seattle to 7.7% in Dallas. Seattle prices are rising so rapidly that they have left No. 2 Portland in the dust.”

I may be biased by what I see locally – and by generally overheated housing markets along the entire West Coast - but I believe a powerful inflationary bias and Bubble Dynamics have taken hold in many markets around the country. This is an important consequence of timid central bankers and low bond yields. Recent housing sales have somewhat disappointed, but this is likely being impacted by the lack of inventory in strong markets. It’s taking time for builders to catch up with robust demand (homebuilder index up 13.8% y-t-d).

There is ample support for the global Bubble thesis. Emerging market equities (EEM) rose this week to three-year highs. Brazil’s 1.2% rise increased y-t-d gains to 19.4%. India’s almost 1% gain took y-t-d returns to 19.8%. So far this year, stocks in Turkey have gained 41%, Poland 26%, Hungary 17.9%, Romania 14.6%, Hong Kong 27.1%, South Korea 16.4%, Taiwan 14.5%, Indonesia 10.7%, Philippines 16.3%, Vietnam 18.6%, Mexico 11.9%, Argentina 40%, Chile 24.6% and South Africa 13.9%.

In any other environment, surging securities and asset prices coupled with synchronized global economic momentum would see bond prices under pressure. But with global central bankers fixated on consumer price indices and the bond market confident in inflation dynamics, fixed income has been about as comfortable as one could imagine.

Perhaps central bankers have just decided to sit back and let these Bubbles run. I hold out some hope that they will recognize their predicament and begin to signal a desire to get back to the process of “normalization.” We’re at the late phase of the Bubble - where bond markets are sniffing out trouble (bursting Bubbles and mounting geopolitical risks). But it’s the bond market’s keen sense of smell that keeps yields artificially low, ensuring exactly the loose financial conditions necessary to sustain perilous late-stage Bubble excess.

A Thursday Bloomberg headline: “The Bond Market’s Biggest Rally of 2017 Amazes Traders.” By Friday afternoon fixed income did seem to be awakening somewhat to reality. Also from Bloomberg: “Junk Bonds Face Wave of Supply Just as Investors Turn Sour.” It’s interesting to ponder how the world might change when investors turn sour on corporate Credit and fixed-income more generally. It may not these days be the most conspicuous of Bubbles – but it’s surely among the biggest and with the most far-reaching consequences.

Seconds out

The North American Free-Trade Agreement renegotiation begins

Rewriting North America’s trade rules will not be easy

THE North American Free-Trade Agreement (NAFTA), a 23-year-old trade deal between America, Mexico and Canada, is being revamped. On August 16th, after months of threats, taunts and tweets, the first round of talks started in Washington. The negotiators face a daunting challenge, straddling domestic and foreign policy. They must please their political masters while grappling with devilishly detailed policy problems. If they fail, it will not be for lack of experience. The professionals are in the room.

This negotiation will be more tense than most. Participation in trade talks is usually by mutual consent. In this one, President Donald Trump is trying to hold his trade partners hostage, by threatening to withdraw from the original deal if a better one cannot be agreed on. That such an outcome would also hurt America does not make the exercise any easier.

Pressure is added by a desperately tight, if unacknowledged, deadline, set by the presidential-election timetable in Mexico. If no deal is agreed by early 2018, talks must pause to restart a year later. By then, Andrés Manuel López Obrador, a fiercely anti-American Mexican candidate, may be in power. Ildefonso Guajardo (pictured, right), Mexico’s economy minister, reckons there is a 60% chance that the deal will be renegotiated this year. The original NAFTA talks took three years.

The first round of negotiations is when each side sets out its priorities. At the opening press conference the Mexicans and the Canadians both emphasised the importance of keeping the benefits of the existing deal. Less promisingly, Robert Lighthizer (pictured, left), the United States Trade Representative, said he wanted assurances that America’s huge trade deficits would not continue. Making the deal hinge on this would cross the others’ red lines.

Mr Lighthizer also spoke of making a pact that respects sovereignty, a swipe at Chapter 19 of the original deal. This sets out a process for resolving disputes over defensive tariffs, arbitrated by a panel of judges picked by the three partners. Mexico and Canada are open to making this process faster. But ditching it is unacceptable to the Canadians, who do not want to be vulnerable to American anti-dumping measures.

The talks will be split into groups covering specific negotiating areas. Labour standards and dispute settlement were on the agenda for the first day. Each side usually brings along some proposed text, often lifted from another agreement. On labour standards, American trade veterans may recognise some text negotiated for the Trans-Pacific Partnership, the Obama administration’s attempt—jettisoned by Mr Trump—to update NAFTA, and bring in nine other Pacific Rim countries. The Mexicans say they will find it difficult to agree to anything stronger.

The Canadians have the advantage of ready-made text from a recent deal with the EU. Its dispute-settlement rules watered down investors’ rights in favour of governments’ freedom to regulate. The Americans may reject that in the face of fierce resistance from corporate lobbyists.

Given the time pressure, tricky topics will be broached early. Procurement was on the agenda for day two. Chrystia Freeland (centre), Canada’s foreign minister, held up pictures of firefighters from the other NAFTA partners tackling Canadian forest fires as a symbol of co-operation. In other comments she was less friendly, declaring that “local-content provisions for major government contracts are political junk-food: superficially appetising, but unhealthy in the long run.” Yet to ease Canadian contractors’ access to American government business would irk Mr Trump, a staunch advocate of “Buy American”.

The bracket bulge

After the first round of meetings, the proposals will be merged into a single document.

Uncontroversial items—a prohibition on customs duties for digital products, say—can be slotted in. Disagreements will be in brackets, indicating which side holds which position. The objective then is to remove as many brackets as possible.

Such talks make grubby mercantilist horse-traders of even high-minded negotiators. Perhaps the Canadians could parlay opening their dairy market for better access to American government contracts. Trickier decisions will require “political direction”, said Canada’s chief negotiator, Steve Verheul, who has set up a system to get speedy sign-offs from his superiors.

Rules relating to the car industry will be particularly contentious. Without that trade, America would have no deficit in goods with Mexico. At issue are the rules that set the amount of regional content a product must have for it to count within the deal. Without such rules other countries could exploit the pact to export tariff-free through a NAFTA member. Enticingly for the Trump administration, tight rules (and those in NAFTA are fairly tight) reduce imports from non-NAFTA countries.

Mr Lighthizer says that the rules of origin should require higher NAFTA content and “substantial” American content. The Mexicans will balk at any asymmetry in favour of America, arguing that it violates the spirit of a regional deal. Companies will resist too, and where non-NAFTA tariffs are low, they have the option of simply operating outside the parameters of the agreement. Tariffs on cars entering America are a mere 2.5%. For products where non-NAFTA tariffs are even lower, more than a quarter flowing into America from Mexico bypass the deal entirely.

The need for speed will probably oblige negotiators to sacrifice some of their ambitions. Complicated areas such as services or intellectual property may be jettisoned, or shallow agreements reached. Resolutions for historically difficult disputes, such as between America and Mexico on sugar, or between America and Canada on softwood lumber, may have to wait.

Ms Freeland predicted “some dramatic moments ahead”. Trade negotiators are inured to screaming, yelling, walkouts and all-nighters. Wendy Cutler, a negotiator under the Obama administration, says the tension is sometimes staged for the benefit of a domestic audience: “It’s not always what it looks like to the public.”

America needs its unions more than ever

Labour reform could help restore the bargaining power of US workers

 by: Lawrence Summers

Membership of workers' unions has fallen considerably, reducing the bargaining power of employees © Bloomberg

The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children. A pervasive sense of vulnerability and missing opportunity leads to dissatisfaction, reduces faith in government and institutions, diminishes willingness to support the least fortunate, increases resentment towards members of other ethnic groups and fuels truculence towards other nations.

As long as a substantial majority of American adults believe that their children will not live as well as they did our politics will remain bitter and divisive. Middle class anxiety is surely also fed by the slow growth of wages even in the ninth year of economic recovery with unemployment at historic low levels. The Phillips curve — the view that tighter labour markets spur an acceleration of wage growth — appears to have broken down. The Bureau of Labor Statistics just reported that average hourly earnings last month rose by all of 3 cents or little more than 0.1 per cent. For the last year, they rose by only 2.5 per cent. In contrast profits of the S&P 500 are rising at a 16 per cent annual rate.

What is going on? Economists do not have complete answers. In part there are inevitable fluctuations. Profits have declined in recent years. The wages that are reflected by the BLS are earned in the US, whereas a little less than half of profits are earned abroad and have become more valuable as the dollar has declined. In part, wages have not risen more because a strengthening labour market has drawn more people into the workforce.

But I suspect the most important factor explaining what is happening is that the bargaining power of employers has increased and that of workers has decreased. Bargaining power depends on alternative options. Technology has given employers more scope for replacing Americans with foreign workers, or with technology, or by drawing on the gig economy. So their leverage to hold down wages has increased.

On the other hand various factors have decreased the leverage of workers. Employers increasingly offer gigs rather than jobs. For a variety of reasons, including reduced availability of mortgage credit and the loss of equity in existing homes, it is harder than it used to be to move to opportunity. Diminished saving in the wake of the crisis means that many families cannot afford even a very brief interruption in work. Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far.

On this Labor Day we would do well to remember that unions have long played a crucial role in the American economy in evening out the bargaining power between employers and employees.

They win higher wages, better working conditions and more protection from unjust employer treatment for their members. More broadly they provide crucial support in the political process for broad measures such as Social Security and Medicare, which benefit members and non-members alike. Both were at their inception passionately opposed by major corporations.

The shrinking of the union movement to the point where today only 6.4 per cent of private sector workers — a decline of nearly two-thirds since the late 1970s — are in unions is one important contributor to the decline in the relative position of labour in general and those who work with their hands in particular. The decline in the unions is also a contributor to the pervasive sense that too often our political system is for sale to the highest bidder.

What can be done? This is surely not the moment for policy to tilt further to strengthening the hand of large employers. Sooner or later labour law reform that gives organisers a chance by seriously punishing employers who engage in illegal reprisals should be back on the agenda. Union efforts to organise non-traditional groups in non-traditional ways need to be encouraged. And policy support needs to be given to institutions where workers have a chance to share in profits and in corporate governance.

In an era when the most valuable companies are the Apples and the Amazons rather than the General Motors and the General Electrics, the role of unions cannot go back to being what it was. But on this Labor Day any leader concerned with the American middle class needs to consider that the basic function of unions — balancing the power of employers and employees — is as important to our economy as it has ever been.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

The Hajj: An Expression of Saudi Power

By Kamran Bokhari


The annual multiday Islamic pilgrimage known as the hajj began Aug. 31. Each year, a few million Muslims from across the globe flock to Islam’s two holiest mosques, in Mecca and Medina, to perform their religious obligation. But the hajj is more than a religious pilgrimage; it’s an expression of Saudi power. Stewardship over the sacred mosques in Mecca and Medina, and thus the control of the hajj, gives the monarchy in Riyadh a legitimacy no other country that claims to be a leader of the Islamic world has, especially among Sunni Arabs. It is a source of stability at home and a foundation of its regional influence, and, as with most sources of power, Saudi Arabia won’t surrender it easily, even as it is contested in the coming years.

A Holy Responsibility

Any power that seeks to dominate the Middle East has to control the Hejaz region in the western part of the Arabian Peninsula along the Red Sea coast. From here, trade is possible north through the Suez Canal and south through the Bab el-Mandeb Strait. The area, the crown jewels of which are Mecca and Medina, changed hands numerous times over the centuries. The last time was in 1927, when Hejaz fell to the founder of the modern Saudi kingdom and father of the reigning monarch, Abdulaziz bin Abdulrehman. Abdulaziz had been expanding his territory in the region for decades, but he knew that to be truly exceptional, his kingdom had to control Hejaz and the holy cities.

Ninety years later, the Saudis realize that they can’t take their control over Mecca and Medina for granted. Their reign pales against the more than 1,400-year history of Islam. And they recall how their forefathers, in an earlier attempt to gain control over the Arabian Peninsula during the 18th and 19th centuries, lost control of the two cities. In 1808, during the age of the so-called first Saudi state, they seized Mecca and Medina from the Ottoman Empire. But they were able to hold them for only eight years before the Ottomans, through their viceroy in Egypt, took them back.

The same fate may have awaited Abdulaziz were it not for the discovery of oil in Saudi Arabia in 1938. After that, Saudi Arabia quickly became the world’s largest exporter of crude, strengthening the foundation of the kingdom. But Saudi Arabia’s control of the hajj has not gone unchallenged, especially in more recent decades.

In 1979, renegade Salafists laid siege to the Grand Mosque in Mecca for several days. The incident was a shock for the Saudis and extremely embarrassing for a number of reasons. First, the attackers – several hundred gunmen – came from the Saudi religious establishment itself. They felt that the Saudis had betrayed the state’s Salafi creed. Second, Saudi security forces proved incapable of retaking the mosque complex on their own and required the involvement of French commandos.

Eight years later, during the 1987 hajj, several thousand Iranian pilgrims held a protest in the Grand Mosque in Mecca. Saudi security forces opened fire, killing some 400 people, mostly Iranian pilgrims. The Saudis mostly avoided serious backlash because of the sectarian divide and Iran’s stated expansionist goals at the time, which most Muslim countries opposed. Iranians boycotted the hajj for three years, but by 1991 the matter was resolved.
Losing Control

The Saudi state would not be what it is today – the region’s sole remaining Arab power – if it was not the custodian of the two holy mosques. But the geopolitical environment for the Saudis is rapidly changing. This year’s hajj comes at a time of growing instability in and around the Arabian Peninsula. For years, the Saudi kingdom has faced the challenge from Iran to the east as well as expanding jihadism in the north in Iraq and Syria and in the south in Yemen, where Riyadh is fighting its own war.

A dispute with Qatar over the past few months has added to the Saudis’ list of problems. The tiny emirate of Qatar, powered by its status as the world’s largest exporter of liquefied natural gas, has pursued policies that the Saudis and their main regional ally, the United Arab Emirates, see as a threat to their interests. A coalition led by the Saudis and the UAE abruptly broke off diplomatic ties with the Qataris in June and have been trying to isolate Doha ever since, trying to bring it back into their fold. The blockade has created problems for Qatari citizens seeking to perform the hajj.

Muslim pilgrims gather at the Grand Mosque in the holy Saudi city of Mecca early on Aug. 30, 2017, during the annual hajj. KARIM SAHIB/AFP/Getty Images

Matters came to a head when, on July 30, Saudi Foreign Minister Adel al-Jubeir denounced an alleged Qatari call to “internationalize” Mecca and Medina. After a meeting with his counterparts from the UAE, Bahrain and Egypt, al-Jubeir told reporters that Qatar’s request was “an aggressive act and a declaration of war against the kingdom.” Qatar, however, denies that it ever made the request.

Regardless, the outcry from Riyadh is in truth an expression of Saudi Arabia’s own insecurity. There are currently no serious attempts to internationalize Mecca and Medina. Although the majority of the Muslim world opposes the Saudi interpretation of the faith and the kingdom’s attempts to run the holy places in accordance with Salafism, Muslim countries have historically accepted the kingdom as the manager of the holy cities and the organizer of the hajj. Until this alleged Qatari statement, Iran – Saudi Arabia’s historical nemesis – was the only country to officially call for internationalization. Being a Shiite Islamic state, Iran doesn’t carry much weight in the majority Sunni Muslim world.

Still, there is a common theme among Muslims from all parts of the world who feel strongly that the Saudis should not use Mecca and Medina as political leverage. A great many who have performed the hajj will complain about the way the Saudis have managed the event and mistreated pilgrims. On many occasions, when stampedes have claimed the lives of pilgrims, the Saudis have been accused of mismanagement of the hajj in spite of their massive financial resources.

Now that the Saudis are in the middle of a financial crunch because of the decline in oil prices, managing the hajj and maintaining the two cities is even more critical. Depressed oil prices weaken the kingdom’s ability to maintain stability at a time of growing regional insecurity. This has obvious and serious implications for the millions of pilgrims coming to Saudi Arabia from around the world over the next few days.

In the event that Saudi authorities have a hard time dealing with domestic unrest and violence, the kingdom’s role as custodian of the two holy mosques will come into serious question. This is a risk not lost on the Saudis, which is why in October 2015, Mohammed bin Salman (the new crown prince) launched an initiative called the Islamic Military Alliance – a force composed of troops from various Islamic countries whose primary goal is to ensure the security of the holy places and, by extension, the kingdom. In other words, even two years ago the Saudis were anticipating problems that they may not be able to deal with alone. It is not impossible, therefore, that in the future military forces from other major Muslim states, such as Pakistan, Egypt or even Turkey, could be stationed in the area to at least ensure that the hajj is not disrupted. With this reliance on other Muslim countries comes an inadvertent threat to Saudi custodianship of the two holy mosques, but there may be nothing Riyadh can do about it.

The Wrong Way to Prevent Nuclear War

Carl Bildt

China's first nuclear missile

STOCKHOLM – A vast majority of countries want to eliminate the existential threat of nuclear catastrophe, and rightly so. But achieving a world free of nuclear weapons is easier said than done, and there is a risk that some attempts to do so could prove self-defeating.
Since the end of the Cold War, nuclear stockpiles around the world have been significantly reduced.
Russia and the United States have each shrunk their nuclear arsenals by 80%, and during Barack Obama’s presidency, the US urged Russia to pursue further reductions. In Western Europe, the United Kingdom and France have both made their already small arsenals even smaller.
These countries had various reasons for reducing their stockpiles. But, as signatories to the 1968 Nuclear Non-Proliferation Treaty (NPT) – the foundation of global efforts to reduce the threat posed by nuclear weapons – they also had an obligation to do so.
In recent years, progress toward nuclear disarmament has stalled. Russia is currently modernizing its strategic nuclear forces, and has started to mention its nuclear capacity more often in public statements. That explains why efforts to reduce nuclear arsenals in Western Europe have come to a halt. The US, for its part, is also reviewing its options for modernizing its nuclear arsenal.
Meanwhile, Pakistan has continued to produce the fissile materials used in nuclear weapons.
Efforts to make the Middle East a nuclear-free zone have gone nowhere, largely because of Israel. The international community could not agree on a way forward at NPT review conferences in 2005 and 2015. And, of course, North Korea’s nuclear ambitions have created another nuclear crisis in East Asia.
Against this backdrop, a large bloc of countries has proposed a far-reaching Treaty on the Prohibition of Nuclear Weapons, a draft of which was endorsed by 122 United Nations member states in early July. Unfortunately, what started as a worthwhile humanitarian effort has culminated in a severely flawed proposal.
Three issues stand out. First, since no nuclear states support a nuclear-ban treaty, the current proposal, by itself, would not rid the world of a single nuclear warhead. Worse, the new treaty could undermine the NPT, which, despite its own flaws, has far wider backing, including that of the five permanent members of the UN Security Council (China, France, Russia, the UK, and the US).
Finally, by treating the concept of extended nuclear deterrence as illegal, or at least immoral, the draft treaty could actually threaten security in Europe and East Asia.
The initial draft treaty, when it was unveiled earlier this year, did not include language explicitly banning the use of nuclear weapons as a deterrent. But the version that countries voted on in July did.
This is a critical change. The threat of a nuclear counterstrike is what keeps countries from using nuclear weapons in the first place. And so-called extended deterrence through alliances is what protects non-nuclear states from being blackmailed by nuclear states. Without extended deterrence, non-nuclear countries could see fit to acquire nuclear weapons of their own.
It is for this reason that the Netherlands, the only NATO country to participate in developing the nuclear-ban treaty, ultimately voted against it. Japan, the only country that has ever been attacked with nuclear weapons, has also withheld support for the treaty, because it relies on extended nuclear deterrence from the US.
Without such protection, Japan would be completely vulnerable to Chinese nuclear blackmail and North Korean missile attacks. Indeed, since diplomacy and deep sanctions have not put an end to North Korea’s nuclear program, nuclear deterrence stands as the only practical way to protect East Asian countries from nuclear blackmail or attack. Likewise, the vast majority of European countries – from Finland to Portugal – have no wish to reside in the shadow of Russian nuclear warheads with nothing to protect them.
By effectively banning deterrence, the draft treaty could make the world even less safe than it already is. Of course, proponents of the treaty argue that it would build up public support for a nuclear-weapons ban over time, eventually forcing the governments of nuclear states to give up their arsenals.
But this is pure naiveté. No one with any connection to reality could seriously believe that the governments of China, Israel, Pakistan, and Russia will simply abandon their nuclear weapons because public opinion has turned against them.
Unfortunately, nuclear weapons are broadly popular in these countries, because they are seen as a security guarantor and a realization of national ambitions on the world stage. Those of us who want a nuclear-free world do not have to agree with this outlook; but we had better not ignore it.
A more realistic approach would be to pursue further nuclear-weapons reductions in both the US and Russia, where serious risks still need to be addressed. To that end, it is vital that neither country modernizes its nuclear arsenal in a way that is seen as expanding its nuclear capabilities. Instead, they must pave the way for further reductions.
In the Middle East, ending current conflicts and developing conflict-resolution mechanisms could help drive progress toward nuclear-free status over time. In this regard, the nuclear agreement between Iran and the P5+1 (the five permanent members of the UN Security Council, plus Germany) is an important first step.
As for South Asia, one hopes that a détente between India and Pakistan will facilitate better nuclear-arms control, even if the shadow of China – which sees its bomb as part of its place in the world – will still hang over India.
In the end, full-scale nuclear disarmament probably cannot be achieved with a single Big Bang. The world would be better served by an incremental approach based on the NPT, strategic arms reductions by the major powers, and conflict resolution in key regions.
In the best-case scenario, the proposed nuclear-ban treaty will be just a sideshow. But there is reason to fear that it will complicate ongoing efforts to reduce nuclear arsenals further, deepen the divide between nuclear- and non-nuclear states, and, in the worst-case scenario, even increase the risk of a nuclear conflict in key regions.

Doug Casey on Asset Seizures

Justin’s note: Jeff Sessions wants to steal your property.

Sessions is the U.S. Attorney General. Since taking office in February, he’s done all sorts of idiotic things. He’s threatened to crack down on the legal marijuana market. He’s attacked gay rights.

And now, he wants to amp up asset seizures.

This is when the government takes money and property from people. You don’t even need to be convicted of a crime.

It’s a disturbing development, to say the least. That’s why I called Doug Casey as soon as I heard about it…

Justin: Doug, what do you think of Sessions’ latest “bright” idea?

Doug: Well, let me preface this by saying Sessions was a disastrous choice for Attorney General.

He’s done nothing in his life but be a lawyer, a prosecutor, and a politician. He has no experience—and therefore probably no inclination or even ability—to produce things of tangible value.

But we almost always get undesirables as the AG. They’re hatchet men, meant to prosecute “the enemy,” taking their pick of the hundreds of thousands of laws and regulations on the books to do so. Look at some of the recent AGs—Loretta Lynch, Eric Holder, Alberto Gonzales, John Ashcroft, Janet Reno. All of them would have been willing and obedient lapdogs to Stalin or Beria. A certain personality type is suited for the job.

Sessions is a rabid drug warrior, even against something as useful and benign as hemp, or marijuana.

He’s a busybody who feels no guilt or remorse at enforcing laws that have destroyed the lives of tens of millions. I don't know if he's stupid, bent, thoughtless, paranoid or what his problem might be.

Maybe he’s afraid that if pot wasn’t illegal he’d become a dope fiend himself. But the proper direction, the objective, is to legalize all drugs. Not amp the drug war up another notch, as he wants to do.

And not only does he want to amp up the drug war, but he wants to increase the State’s ability to confiscate citizens’ property—especially cash—on even suspicion of breaking a law.

In the meantime he's not doing anything to investigate the people in Hillary’s camp for all kinds of apparent illegality. In fact, now that Trump's in office, what ever happened to his promise of a real investigation of what really happened to things like Building 7 on 9/11? Or the strange deaths that seem to have surrounded the Clinton clan for decades?

So far the man seems all negatives no positives. He’s just another Deep State actor who’s climbed the political ladder a little higher. These guys all protect each other.

But increasingly many of Trump’s choices are disastrous, like his National Security Advisor McMaster and White House Chief of Staff Kelly. And wormtongues Ivanka and Jared Kushner. This is perhaps an inevitable problem when a President is just a pragmatist with no philosophical core.

Although, I hasten to add, having no core may be better than having a rotten core, like Obama and others in the recent past.

Justin: Not to mention, asset seizures don’t work. Over the past decade, the federal government has seized more than $28 billion. But that’s done absolutely nothing to deter crime.

So, why would Sessions double down on this failed policy? Is he clueless? Or is the government just that desperate?

Doug: Good question. Well, I’ve already speculated on some possible aspects of Session’s character that might partially explain this. But all the repressive aspects of government—civil forfeitures are just one—have been growing and compounding for years. It’s not a conspiracy, it’s the natural progression of all living organisms. They all want to grow, exert more control on their environments, and become more powerful. The problem is that government has unusual powers, and no longer seems to have many limits. So you can expect this trend to accelerate.

I saw the other day the government steals more from the American people through confiscations than is lost outright to robberies and muggings. It’s been reported that in 2015 civil forfeitures exceeded the amount stolen by all robbers. It’s quite amazing and disturbing. There are at least two reasons things are deteriorating.

Number one, as a general rule, police are no longer trained as “peace officers.” They’re trained to be, and view themselves, as “law enforcement officers.” This is a very different thing. The police are a bigger threat to your property and your liberty, not to mention your life, than actual criminals. Number two, these governments are all bankrupt. They're looking for revenue wherever they can get it. Predators are most dangerous when they’re hungry.

The police are the ones that actually make it happen, and they have a vested interest in doing the wrong thing. Whenever a police department confiscates things under these laws, they get to keep some percentage. It varies, but can be 10, 20, 30, 50 percent of what's confiscated, and they love it because the money goes to the local police department in question. They can use it for buying fun cop toys, or for buying further educational benefits, or whatever, for themselves. So, they're profiting from this stuff as directly as the criminals do that steal things from citizens. It's a total disaster.

And remember, the Attorney General is the country’s top law enforcement officer.

Justin: Yeah, it’s scary.

Unfortunately, the government is sinking deeper in debt by the day. So, I’m afraid this is going to get worse before it gets better. Do you agree?

Doug: It's inevitable.

These governments are digging themselves into deep financial holes. They're going to need more and more revenue. The populace has been trained to see the government as a cornucopia. As the economy goes into the trailing edge of the current financial hurricane, they’re going to demand even more freebies from all levels of government. So, the trend will continue until there's some type of a crisis. At which point anything can happen.

The downtrend is in motion. And trends in motion tend to continue and accelerate until they change. I like to draw attention to France in 1789, a horrible situation with its highly authoritarian and totally bankrupt government. A revolution was necessary and welcome. But then things got worse under Robespierre. And worse again under Napoleon. The exact same thing with Russia in 1917—but then they got Lenin, and then Stalin.

Justin: Absolutely. So, asset seizures won’t even put a dent in the government’s debt problem.

With that said, how else might the government steal money and property from people?

Doug: Well, they're now talking about making you declare your cryptocurrencies whenever you cross a border. If you don't, and they find out, they're eligible for confiscation. As cryptocurrencies get bigger—and they will—this will constitute both a gigantic invasion of privacy and an attack on your wealth.

All governments already ask whether you have more than $10,000 when you cross their borders, and reserve the right to search you. If this becomes law, it means that you, your computer, and your smartphone will always be liable to a full forensic audit.

It's another major step towards the world of 1984. Every new law they pass has Kafka-esque possibilities. That’s what legislatures around the world do every day they’re in session. All of these laws have severe penalties. The trend in this direction—which started in earnest just over 100 years ago—is going hyperbolic. And the average human—miseducated, propagandized, and besotted by food and drugs—wants more laws. Why? I think fear is today’s dominant emotional tone. People want to be protected and cared for, like farm animals. They see the State as their benevolent shepherd.

There are no positive political trends in today’s world. They aren’t cutting back on regulations, reducing taxes, or eliminating laws anywhere. They're doing just the opposite.

Justin: So, how can people protect themselves from this?

Doug: It’s increasingly hard because the statists, collectivists, socialists, fascists, globalists, and the like have won the war for the hearts and minds of the masses all over the world. And the world’s governments—notwithstanding their inevitable wars and such—are cooperating with each other far, far more than ever before.

In a nutshell, there are three things to keep in mind.

First, become as wealthy as possible. Although they can steal anything and everything from you, the more you have the more damage you can sustain, and the more influence you can exert.

Second, diversify politically and geographically. You want to have some convenient options if your government starts looking like Russia in the ‘20s, or Germany in the ‘30s, China in the ‘50s, Cuba in the ‘60s, etc., etc. It’s a very long list.

Third, keep your head down. The tall poppy is the one selected for cutting. I observe my first two rules, but not so much this one. That’s because sometimes we have to make a choice between what’s smart and what’s right. In my case, almost nothing is worth feeling like a whipped dog.

Justin: Thanks for taking the time to speak with me today, Doug.

Doug: My pleasure.

Which Type of Exercise Is Best for the Brain?

By Gretchen Reynolds

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Some forms of exercise may be much more effective than others at bulking up the brain, according to a remarkable new study in rats. For the first time, scientists compared head-to-head the neurological impacts of different types of exercise: running, weight training and high-intensity interval training.

The surprising results suggest that going hard may not be the best option for long-term brain health.

As I have often written, exercise changes the structure and function of the brain. Studies in animals and people have shown that physical activity generally increases brain volume and can reduce the number and size of age-related holes in the brain’s white and gray matter.

Exercise also, and perhaps most resonantly, augments adult neurogenesis, which is the creation of new brain cells in an already mature brain. In studies with animals, exercise, in the form of running wheels or treadmills, has been found to double or even triple the number of new neurons that appear afterward in the animals’ hippocampus, a key area of the brain for learning and memory, compared to the brains of animals that remain sedentary. Scientists believe that exercise has similar impacts on the human hippocampus.

These past studies of exercise and neurogenesis understandably have focused on distance running. Lab rodents know how to run. But whether other forms of exercise likewise prompt increases in neurogenesis has been unknown and is an issue of increasing interest, given the growing popularity of workouts such as weight training and high-intensity intervals.

So for the new study, which was published this month in the Journal of Physiology, researchers at the University of Jyvaskyla in Finland and other institutions gathered a large group of adult male rats. The researchers injected the rats with a substance that marks new brain cells

and then set groups of them to an array of different workouts, with one group remaining sedentary to serve as controls.

Some of the animals were given running wheels in their cages, allowing them to run at will. Most jogged moderately every day for several miles, although individual mileage varied.

Others began resistance training, which for rats involves climbing a wall with tiny weights attached to their tails.

Still others took up the rodent equivalent of high-intensity interval training. For this regimen, the animals were placed on little treadmills and required to sprint at a very rapid and strenuous pace for three minutes, followed by two minutes of slow skittering, with the entire sequence repeated twice more, for a total of 15 minutes of running.

These routines continued for seven weeks, after which the researchers microscopically examined brain tissue from the hippocampus of each animal.

They found very different levels of neurogenesis, depending on how each animal had exercised.

Those rats that had jogged on wheels showed robust levels of neurogenesis. Their hippocampal tissue teemed with new neurons, far more than in the brains of the sedentary animals. The greater the distance that a runner had covered during the experiment, the more new cells its brain now contained.

There were far fewer new neurons in the brains of the animals that had completed high-intensity interval training. They showed somewhat higher amounts than in the sedentary animals but far less than in the distance runners.

And the weight-training rats, although they were muchstronger at the end of the experiment than they had been at the start, showed no discernible augmentation of neurogenesis. Their hippocampal tissue looked just like that of the animals that had not exercised at all.

Obviously, rats are not people. But the implications of these findings are provocative. They suggest, said Miriam Nokia, a research fellow at the University of Jyvaskyla who led the study, that “sustained aerobic exercise might be most beneficial for brain health also in humans.”

Just why distance running was so much more potent at promoting neurogenesis than the other workouts is not clear, although Dr. Nokia and her colleagues speculate that distance running stimulates the release of a particular substance in the brain known as brain-derived neurotrophic factor that is known to regulate neurogenesis. The more miles an animal runs, the more B.D.N.F. it produces.

Weight training, on the other hand, while extremely beneficial for muscular health, has previously been shown to have little effect on the body’s levels of B.D.N.F., Dr. Nokia said, which could explain why it did not contribute to increased neurogenesis in this study.

As for high-intensity interval training, its potential brain benefits may be undercut by its very intensity, Dr. Nokia said. It is, by intent, much more physiologically draining and stressful than moderate running, and “stress tends to decrease adult hippocampal neurogenesis,” she said.

These results do not mean, however, that only running and similar moderate endurance workouts strengthen the brain, Dr. Nokia said. Those activities do seem to prompt the most neurogenesis in the hippocampus. But weight training and high-intensity intervals probably lead to different types of changes elsewhere in the brain. They might, for instance, encourage the creation of additional blood vessels or new connections between brain cells or between different parts of the brain.

So if you currently weight train or exclusively work out with intense intervals, continue. But perhaps also thread in an occasional run or bike ride for the sake of your hippocampal health.