China, the U.S. and the Oil Blame Game

By Nathaniel Taplin




Investors in the black stuff found themselves with a big black eye Tuesday. U.S. oil prices dropped by more than 7%, the worst one-day fall since 2015 following a bearish report from the Organization of the Petroleum Exporting Countries (OPEC) and more Twitterbluster on oil supply from President Trump.

The market’s main focus has been on what the report had to say about oil supply, particularly figures that showed rising production in Russia and from other OPEC members more than offsetting cuts from sanction-hit Iran. More worrying is what the report didn’t say. In particular, its estimates for demand growth next year from China, the world’s second-biggest consumer, are starting to look a little too rosy. 
An oil tanker at China’s Ningbo Zhoushan port. OPEC’s demand-growth estimate for China might be a little too rosy.


An oil tanker at China’s Ningbo Zhoushan port. OPEC’s demand-growth estimate for China might be a little too rosy. Photo: china stringer network/Reuters 



Chinese oil consumption has held up well given the country’s softening growth. Data for October released Wednesday hint at choppier waters ahead: investment in real estate, the main bright spot in the economy this year along with exports, was up just 7.7% from the same time last year, its slowest rate since December. Retail sales also weakened again, after a late summer bounce.

OPEC has penciled in slower growth in oil demand from both China and the U.S. next year. But it is still forecasting Chinese demand to rise by 340,000 barrels a day in 2019, not much below its estimate of a 390,000 gain this year. For the U.S. it predicts a much sharper slowdown in demand growth: a 240,000 barrels a day gain in 2019 against an estimated 410,000 rise this year.

China has managed to defy doom-mongers so far, and its economic data paint a mixed picture: industrial output accelerated in October, for instance. But oil demand growth there is already running well above its long-term average, leaving plenty of downside potential. Chinese apparent demand—refinery runs plus net oil-product imports—rose nearly 8% on the year in the third quarter. Over the five years to October, that growth rate was less than 3% a month on average.

For now, demand growth in both the U.S. and China still looks decent. But the U.S. economy is still roaring along, and consumer confidence is at its highest since 2000. In China, retail sales are growing at their slowest since the early 2000s, private businesses are struggling to get loans and tariff rates on Chinese goods entering the U.S. are about to jump sharply again.

If there is a big hit to oil demand globally next year, it looks likely to come from across the Pacific rather than the U.S.


Trump’s Diminishing Power and Rising Rage

The coming months may be especially dangerous for America and the world. As US President Donald Trump’s political position weakens and the obstacles facing him grow, his mental instability will pose an ever-greater danger.

Jeffrey D. Sachs  

trump angry


NEW YORK – The drama of Donald Trump’s presidency has centered around whether an extremist president would be able to carry out an extremist policy agenda against the will of the majority of Americans. So far the answer has been no, and the midterm elections make it far less likely. Yet Trump’s rising frustrations could push him over the edge psychologically, with potentially harrowing consequences for American democracy and the world.

None of Trump’s extremist policy ideas has received public support. The public opposed last year’s Republican-backed corporate tax cut, Trump’s effort to repeal the Affordable Care Act (Obamacare), his proposed border wall with Mexico, the decision to withdraw from the Iran nuclear agreement, and the imposition of tariff increases on China, Europe, and others. At the same time, contrary to Trump’s relentless promotion of fossil fuels (coal, oil, and gas), the public favors investments in renewable energy and remaining in the Paris climate agreement.

Trump has tried to implement his radical agenda using three approaches. The first has been to rely on the Republican majorities in the two houses of Congress to pass legislation in the face of strong popular opposition. That approach succeeded once, with the 2017 corporate tax cut, because big Republican donors insisted on the measure, but it failed with Trump’s attempt to repeal Obamacare, as three Republican senators balked.

The second approach has been to use executive orders to circumvent Congress. Here the courts have repeatedly intervened, most recently within days of the election, when a federal district court halted work on the Keystone XL Pipeline, a project strongly opposed by environmentalists, on the grounds that the Trump administration had failed to present a “reasoned explanation” for its actions. Trump repeatedly and dangerously oversteps his authority, and the courts keep pushing back.

Trump’s third tactic has been to rally public opinion to his side. Yet, despite his frequent rallies, or perhaps because of them and their incendiary vulgarity, Trump’s disapproval rating has exceeded his approval rating since the earliest days of his administration. His current overall disapproval rating is 54%, versus 40% approval, with strong approval from around 25% of the public. There has been no sustained move in Trump’s direction.

In the midterm elections, which Trump himself described as a referendum on his presidency, the Democratic candidates for both the House and Senate vastly outpolled their Republican opponents. In the House races, Democrats received 53,314,159 votes nationally, compared with 48,439,810 for Republicans. In the Senate races, Democrats outpolled Republicans by 47,537,699 votes to 34,280,990.

Summing up votes by party for the three recent election cycles (2014, 2016, and 2018), Democratic Senate candidates outpolled Republican candidates by roughly 120 million to 100 million. Nonetheless, the Republicans hold a slight majority in the Senate, where each state is represented by two senators, regardless of the size of its population, because they tend to win their seats in less populous states, whereas Democrats prevail in the major coastal and Midwestern states. Wyoming, for example, elects two Republican senators to represent its nearly 580,000 residents, while California’s more than 39 million residents elect two Democratic senators. Democrats win more votes, but Republicans win more seats.

Without control of the House, however, Trump will no longer be able to enact any unpopular legislation. Only policies with bipartisan support will have a chance of passing both chambers.

On the economic front, Trump’s trade policies will become even less popular in the months ahead as the American economy cools from the “sugar high” of the corporate tax cut, as growing uncertainty about global trade policy hamstrings business investment, and as both the budget deficit and interest rates rise. Trump’s phony national-security justifications for raising tariffs will also be challenged politically and perhaps in the courts.

True, Trump will be able to continue appointing conservative federal judges and most likely win their confirmation in the Republican-majority Senate. And on issues of war and peace, Trump will operate with terrifyingly little oversight by Congress or the public, an affliction of the US political system since World War II. Trump, like his recent predecessors, will most likely keep America mired in wars in the Middle East and Africa, despite the lack of significant public understanding or support.

Nonetheless, there are three further reasons to believe that Trump’s hold on power will weaken significantly in the coming months. First, Special Counsel Robert Mueller may very well document serious malfeasance by Trump, his family members, and/or his close advisers. Mueller kept a low profile in the run-up to the election. We will most likely hear from him soon.

Second, the House Democrats will begin to investigate Trump’s taxes and personal business dealings, including through congressional subpoenas. There are strong reasons to believe that Trump has committed serious tax evasion (as the New York Times recently outlined) and has illegally enriched his family as president (a lawsuit that the courts have allowed to proceed alleges violations of the emoluments clause of the Constitution). Trump is likely to ignore or fight the subpoenas, setting the stage for a major political crisis.

Third, and most important, Trump is not merely an extremist politician. He suffers from what author Ian Hughes has recently called “a disordered mind,” filled with hate, paranoia, and narcissism. According to two close observers of Trump, the president’s grip on reality “will likely continue to diminish” in the face of growing political obstacles, investigations into his taxes and business dealings, Mueller’s findings, and an energized political opposition. We may already be seeing that in Trump’s erratic and aggressive behavior since the election.1

The coming months may be especially dangerous for America and the world. As Trump’s political position weakens and the obstacles facing him grow, his mental instability will pose an ever-greater danger. He could explode in rage, fire Mueller, and perhaps try to launch a war or claim emergency powers in order to restore his authority. We have not yet seen Trump in full fury, but may do so soon, as his room for maneuver continues to narrow. In that case, much will depend on the performance of America’s constitutional order.


Jeffrey D. Sachs, Professor of Sustainable Development andProfessor of Health Policy and Management at Columbia University,is Director of Columbia’s Center for Sustainable Development andof the UN Sustainable Development Solutions Network. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, Building the New American Economy, and most recently, A New Foreign Policy: Beyond American Exceptionalism.


Europe should work with Iran to counter US unilateralism

Iranian president warns that the Trump administration endangers world stability




President Hassan Rouhani: 'Iran believes in multilateralism and is prepared to join other peace-loving nations in this path' © Don Emmert/AFP


The world faces a myriad of challenges, including economic issues, social crises, the predicament of refugees, xenophobia, terrorism and extremism.

Europe has not been exempt, and has been confronted by these problems almost daily. Over the past two years, US foreign policy has emerged as a new and complicated problem, as America creates new challenges on a variety of fronts in international relations.

We see US complicity in the daily atrocities in Yemen and in the humiliation and gradual perishing of the great nation of Palestine, which has daily inflamed the emotions of one-and-a-half billion Muslims.

We believe the American government has explicitly supported criminal groups like Isis, who value no human principles, exacerbating the problems of our region.

More broadly, US president Donald Trump’s approach to matters of trade, international treaties and the humiliating manner in which he treats even America’s allies, illustrates how US foreign policy has posed new challenges to the global order.

In brief, the US administration’s policies of unilateralism, racial discrimination, Islamophobia, and the undermining of important international treaties, including the Paris Climate Accord, are fundamentally incompatible with multilateralism and other socio-political norms valued by Europe.

There is another critical matter aggravating transatlantic relations: the Iran nuclear deal. Known as the Joint Comprehensive Plan of Action, it was the product of two years of intensive negotiations between Iran and six other countries, including three from Europe.

As an annex to UN Security Council Resolution 2231, this agreement enjoys the approval of the overwhelming majority of the international community and, as part and parcel of international law, imposes certain obligations on all the members of the UN.

Unfortunately, the US, through raising unfounded claims and in complete disregard for its international obligations, has abandoned the nuclear agreement and imposed extraterritorial and unilateral sanctions on Iran and, by extension, other countries.

The US is, in effect, threatening states who seek to abide by resolution 2231 with punitive measures. This constitutes a mockery of international decisions and the blackmailing of responsible parties who seek to uphold them.

The nuclear accord is recognised as a great victory for diplomacy in our time. That is why the EU is working with other nations around the world — with the exception of a very few — to save this great achievement.

Since the US withdrew, we have held constructive talks with the remaining JCPOA participants. Their support has been valuable, but it is essential that the European parties, as well as China and Russia (known as E3+2), present and implement their final proposed package of measuresto compensate for and mitigate the effects of America’s newest unilateral and extraterritorial sanctions before they are imposed.

This historic agreement can only survive if the Iranian people can witness and enjoy the benefits it promised.

The recent decision of the International Court of Justice and its provisional measure against US unilateral sanctions reaffirms the legitimacy of Iran’s position, and the illegality of these oppressive sanctions.

Disregarding the binding and mandatory nature of the provisional measure demanded by the ICJ would undermine confidence in international treaties. That would create a major challenge with possibly dangerous and negative consequences for regional and international peace and security.

The nuclear deal demonstrated that Iran is committed to reason and dialogue. We have initiated political consultations with Europe on key issues of mutual interest, especially on regional crises, with the aim of finding appropriate solutions.

In today’s tumultuous world, the only way to overcome difficulties is through concerted international efforts based on mutual interests, and not the short-sighted demands of one or a few states. Unilateralism is fatal; while multilateralism is the only appropriate, inexpensive and effective course of action.

Europe’s tradition of multilateralism positions it well to play an important role in reinforcing peace and stability, in line with its identity and interests. Iran believes in multilateralism and is prepared to join other peace-loving nations in this path.

Cooperation between Iran and Europe will secure the long-term interests of both parties, and ensure international peace and stability.


The writer is president of the Islamic Republic of Iran


About The Coming Recession

by: Larry Kummer


- This month’s sharp drop in stock prices has raised fears about the US economy?

- Are these fears warranted?

- Is the expansion “old”?

- How can we predict the next recession?

 
The US and global stock markets have fallen, with the usual hysterical headlines (it is up 6.1% before dividends over 12 months, up 0.6% YTD, down 7.3% from the October 3 peak). Are equity investors telling up something about the economy? The answer might shake America - businesses, households, and Washington DC.
 
This expansion has run for 112 months counting from the 2009 trough (the second longest), and 130 months from 2007 peak (the longest) - using the NBER's data since 1854. It continues to run strong. When will the growth end? What happens then?
 
Do economic expansions grow old and die?
 
Glenn D. Rudebusch summarized economists' answer in "Will the Economic Recovery Die of Old Age?" (San Francisco Fed's Letters, 4 February 2016. He gives two graphs answer the question. First, a simple mortality table shows that people grow old and die.
 
 
Age mortality table
Source: Federal Reserve Bank of San Francisco
 
 
See the same graph for economic expansions. They aged and died before the Great Depression and WWII. But that taught economists about the value of economic stabilizers (e.g., unemployment insurance), plus fiscal and monetary stimulus. Since then, the odds of recession ending each month increase only slightly over time. That is progress!
 
Probability of a recession ending by month
Source: Federal Reserve Bank of San Francisco
 
Non-economists cosplaying economists in the news often say that this expansion is "living on borrowed time." That is false. Also, it is not a recovery. Almost all measures of economic activity long-ago passed their previous peaks. This is an economic expansión.
 
What kills expansions?
 
People often confuse signs of a slowdown (e.g., consumer confidence falls, economic activity slows) with the factors that cause the slowdown. Such as economic or political shocks. A partial list includes trade wars, real wars, monetary policy (excessive rate increases by the Fed, restrictions on lending, breaking growth of the money supply), fiscal policy (large cuts in spending, large tax increases), and popping of big investment bubbles. As with most disasters, multiple errors are usually necessary (a dozen mistakes, plus an iceberg, sank the Titanic).
 
There are many links that can break in our complex world.
 
Two causes are especially common in the post-WWII era. First, the Fed brakes too hard to prevent "overheating." Sometimes, overheating means a rapid rise of inflation. Sometimes, it means full employment forcing businesses to share productivity growth with their workers. "Profit inflation" is good in bankers' eyes. "Wage inflation" is bad!
 
Second, "imbalances" in the economy. These can be excessive growth in government, consumer, or business borrowing - which ends suddenly, creating a shock. Or sector imbalances - such as the tech boom and the regional real estate boom-bust cycles.
 
The slow growth in real GDP after the 2008-2009 bust - roughly 2.5% from 2010 to 2017 - created few imbalances. Optimists cheered as the dawn of a new age the Q2 growth of 4.2% (SAAR) and Q3's 3.5%. Just as they did in 2014: Q2 of 5.2% and Q3 4.9%. But those micro-booms fizzled. As this one might: estimates for Q4 are about 2.7% - despite the GOP's massive debt-fueled fiscal stimulus (quite mad to do late in an economic expansion, when we should be reducing the Federal deficit).
 
Recessions and depressions are normal!
Thou know'st it's common; all that lives must die, Passing through nature to eternity.- Queen Gertrude to Hamlet (Act I, scene 2).
Something will eventually end an expansion. Expansions are part of the business cycle, along with recessions - and depressions. They do not represent God's judgement on our moral faults, or failure to follow the One True Simple Ideology of Economics. They are similar to weather: to be prepared for in advance, to be mitigated when they strike, and learned from afterwards (to do better next time).
 
The US economy has been in a recession roughly 20% of the time since 1854. Depressions were frequent before the creation of the Fed and use of fiscal stabilizers.
 
© Siri Wannapat | Dreamstime.

A look at our future
 
First, the bad news. Economists have little ability to predict recessions. Surveys of economists' consensus forecast have never successfully predicted a recession. For example, look at the predictions made in February 2008. The consensus forecast for real GDP in 2008 was +1.8%; actual was -0.1%.
 
Their forecast for 2009 was +2.8%; actual was -2.4%. The recession had begun in December 2007.
 
Some economists expected a recession (but being pros, were vague about when). I have found nobody that predicted the collapse of the global banking system, which turned a US real estate downturn into the Great Recession.
 
With that out of the way, let's look at some indicators. There are many quantitative indicators. My favorite is the Econbrowser Recession Indicator Index created by James Hamilton (econ prof at UC San Diego). The probability that Q2 was a recession was 1.1%. That's reassuring - if you worried about that.
 
 
Then, there are the US leading indicators and the OECD's Composite Leading Indicator (shown for the major nations and regions). They nicely show were we are; none are reliable guides to the future.
 
All look OK today.
 
There are many methods for predicting recessions. None work well. Many of the best look at the shape of the yield curve. See this graph from Cyrille Lenoel's "Predicting recessions in the United States with the yield curve" in the National Economic Review, May 2018. Data as of March 2018. Backtesting shows this model's predictions of a recession are correct 69% of the time (accuracy), but it predicts only 35% of recessions (sensitivity). The odds of recession in the next 12 months is rising fast.
 
Predicting recessions using the yield curve
 
For more about this indicator, and what it is telling us, see this dark but clear report: "Forecasting the Next Recession: The Yield Curve Doesn't Lie" by Guggenheim Investments, 29 October 2018 - "Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve's signal at their peril."
 
Some forecasters rely on quantitative methods and personal skill. Such as the team at the Economic Cycle Research Institute. Their co-founder, Lakshman Achuthan, gave a warning in the New York Post, October 24.
"The economy has been boosted by massive fiscal stimulus - plus an energy boom for the ages - steering it clear of recession risk. But it's remarkable that it is already in a slowdown that not many see - certainly not the Fed."
Their reports look at some darker aspects of recent data. They noticed that Real GDP has been wonderful, but growth of real GDI (gross domestic income) has been slowing since Q2 of last year. Housing construction is weak.

There are other signs of slowing. Sales of light vehicles have been flattish since June 2014.

There is another indicator "flashing red", described by Achuthan on October 26.

"Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year. …the world's largest economies are generating debt 10X faster than economic growth. Adding debt at that pace, if it continues, will boost the debt-to-GDP ratio at an alarming rate. 
"Remarkably, then, the global economy - slowing in sync despite soaring debt - finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll's Through the Looking Glass
'Now, here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'"

But stock prices predict recessions!

But they don't. There is a low correlation between stock prices and GDP, or anything else (on an ex ante basis), or stock market traders would be richer than stockbrokers (they're not).
 
Investors in stock and bonds have no special insights, either as individuals or crowds. My favorite example was their inability to see WWI as it began.
 
On the other hand, a stock market crash would have only a small effect on the economy. Watch the banks! If they crumble, the economy crumbles too (as it did after 1929+ and 2008-2009).
 
Why should we care?
 
We need a long warning because we are unprepared for a recession. Monetary policy is the fast and effective method to fight a recession. But with rates so low, that cannot help much. Fiscal policy is the second big tool. Trump's tax cuts, part of the GOP's long-term effort to make the rich richer - and bleed the Federal government - will make that more difficult to use. The April 9 CBO report gave this chilling warning.
"CBO estimates that the 2018 deficit will total $804 billion, $139 billion more than the $665 billion shortfall recorded in 2017. …In CBO's projections, budget deficits continue increasing after 2018, rising from 4.2% of GDP this year to 5.1% in 2022 (adjusted to exclude the shifts in timing). That percentage has been exceeded in only five years since 1946; four of those years followed the deep 2007-2009 recession."
Keynes recommended running deficits during recessions - countercyclical stimulus - with surpluses during expansions. The GOP keeps cutting taxes during expansions, sending the Federal deficit skyrocketing. Reagan did it. Bush Jr. did it. Now Trump has done it.
 
The Federal deficit was 1.1% of GDP in 2007. It zoomed in the recession as tax receipts crashed and expenditures rose (e.g., unemployment and welfare payments, and later the fiscal stimulus).
 
We will begin the next recession with a deficit of 4-5%. That is insane. The politics of stimulus programs will be complex. If we have a Republican President and Congress, the US economy might have a bad time. That is guaranteed if Trump is President.
 
What might happen in a recession?
 
I wrote several posts about that during the 2015-2016 slowing, when the theory about a "stall speed" of the US economy (below which it would fall into recession) made a recession appear likely. This proved that there is no stall speed. The most valid is that the big victim of the coming stock market crash will be the San Francisco Bay Area. It sells dreams for money, an industry that I expect to crash hard in the next recession. The accelerating exodus of middle-class families makes the region even more vulnerable.
 
Beyond that, we can only guess. Much depends on the nature of the downturn and the government's response. The private and public pension systems are already weak, despite the long expansion. A stock market crash and long recession will push many past the point of recovery, as the date at which their cash flows turn negative approaches (i.e., more payments than contributions). Also, boomers have saved too little for retirement, and too much of that is in real estate and stocks - both probably severe casualties of a long recession.
 
My best guess: it won't be pretty. My advice: expect the unexpected.


Do I Need a Budget?

Jared Dillian
Editor, The 10th Man


Eh.

Probably not.

I am a bit like the Joker. Do I look like a guy with a plan?

The problem with plans is that people interpret them a little too rigidly. I know of a situation where a woman budgeted x for groceries, and her bill at the checkout line came to x + $20. She stood there and said “I can’t afford my groceries” because she went over her budget by $20.

True story.

That is the type of stupid stuff that happens when you put people on a budget.

The problem is, some people need to obey stupid rules, because they have zero discipline.

Unless they follow a budget to the penny, they are going to spend like sailors. I am sorry that these people exist. As many others have observed before me, rules are for the stupid.

Even though I am not high on budgets, I am high on radical saving, so I like a simple heuristic such as save as much as humanly possible or save until it hurts. That usually does a better job than an actual budget, and is a lot less work. Of course, that works for me because saving comes naturally to me in the first place, so it might not work for everyone.

What does saving until it hurts look like in practice?

You are driving down the road. You are thirsty. You think of stopping at Burger King and getting a large Diet Coke, but you are saving as much as humanly possible, so you don’t spend the $2.50 and you keep driving, and you stay thirsty.

Basically, if you are saving as much as humanly possible, you will experience discomfort. Physical discomfort. That is when you know you are doing it right.

You will go to a restaurant and get the cheapest thing on the menu, whether you like it or not. That is mild discomfort.

You will go to Dick’s Sporting Goods for a pair of running shoes and get the $39 shoes instead of the $129 shoes. That is mild discomfort.

You will buy a gently used car that is one year old rather than a new car. No new car smell. That is mild discomfort.

The goal is to save and save and save so you can reach a point where you no longer have to experience discomfort. If you are thirsty, you can buy the Diet Coke. The $2.50 will not be a big deal.

I can speak from experience—it is nice when you get there. But I was once forced to make those economic choices.

Some People Don’t like Discomfort

Some people are never willing to make any sort of economic sacrifice. Hey, a wine fridge sounds like a good idea. Hey, the panoramic sunroof sounds like a good idea.

My story is one of economic sacrifices. I lived far below my means during a time when it was expected I would live far above my means. When I was at Lehman Brothers, I bought a tiny, cheap house in a neighborhood that was not even really up-and-coming. I famously bought Men’s Wearhouse suits. I brought cans of Chef Boyardee to work for lunch. I was comically miserly.

Interestingly, it ended up being necessary. Lehman went bankrupt, my stock vaporized, my income disappeared, and I had to start from zero. But I had a seven-figure bank account from what I had saved in the good years, and that meant I was able to take risk—at a point in time where nobody was in the mood to take risk.

Dave Ramsey has an expression for this: “Live like no one else, so you can live like no one else.” I have my disagreements with Mr. Ramsey but I like this turn of phrase.

At the Same Time

You can’t spend your whole life in doomsday-prepping mode. I have some relatives who were prodigious savers all their lives, never allowing themselves any extravagance, and they are now too old and physically infirm to enjoy their wealth.

There are two types of people in this world: people who spend too much, and people who spend too little. Sometimes, the latter are even more frustrating than the former.

Some people say that budgets give people good habits. I am not so sure. Budgets are good for people who follow rules.

But what if there are no rules? There are no rules in life. If you make more money, are you going to change the rules, to allow the occasional extravagance? Who gets to change the rules?

If you change the rules, are you cheating on the budget?

This is why I hate budgets.

Some people inherit a ton of money and never spend a minute of their lives in discomfort. That does not apply to most of us. Unless you are blessed with unlimited resources, you are going to spend at least some of your life in a state of discomfort.

Better to do it while you are young, when you are better able to bear it.

What Happens After That

Only after you have established good saving habits should you start investing.


The Neuroscience of Hate Speech

Humans are social creatures who are easily influenced by the anger and rage that are everywhere these days.

By Richard A. Friedman




Do politicians’ words, the president’s especially, matter?

Since he has been in office, President Trump has relentlessly demonized his political opponents as evil and belittled them as stupid. He has called undocumented immigrants animals. His rhetoric has been a powerful contributor to our climate of hate, which is amplified by the right-wing media and virulent online culture.

Of course, it’s difficult to prove that incendiary speech is a direct cause of violent acts. But humans are social creatures — including and perhaps especially the unhinged and misfits among us — who are easily influenced by the rage that is everywhere these days. Could that explain why just in the past two weeks we have seen the horrifying slaughter of 11 Jews in a synagogue in Pittsburgh, with the man arrested described as a rabid anti-Semite, as well as what the authorities say was the attempted bombing of prominent Trump critics by an ardent Trump supporter?

You don’t need to be a psychiatrist to understand that the kind of hate and fear-mongering that is the stock-in-trade of Mr. Trump and his enablers can goad deranged people to action. But psychology and neuroscience can give us some important insights into the power of powerful people’s words.

We know that repeated exposure to hate speech can increase prejudice, as a series of Polish studies confirmed last year. It can also desensitize individuals to verbal aggression, in part because it normalizes what is usually socially condemned behavior.  
At the same time, politicians like Mr. Trump who stoke anger and fear in their supporters provoke a surge of stress hormones, like cortisol and norepinephrine, and engage the amygdala, the brain center for threat. One study, for example, that focused on “the processing of danger” showed that threatening language can directly activate the amygdala. This makes it hard for people to dial down their emotions and think before they act.

Mr. Trump has managed to convince his supporters that America is the victim and that we face an existential threat from imagined dangers like the migrant caravan and the “fake, fake disgusting news.”


Were the men arrested in the synagogue shootings and bombing attacks listening? Robert Bowers, for example, apparently blamed Jews for helping transport members of the Central American migrant caravan. It seems he did not think the president was going far enough in protecting the country from invaders. “I can’t sit by and watch my people get slaughtered,” he wrote online before the murderous rampage. And Cesar Sayoc Jr., accused of mailing bombs to CNN, echoed the president in a tweet: “More lies con job Propaganda bye failing failing CNN garbage.”

But you don’t have to be this unhinged to be moved to violence by incendiary rhetoric. Just about any of us could be susceptible under the right conditions.

Susan Fiske, a psychologist at Princeton, and colleagues have shown that distrust of a out-group is linked to anger and impulses toward violence. This is particularly true when a society faces economic hardship and people are led to see outsiders as competitors for their jobs.
Mina Cikara, a psychologist at Harvard and a co-author of that study, told me that “when a group is put on the defensive and made to feel threatened, they begin to believe that anything, including violence, is justified.”

There is something else that Mr. Trump does to facilitate violence against those he dislikes: He dehumanizes them. “These aren't people,” he once said about undocumented immigrants suspected of gang ties. “These are animals.”

Research by Dr. Cikara and others shows that when one group feels threatened, it makes it much easier to think about people in another group as less than human and to have little empathy for them — two psychological conditions that are conducive to violence.

A 2011 study by Dr. Fiske and a colleague looked at “social cognition” — the ability to put oneself in someone else’s place and recognize “the other as a human being subject to moral treatment.” Subjects in the study were found to be so unempathetic toward drug addicts and homeless people that they found it difficult to imagine how those people thought or felt. Using brain M.R.I., researchers showed that images of members of dehumanized groups failed to activate brain regions implicated in normal social cognition and instead activated the subjects’ insula, a region implicated in feelings of disgust.

As Dr. Fiske has written, “Both science and history suggest that people will nurture and act on their prejudices in the worst ways when these people are put under stress, pressured by peers, or receive approval from authority figures to do so.”

So when someone like President Trump dehumanizes his adversaries, he could be putting them beyond the reach of empathy, stripping them of moral protection and making it easier to harm them.

If you still have any doubt about the power of political speech to foment physical violence, consider the classic experiment by the Yale psychologist Stanley Milgram, who in the early 1960s studied the willingness of a group of men to obey an authority figure.

Subjects were told to administer electrical shocks to another participant, without knowing that the shocks were fake. Sixty-five percent of the subjects did what they were told and delivered the maximum shock, which if real could have been fatal. The implication is that we can easily be influenced by authority to do terrible harm to others — just by receiving an order.

Now imagine what would happen if President Trump actually issued a call to arms to his supporters. Scared? You should be.


Richard A. Friedman is a professor of clinical psychiatry and the director of the psychopharmacology clinic at the Weill Cornell Medical College, and a contributing opinion writer.

 A Palpable Sense Of Panic


Based the last few days’ headlines you’d never know the world is in year 10 of a pretty good expansion. Check this out:
Not terrified of a recession? These stocks hint you should be
Cyclical commodities continue to weaken, gold moves in relation
Italian banks on verge of new crisis on €400 million hole at Banca Carige
China rate-cut chatter becomes louder as growth risks gather
“iPhone story is showing cracks”: Apple slides under $200 after supplier forecast cut
Japan PM Abe calls for public works spending plan to help economy
What plunging oil prices tell us about stocks and the economy
Why Chinese authorities are freaking out

Note the strong words: “freaking out,” “plunging,” “slides,” “on verge of new crisis,” “terrified.”

These headlines — which aren’t cherry-picked; they’re representative of what’s out there — display a palpable sense of panic.

What’s happening? The short answer is “time.” Nothing – long-distance runner, living organism or economic trend – continues in one direction forever because the longer the journey the more imbalances accumulate. In a runner these manifest as muscle cramps and shortness of breath. In an economy you get soaring debt, rising inflation, labor shortages and overpriced assets.

These make it harder to keep going, and increasing difficulty spooks traders and politicians, which in turn spooks the headline writers.

What happens next? People who were obliviously riding the growth wave try to make sense of this new pattern and discover that things aren’t as good as they thought. Maybe they find this chart (from Real Investment Advice) illustrating how pretty much all the “growth” the US has generated in the past few decades has been due to rising debt.

US growth and debt panic


Then they wonder what this means for their mutual funds, and find this chart from the same source showing that, contrary to recent experience, stocks don’t always go up.


Stock market returns panic


Our hypothetical person’s blithe optimism evaporates and they begin to act accordingly, dumping their stocks and telling friends to sell their houses, annoying most but converting a few who spread the word further, and so on, until the economy’s general mood turns dark.

“Buy the dip” becomes “sell the rip,” cash becomes king, growth stocks are judged on their P/E ratios rather than subscriber trends. And everything is revalued with risk rather than reward in mind.

Is this that kind of phase change, or just a blip in a continuing expansion/bull market? We won’t know until after the fact, alas. Especially because there’s still at least one big potential player out there with the power to keep the game going: Corporations have been buying back their shares since 2009 and are projected to buy another trillion or so dollars worth in the coming year.

Corporate share buybacks panic


If they follow through, it’s possible that all that new cash will push the “illusion of prosperity” even further past its due date. But it’s also possible that regardless of how much cash they have on hand, corporate executives, as pattern-seeking humans, will notice market psychology shifting and decide that instead of being a good time to buy, this is a great opportunity to capture some dumb money by selling shares at record high prices. Note on the above chart what buybacks did in the two years after their 2007 peak. They went negative, meaning more sales than purchases, which turbocharged an already brutal bear market. They could do that again. It just depends on their mood.


Israel and Gaza, Preparing for a Bigger Fight

Egypt’s peace talks have failed, and both sides are escalating attacks.

By Jacob L. Shapiro


Gaza and Israel may be bracing for their most serious fight in years as security continues to deteriorate. A brief lull in hostilities this morning gave way to a barrage of rocket fire and mortar rounds by Hamas into Israel throughout the afternoon. Having already deployed additional infantrymen and Iron Dome systems to the border with Gaza, Israel Defense Forces are sending more armor. The armed forces have been given the go-ahead to strike Hamas targets in Gaza, according to the Times of Israel.

Not that that has stopped Israel from retaliating already. Since this morning, it has attacked tunnels, houses of senior Hamas officials, and the headquarters of the Hamas-affiliated Al-Aqsa television station in Gaza city. A statement from the IDF said it will continue to attack rocket sites throughout the Gaza Strip – and promised more was on the way. Hamas has responded with threats of its own. Its spokesman said the group may expand its range of fire, saying that Ashkelon, the closest large city to Gaza, is “just the beginning.”



 

Notably, nothing Hamas has done so far – not even the reported strike on an Israeli military bus with an anti-tank missile – has demonstrated new capabilities. Every munition the group has used has been used before and so falls within the “normal” bounds of retaliatory attacks. Even so, the situation has worsened markedly in that past 12 hours, and if it continues to do so, Hamas may resort to using more serious weapons such as precision-guided missiles and long-range munitions. That will only lead to still more aggressive Israeli reprisals, potentially including a land invasion.

More striking than the type of attacks is the timing. Egypt has been working hard to broker a long-term Israel-Hamas truce, and it seemed as though progress was being made. Last Thursday, Israel allowed $15 million of Qatari money into Gaza – denominated in U.S. dollars and conveyed in three large suitcases, according to local reports – so that Hamas could pay civil servants. Israel has been eager to pacify Gaza so it can deal with bigger threats to the north – namely, Hezbollah in Lebanon and Iran proxies in Syria. It’s possible that the sudden rash of violence was engineered by those eager to scuttle the plans. It’s just as likely that Israel wanted to strike a quick blow before turning to its enemies to the north.

Whatever the case may be, it’s clear that Egypt’s peace talks have failed. Israel appears to be preparing for an increased tempo of operations in Gaza, and potentially for a limited ground incursion. Hamas seems ready for a fight. The only questions that remain are how quickly the violence will escalate and whether Egypt can pull both sides back from the brink. Judging by current Israeli deployments and continued Hamas rocket fire, Cairo will have a hard time restoring calm soon. This most recent round of Hamas-Israel violence may be just beginning.


Why The Next Bear Will Be Bad

by: Eric Parnell, CFA


- Thought the month of October was bad?  It may be only the very beginning of the beginning.

- The long-term rhythm of the U.S. economy has been badly disrupted for many years.

- An economic and stock market heart attack has been building for nearly three decades now with several close calls along the way.

- The cleansing process is not pleasant, but it is necessary in fostering long-term growth.

- Even if U.S. stocks fall into a prolonged bear market, capital markets are always filled with attractive return opportunities.  Investors may just have to work at it going forward.

          
“No way you can fight it every day
No matter what you say
You know it, the rhythm is gonna get you”
 
- Rhythm Is Gonna Get You, Gloria Estefan & Miami Sound Machine, 1987
 
 
Thought the month of October was bad? If so, you ain’t seen nothing yet. Why? Because the United States has been battling an increasingly challenging case of economic arrhythmia in recent years. And while potentially rather harmless and manageable at one time, policy makers have repeatedly refused to learn from the past, letting the problem fester and grow. Eventually, the rhythm is gonna get this market in a big time way.
 
The U.S. economy has historically moved with rhythm. Every three years on average, the economy would expand. And then for just over a year on average, the economy would fall into recession. This historical rhythm is important in maintaining balance in the U.S. economy. For by periodically entering into recession, the economy is given the opportunity to cleanse the excesses built up during the last expansion and build a stronger base for the next phase of growth. And while policy maker hubris has led us to try and cheat this historical cycle by trying to take the good while avoiding the bad, history tells us that the practice of trying to cheat recessions can bring far greater consequences down the road.
 
The rhythm of the U.S. economy has been disrupted in recent years. According to the National Bureau of Economic Research (NBER), the historical relationship described above remained consistently intact barring rare exception for 128 years from 1854 to 1982. But then something dramatically changed about three decades ago right around the time that Alan Greenspan took the reins as Federal Reserve Chair. The idea was fully embraced that the U.S. economy could effectively cheat death and enjoy continued growth without recessions through the active implementation of fiscal and monetary policy. But as the old Chiffon Margarine ads taught us way back when, it’s not nice to fool Mother Nature.
The first instance of cheating economic death came in 1986. Under normal economic rhythms, the timing was right for the economy to slow that year. And so it was in 1986 that economy growth began to fade. But instead of falling into recession, the fiscal and monetary policy makers managed to ease the economy into a “soft landing”. U.S. stocks celebrated and ramped higher into 1987. And we all know what happened by October of that year. Unfortunately, the ability of policy makers to “save the day” only emboldened them to up the ante going forward.
 
The next rhythmic disruption came in 1994. After lowering interest rates aggressively to reduce the depth of the 1990 recession, the Fed acted to ease inflationary pressures by tightening policy. But they were able to tighten slowly enough to avoid a recession. Unfortunately, what followed was the start of an epic market bubble where the S&P 500 posted back-to-back-to-back-to-back returns of +38% in 1995, +24% in 1996, +39% in 1997 and +42% in 1998.
 
The economy cheated death once again in 1998. A year following the outbreak of the Asian financial crisis, the recession threat was lapping up against U.S. shores following the Russian ruble crisis and the collapse of Long Term Capital Management. (Remember how a single hedge fundrequired a $3.6 billionbailout orchestrated by the Federal Reserve in order to save the global financial system? Quaint, right?). But once again policy makers intervened by lowering interest rates. And instead of the economy falling into recession, it stabilized. And what followed in the coming months was the full blown inflation of the technology bubble in into its final and most infamous stages.
 
A stock market heart attack finally ensues. By the turn of the millennium, the U.S. economy had skipped three of the past four recessions. And the excesses that built up and never cleansed out of the economy along the way started to boil over. The markets finally buckled, with stocks falling into their worst decline in a quarter century. And the economy soon followed into recession in 2001 with spillover effects lingering well into 2002.
Get on your feet and buy a house! But even after two decades with only one shallow recession leading up to this point, the magnitude of the economic contraction in 2001 was still relatively modest. This once again was thanks to exceptionally aggressive fiscal and monetary policy including interest rates that were locked near 1% for roughly three years from 2001 to 2004. Of course, what followed was a massive housing bubble with catastrophic consequences for the global economy.
 
Not so sudden near cardiac arrest. The Fed, after tightening policy for two years from the summer of 2004 to the summer of 2006, declared it was ceasing to raise rates further citing a pending slowdown in growth that would help diffuse mounting inflation pressures. The intent of policy was to try to achieve yet another economic soft landing. But by this point, the consequence of trying to prevent recessions and the economic excesses being cleansed from the system was on the brink of exploding. And so it did in now historic fashion starting in 2007 and culminating in the financial crisis of late 2008.
 
 
Paddles! Clear! Now on you go. Despite the economic pain so many have endured over the last few years, the outcome could have been vastly worse had it not been for unprecedentedly aggressive fiscal and monetary policy response. Indeed, the recession was severe, but it could have been worse. Unfortunately, by taking such decisive policy action yet again and not being able to resist keeping the economy on a heavy policy adrenaline rush in the years since, we set ourselves up for potentially an even bigger cardiac episode going forward.
 
Missed treatment in 2012. According to the rhythm of the economy, after three years of economic expansion, we reached the point where it is time for another recession. And the stage was clearly set for such an outcome as we moved toward the summer of 2012. U.S. economic data was increasingly fading, Asian economies were slowing and Europe was descending into its own crisis. One of many indicators suggesting accumulating underlying economic stress was the sharp rise in high yield bond spreads into late 2011.
 
 
But policy makers once again simply could not help themselves, as they operation twisted and quantitative eased for the third time no less with a declaration of unlimited medicine in order to keep this economy afloat. Recession avoided (for the time being), further excesses accumulated.
 
Another missed treatment in 2016. Next up after skipping 2012 was 2016. And like clockwork, we were heading in that direction starting as early as the summer of 2014. Over the next 18 months into early 2016, oil prices fell by more than -75% and corporate earnings were falling by double digits. And see if you can find the signs of accumulating economic stress in the high yield bond market over this same time period in the chart from 2012 above. But did policy makers allow the economy to fall into recession? Sakes alive no! Instead, the Federal Reserve along with their global monetary policy compadres busted out the economic crash cart once again, postponing interest rate increases, and injecting another $6 trillion in monetary adrenaline into the global economy. Get up and keep running, U.S. economy, you’re OK!
 
So here we find ourselves in late 2018. After the global financial system almost died nearly a decade ago thanks in large part to policy makers thinking they could cheat economic death for nearly two decades prior, they wasted no time in getting right back to their old bad habits, having disrupted the rhythm of the last two economic recessions since. Awesome! I’m certain this will all end really well. Thanks Alan. Thanks Ben. Thanks Janet.
 
The stakes are rising for financial markets. With each successive effort by policy makers to try to smooth over recessions if not bypass them altogether, they have prevented the economy from cleansing itself. As a result, they are creating consequences that are becoming increasingly complex and more severe for the next time around once a recession finally arrives.

The economy will eventually cleanse itself whether policy makers like it or not. It would have been best to let the U.S. economy get on with it in 2012 and 2016 and let the economy recede, as it would have gone a long way in preventing unintended consequences and a more severe outcome down the road. But just as the heart attack victim should have cleaned up their diet and exercise habits many years before, we now find ourselves in that notorious spot of “coulda, shoulda, woulda”. Except that for many economic and market participants, the cries keep going out for “more, more, more”. When will we ever learn?
 
Stock market shortness of breath and chest discomfort. What we have been seeing first in January 2018 and now in October 2018 is not the end. Instead, it is the beginning of the beginning of what could turn out to be a very long road for stocks over the next decade. Historically high stock valuations with generally tepid underlying economic growth outside of a fleeting tax cut sugar high coupled with a growth dampening historically high debt-to-GDP ratio along with corporations also leveraged to the gills having spent the last many years gorging on the repurchases of their own stock. What is not to love about the stock market outlook heading into the 2020s?
 
Don’t be complacent. Stay calm, invest passively, and hold your stocks through whatever lies ahead? Stocks always rise in value over the long-term, right? Maybe. But ask stock investors from just about any other part of the world outside of the U.S. how that has worked out for them since. Let’s put it this way – most are still waiting more than one, two, three decades to get their money back, and this is despite the extraordinary measures by global central banks. What happens the next time around when this support has gone away?
 
Stock investing is not as easy as it has seemed in recent years. It is also important to remember the following almost always overlooked reality that underlies the U.S. stock market. Remove 21 years from stock market history – the 16-year period from 1950 to 1965 when the U.S. was the unrivaled economic superpower of the free world as the rest of the planet rebuilt itself from World War II, and the 5-year period from 1995 to 1999 during the manic rise of the tech bubble, and the U.S. stock market has provided investors with a real annualized rate of return of less than 2%.
You still have time. Now is the time to check the vital signs of your portfolio. The current correction will run its course and the stock market will eventually bounce. How high from here remains to be seen. Nonetheless, stick with passive investing only if you think that the Federal Reserve is both committed AND able to keep making the stock market rise after doing so for so many years with so little to show for it other than two (three?) epic financially destabilizing asset bubbles. Instead, consider where attractive long-term investment opportunities actually exist today and slowly shift your allocations accordingly. Just because the U.S. stock market as measured by the S&P 500 Index may fall into a bear market does not mean that opportunities are not abundant in capital markets. It may not be a great experience for the sleepy passive investor, but bear markets are often regarded as the best times for active management.
 
It’s not a matter of if at this point. Instead, it’s a matter of where. It’s not about standing on the sidelines and waiting for the next bear market to arrive. Nor is it about putting your S&P 500 Index fund into a drawer and forgetting about it (how do those Nikkei 225 Index circa 1989 or Shanghai Composite Index circa 2006 products look today?). Instead, its about positioning today for what may lie ahead in the immediate-term, short-term, intermediate-term, and long-term. And it’s also about having the patience to see today’s attractively valued opportunities through to fruition over time.
 
The next bear may be bad. But you can be better if you are ready.