Credit-Driven Train Crash, Part 1

By John Mauldin


In last week’s letter, I mentioned an insightful comment my friend Peter Boockvar made at dinner in New York: “We now have credit cycles instead of economic cycles.” That one sentence provoked numerous phone calls and emails, all seeking elaboration. What did Peter mean by that statement?

I vividly remembered that quote because it resonated with me. I’ve been saying for some time that the next financial crisis will bring a major debt crisis. But as you’ll see today, it is a small part, maybe the opening event, of a rapidly-approaching train wreck. We’ll need several weeks to tease out all the causes and consequences, so this letter will be the first in a series. These will be some of the most important letters I’ve ever written. Something is on the tracks ahead and I don’t see how we’ll avoid hitting it. So, read these next few letters carefully.

In 1999, I began saying the tech bubble would eventually spark a recession. Timing was unclear because stock bubbles can blow way bigger than we can imagine. Then the yield curve inverted, and I said recession was certain. I was early in that call, but it happened.

In late 2006, I began highlighting the subprime crisis, and subsequently the yield curve again inverted, necessitating another recession call. Again, I was early, but you see the pattern.
Now let’s fast-forward to today. Here’s what I said last week that drew so much interest.

Peter [Boockvar] made an extraordinarily cogent comment that I’m going to use from now on: “We no longer have business cycles, we have credit cycles.”

For those who don’t know Peter, he is the CIO of Bleakley Advisory Group and editor of the excellent Boock Report. Let’s cut that small but meaty sound bite into pieces.

What do we mean by “business cycle,” exactly? Well, it looks something like this:

Photo: Wikispaces (Creative Commons license)
A growing economy peaks, contracts to a trough (what we call “recession”), recovers to enter prosperity, and hits a higher peak. Then the process repeats. The economy is always in either expansion or contraction.

Economists disagree on the details of all this. Wikipedia has a good overview of the various perspectives, if you want to geek out. The high-level question is why economies must cycle at all. Why can’t we have steady growth all the time? Answers vary. Whatever it is, periodically something derails growth and something else restarts it.

This pattern broke down in the last decade. We had an especially painful contraction followed by an extraordinarily weak expansion. GDP growth should reach 5% in the recovery and prosperity phases, not the 2% we have seen. Peter blames the Federal Reserve’s artificially low interest rates. Here’s how he put it in an April 18 letter to his subscribers.

To me, it is a very simple message being sent. We must understand that we no longer have economic cycles. We have credit cycles that ebb and flow with monetary policy. After all, when the Fed cuts rates to extremes, its only function is to encourage the rest of us to borrow a lot of money and we seem to have been very good at that. Thus, in reverse, when rates are being raised, when liquidity rolls away, it discourages us from taking on more debt. We don’t save enough.

This goes back farther than 2008. The Greenspan Fed pushed rates abnormally low in the late 1990s even though the then-booming economy needed no stimulus. That was in part to provide liquidity to a Y2K-wary public and partly in response to the 1998 market turmoil, but they were slow to withdraw the extra cash. Bernanke was again generous to borrowers in the 2000s, contributing to the housing crisis and Great Recession. We’re now 20 years into training people (and businesses) that running up debt is fun and easy… and they’ve responded.

But over time, debt stops stimulating growth. Over this series, we will see that it takes more debt accumulation for every point of GDP growth, both in the US and elsewhere. Hence, the flat-to-mild “recovery” years. I’ve cited academic literature via my friend Lacy Hunt that debt eventually becomes a drag on growth.

Debt-fueled growth is fun at first but simply pulls forward future spending, which we then miss. Now we’re entering the much more dangerous reversal phase in which the Fed tries to break the debt addiction. We all know that never ends well.

So, Peter’s point is that a Fed-driven credit cycle now supersedes the traditional business cycle. Since debt drives so much GDP growth, its cost (i.e. interest rates) is the main variable defining where we are in the cycle. The Fed controls that cost—or at least tries to—so we all obsess on Fed policy. And rightly so.

Among other effects, debt boosts asset prices. That’s why stocks and real estate have performed so well. But with rates now rising and the Fed unloading assets, those same prices are highly vulnerable. An asset’s value is what someone will pay for it. If financing costs rise and buyers lack cash, the asset price must fall. And fall it will. The consensus at my New York dinner was recession in the last half of 2019. Peter expects it sooner, in Q1 2019.

If that’s right, financial market fireworks aren’t far away.  

Corporate Debt Disaster
In an old-style economic cycle, recessions triggered bear markets. Economic contraction slowed consumer spending, corporate earnings fell, and stock prices dropped. That’s not how it works when the credit cycle is in control. Lower asset prices aren’t the result of a recession. They cause the recession. That’s because access to credit drives consumer spending and business investment.

Take it away and they decline. Recession follows.
If some of this sounds like the Hyman Minsky financial instability hypothesis I’ve described before, you’re exactly right. Minsky said exuberant firms take on too much debt, which paralyzes them, and then bad things start happening. I think we’re approaching that point.
The last “Minsky Moment” came from subprime mortgages and associated derivatives. Those are getting problematic again, but I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds that will be very hard to liquidate in a crisis.
Corporate debt is now at a level that has not ended well in past cycles. Here’s a chart from Dave Rosenberg:

Source: Gluskin Sheff

The Debt/GDP ratio could go higher still, but I think not much more. Whenever it falls, lenders (including bond fund and ETF investors) will want to sell. Then comes the hard part: to whom?
You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice. One reason for the Great Recession was so many borrowers had sold short-term commercial paper to buy long-term assets. Things got worse when they couldn’t roll over the debt and some are now doing exactly the same thing again, except in much riskier high-yield debt. We have two related problems here.
  • Corporate debt and especially high-yield debt issuance has exploded since 2009.
  • Tighter regulations discouraged banks from making markets in corporate and HY debt.
Both are problems but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major bank market-making abilities by around 90%. For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap. The problem is they are not true market makers. Nothing requires them to hold inventory or buy when you want to sell. That means all the bids can “magically” disappear just when you need them most. These “shadow banks” are not in the business of protecting your assets. They are worried about their own profits and those of their clients.
Gavekal’s Louis Gave wrote a fascinating article on this last week titled, “The Illusion of Liquidity and Its Consequences.” He pulled the numbers on corporate bond ETFs and compared it to the inventory trading desks were holding—a rough measure of liquidity.
(Incidentally, you’ll get that full report on Monday if you subscribe to Over My Shoulder. What you learn could easily pay for your first year.)
Louis found dealer inventory is not remotely enough to accommodate the selling he expects as higher rates bite more.
We now have a corporate bond market that has roughly doubled in size while the willingness and ability of bond dealers to provide liquidity into a stressed market has fallen by more than -80%. At the same time, this market has a brand-new class of investors, who are likely to expect daily liquidity if and when market behavior turns sour. At the very least, it is clear that this is a very different corporate bond market and history-based financial models will most likely be found wanting.
The “new class” of investors he mentions are corporate bond ETF and mutual fund shareholders. These funds have exploded in size (high yield alone is now around $2 trillion) and their design presumes a market with ample liquidity. We barely have such a market right now, and we certainly won’t have one after rates jump another 50–100 basis points.
Worse, I don’t have enough exclamation points to describe the disaster when high-yield funds, often purchased by mom-and-pop investors in a reach for yield, all try to sell at once, and the funds sell anything they can at fire-sale prices to meet redemptions.
In a bear market you sell what you can, not what you want to. We will look at what happens to high-yield funds in bear markets in a later letter. The picture is not pretty.
To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with borrowed money, confident that low interest rates and defaults would keep risks manageable. In fact, according to S&P Global Market Watch, 77% of corporate bonds that are leveraged are what’s known as “covenant-lite.” We’ll discuss more later in this series, but the short answer is that the borrower doesn’t have to repay by conventional means.

Sometimes they can even force the lender to take more debt. In an odd way, some of these “covenant-lite” borrowers can actually “print their own money.”
Somehow, lenders thought it was a good idea to buy those bonds. Maybe that made sense in good times. In bad times? It can precipitate a crisis. As the economy enters recession, many companies will lose their ability to service debt, especially now that the Fed is making it more expensive to roll over—as multiple trillions of dollars will need to do in the next few years. Normally this would be the borrowers’ problem, but covenant-lite lenders took it on themselves.
The macroeconomic effects will spread even more widely. Companies that can’t service their debt have little choice but to shrink. They will do it via layoffs, reducing inventory and investment, or selling assets. All those reduce growth and, if widespread enough, lead to recession.
Let’s look at this data and troubling chart from Bloomberg:
Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking.
“If more of your cash flow is spent into servicing your debt and not trying to grow your company, that could, over time—if enough companies are doing that—lead to economic contraction,” said Zachary Chavis, a portfolio manager at Sage Advisory Services Ltd. in Austin, Texas. “A lot of people are worried that could happen in the next two years.”

The problem is that much of the $2 trillion in bond ETF and mutual funds isn’t owned by long-term investors who hold maturity. When the herd of investors calls up to redeem, there will be no bids for their “bad” bonds.

But they’re required to pay redemptions, so they’ll have to sell their “good” bonds. Remaining investors will be stuck with an increasingly poor-quality portfolio, which will drop even faster. Wash, rinse, repeat.  

Those of us with a little gray hair have seen this before, but I think the coming one is potentially biblical in proportion.

Casey Jones via Wikimedia Commons

Blowing the Whistle

As you can tell, this is a multifaceted problem. I will dig deeper into the specifics in the coming weeks. The numbers seem unbelievable. I truly think we are headed to a staggering credit crisis.
I began this letter describing the coming events as a train wreck. That comparison came up when my colleague Patrick Watson and I were on the phone this week, planning this series of letters. Patrick and his beautiful wife Grace had just come back from Tennessee, and he told me about visiting the Casey Jones birthplace museum in Jackson.
For those who don’t know the story or haven’t heard the songs, Casey Jones was a talented young railroad engineer in the late 1800s. On April 30, 1900, Casey Jones was going at top speed when his train tragically overtook a stopped train that wasn’t supposed to be there.
Traveling at 75 miles per hour, Jones ordered his young fireman to jump, pulled the brakes hard, and blew the train whistle, warning his passengers and the other train. Later investigations found he had slowed it to 35 mph before impact.

Everyone on both trains survived… except Casey Jones.
His heroic death made Jones a folk hero to this day. Many songs told the story and even the Grateful Dead and AC/DC paid tribute decades later. (Trivia: He actually tuned his train whistle with six different tubes to make a unique whippoorwill sound. So, when people heard his train whistle, they knew it was Casey Jones.)
Right now, the US economy is kind of like that train: speeding ahead with the Fed only slowly removing the fuel it shouldn’t have loaded in the first place and passengers just hoping to reach our destination on time. 

Unfortunately, we don’t have a reliable Casey Jones at the throttle. We’re at the mercy of central bankers and politicians who aren’t looking ahead. They can’t simply turn the steering wheel. We are stuck on this track and will go where it takes us.
Next week, we’ll talk about the sequence of how the next debt crisis will arise, how it triggers a recession, and then $2 trillion of deficits in the US and rising debt all over the world. Which just increases pressures on interest rates and lending. And reduces growth. It is not a virtuous cycle.

My Writing Productivity Secret
About ten years ago, I began experimenting with voice recognition technology.

For the first few years the software just wasn’t “ready.” Then about four years ago, Nuance came out with a greatly improved version which has since gotten even better. The new Dragon Professional 15 is amazingly flexible with top-of-the-line recognition accuracy.
Frankly, Dragon voice recognition technology by Nuance makes me at least three times more productive in my writing. Now, even though I have written millions of words, I am still not all that fast a typist. Dragon has changed that.
I don’t often endorse products, but I am so thoroughly satisfied with Dragon that I am comfortable this time. I arranged for Nuance to offer an exclusive 50% discount to my readers that you can access here. If you are a serious writer or simply prefer to answer emails by voice, this is an amazing productivity tool. And it can do so many other things as well.

Click here to learn more.
After a few minutes of training your own personal Dragon to recognize your unique speaking voice—and becoming familiar with the, well, nuances—I think you will be as happy as I am. After all, who doesn’t want to save time and breeze through your writing three times faster? Try it.

Chicago, Orange County, and Raleigh

My next trip will be to a private conference in Chicago for my friends Swan Global Investments. I’ll also meet with old friend Raghuram Rajan, former Reserve Bank of India head and now on the Chicago Booth faculty. Then I fly to Orange County to speak at the CFA Society on May 17. The next week I go to Raleigh, North Carolina, to see old friends and speak at The Investment Institute. Then at some point in June, I’ll be in Cleveland for an overdue medical checkup with Dr. Mike Roizen.
On a personal note, the transition to the new and improved Over My Shoulder has taken me back almost 30 years to when I first hired Patrick Watson as a full-time research assistant. He has been with me through several companies and has worked in others, but now he’s back with me full time. It is very rewarding to have such a long-lasting relationship. He’s probably read more of my writing than anyone I know. Along with a few other changes in my business and personal life, my productivity is already increasing noticeably. I’m very excited about the ways Patrick and I can help enhance your life as well.
This week, Pat Caddell was in town for a meeting and came to stay at my home yesterday and share anecdotes. We really hit it off at my conference, and we’re having some fascinating discussions. He is a very interesting, old-school gentleman.
It’s time to hit the send button. Somewhere in my travels, I picked up a nasty chest cold that my doctor says will take me about a week to recover from, if I’m lucky. Thankfully it is already improving, but I’ve been taking more medicine and cough drops than I like. This too shall pass, though. Have a great week.
Your thinking a lot about credit cycles analyst,

John Mauldin
Chairman, Mauldin Economics

Against graft, for growth

Peru’s new president, Martín Vizcarra, explains his plans

Mr Vizcarra sounds a pragmatic note in an interview with The Economist
THE narrow streets of San José de Lourdes, on Peru’s border with Ecuador, were jammed on May 10th for a once-in-a-lifetime event. Martín Vizcarra (pictured) was the first president of Peru to visit the sweltering town, which was founded nearly 75 years ago and then, it seems, promptly forgotten.

“We are taking a look at the entire country, focusing attention right now on areas that have been abandoned by the state,” he told The Economist in his first interview with a foreign newspaper. “This zone fits that description.”

Schools in San José de Lourdes lack windows and running water. No doctor has visited the health clinic in three years. The poverty rate of around 60% is nearly three times the national average. Cars cross the Chinchipe river on a pulley-drawn platform, sometimes waiting days for passage. The town’s previous mayor is in prison on corruption charges.
Mr Vizcarra’s visit is part of a frenetic travel schedule that he began after his unexpected elevation to the presidency in March. He heads to the countryside at least once a week. In Lima, the capital, he shows up unannounced at schools and hospitals. Part of the point is to show that he is nothing like his predecessor, Pedro Pablo Kuczynski, who resigned to avoid impeachment in a conflict-of-interest scandal. The former president is urbane, polyglot and out of touch. Mr Vizcarra, an engineer by training, is “provincial and proud of it”, says John Youle, a consultant in Lima.

The new president has two priorities. The first is to restore Peruvians’ faith in government and democracy, which has been weakened by Mr Kuczynski’s scandal and by allegations or charges against four other former presidents. “We need to rebuild trust by showing that public management can be done transparently and honestly,” says Mr Vizcarra. His second goal is to boost economic growth, which is too slow to continue the recent progress Peru has made in reducing poverty. In 2017 GDP growth dropped to 2.5% from 3.9% in the previous year and the poverty rate increased. The government has cut its forecast for growth this year from 4% to 3.6%. With more public and private investment, “we will expand the economy, create jobs and fight poverty,” he promises.

Though keen to show that he understands people’s problems, he does not offer quick and easy solutions for them. In San José de Lourdes he spurned a waiting pickup truck to walk from site to site, cuddled a newborn baby at the clinic and placed a cornerstone for a bridge across the Chinchipe.

But to pupils who lobbied for computers at their school he counselled patience. “Before we can think about computers, we have to provide water, electricity [and] bathrooms,” he told them.

His message seemed to be getting through. “It is nice to hear a politician talking about real things and not just making promises,” says Jenny Tello, a teacher. “It will be a big change if he governs like this.”

That will not be easy. The biggest party in congress is Popular Force, led by Keiko Fujimori, the daughter of a former president, Alberto Fujimori, who was jailed for human-rights crimes. Her implacable opposition to Mr Kuczynski helped topple him. The new president must get on better with her. Some well-wishers fear that Mr Vizcarra, a micro-manager with little national experience, will be hamstrung by fujimoristas intent on preventing the institutional reforms he hopes to make. “We are going to talk to all parties and leaders to show Peruvians that the country comes before us,” he says.

On May 2nd congress gave his cabinet a vote of confidence. The government has asked congress for decree powers in six areas, including taxes, political reform, infrastructure and corruption. One proposal is to publish the banking and tax records of any candidate for public office.

A new “public-integrity office” under the prime minister, César Villanueva, will oversee anti-corruption policies. Part of its job will be to implement 100 anti-graft recommendations from a body set up by Mr Kuczynski who, to the chagrin of campaigners, largely ignored them.

To counter the slowdown in economic growth Mr Vizcarra hopes to unblock some $10bn of private investment, much of it in mining projects stalled by farmers and environmental groups. “Peru is a mining country, but we need to do things differently from the past,” he says. That means creating “consensus around advantages and benefits” of projects. Mr Vizcarra can claim to have done this before. As governor of Moquegua, a southern department, from 2011 to 2014, he “knocked mayors’ heads together” to advance the planned Quellaveco copper mine, says Mr Youle.

Mr Vizcarra, who says he will not run for re-election, has just three years to convince voters that a moderate president can clean up government and revive social and economic progress. If he fails, Peru’s sour-minded voters may offer the next chance to someone less committed to pragmatism and democracy.

How Germany Could Punish Eastern Europe

By Nora T. Kalinskij


The EU Commission this week released its proposed budget for 2021-2027, and with it, likely another round of dissension between Brussels and two of the EU’s most rebellious members, Poland and Hungary. The budget, which will be hotly debated over the next few months, if not years, proposes linking EU cohesion funding – which supports economic development and investment in member states – to certain conditions such as the acceptance of refugees. The commission separately proposed another mechanism that would tie access to EU funds to countries’ respect for the rule of law. In recent years, Brussels has repeatedly accused Hungary and Poland of violating EU norms and regulations, and these new measures are meant to compel members to fall in line or face financial consequences. But the EU’s ability to implement them, and therefore compel members to comply, is limited. If anyone has the power to force members to change their behavior, it’s Berlin, not Brussels.
Unanimity Requirement
The discord between the EU and Poland and Hungary came to a head following Europe’s migrant crisis in 2015. In an effort to spread the burden of taking in large numbers of refugees, member states were assigned quotas for the number of refugees they had to resettle. Hungary and Poland, as well as the Czech Republic, refused to comply with the quota scheme. Poland stopped accepting refugees after December 2015; Hungary had refused to accept the quota system from the very start. In response, the European Commission referred all three states to the European Court of Justice late last year.

Brussels’ criticism of Poland and Hungary also involves some measures the two countries have taken over the past several years. Judicial reforms undertaken in Poland threaten the rule of law by allowing the government to interfere in the judiciary, or so Brussels has alleged. The EU has meanwhile criticized Hungary for violating freedom of expression for crackdowns on foreign-funded nongovernmental organizations and other institutions like the Central European University, which was threatened with forced closure.

If the EU wants to pressure these countries to change their behavior, threatening to cut funding, which is used for public investment in things like infrastructure and to support private sector development, is the best option at its disposal. Indeed, Poland and Hungary have both benefited from the EU’s structural funds since joining the union. In 2016, EU funds were 4.2 percent of Hungary’s gross national income and 2.1 percent of Poland’s. By the end of the 2014-2020 budget period, Poland is set to receive 100 billion euros ($120 billion) in structural, agricultural and other EU funds, the most of any EU member state.
The problem for the EU is that its voting structure makes it difficult to pass punitive measures. The proposed budget for 2021-2027 requires unanimous approval, and Poland and Hungary are likely to vote against any measures that punish states for their refusal to accept refugee quotas. Taking this into account, the European Commission is also separately seeking the authority to halt future payments to member states whose judiciaries are deemed to lack independence, arguing that cases of fraud or wasteful public spending would be hard to investigate. This measure would require the support of a qualified majority in the European Council – 55 percent of member countries and 65 percent of the EU population. Yet even a qualified majority will be difficult to win because other member states that receive substantial EU funds will likely join Poland and Hungary in opposing the reform. With no other means of restricting access to structural funds, the EU’s options for reining in its disobedient members through regulation are limited.
The German Bet
But the EU may not need to use regulations at all. The EU’s de facto leader, Germany, has also been critical of the EU’s rogue members. Its economic well-being is dependent on the EU’s remaining intact, and it needs all members to fall in line to guarantee that that happens. And unlike the EU, Germany has substantial economic leverage over these states – except its hands aren’t tied by the unanimity requirement.

Germany’s leverage comes from the fact that the economies of Poland and Hungary are closely linked to Germany’s. In 2016, roughly a quarter of Poland’s and Hungary’s imports and exports came from and went to Germany. This is important, considering exports made up 52 percent of Poland’s gross domestic product that year and a staggering 89.5 percent of Hungary’s. Both countries are home to subsidiaries of German companies and are a key part of the German supply chain, mainly thanks to their relatively low labor costs. Germany is also a large investor in both countries. In 2016, 24 percent of foreign direct investment in Poland and 26.7 percent in Hungary came from Germany. If it wanted to, Germany could threaten to cut investment, strain business ties and reduce the volume of trade.

The problem, however, is that following through on such threats would be bad for Germany too. Cutting investment in Poland and Hungary would result in economic losses for Germany, and more important, it could increase support for euroskeptic movements in both countries, making them even more defiant than they already are. The Polish and Hungarian governments will try to exploit these threats by portraying themselves and their voters as victims of German coercion. Even voters who don’t support Hungarian Prime Minister Viktor Orban and Poland’s ruling Law and Justice party could turn on the EU for punishing the people for the deeds of a government they don’t back. It may not be a perfect solution, but Germany has few other options if it wants to hold the EU together. Chancellor Angela Merkel’s government must act carefully, using a combination of threats both at the bilateral and EU level to encourage Poland and Hungary to make concessions without pushing either out of the fold completely. (Complicating this situation is that the German government lost support in the election last  September.)

The real confrontation here is not between the Poland and Hungary on one side and the EU on the other. It is between Poland and Hungary and Germany. For Poland and Hungary, the threat of economic consequences for noncompliance is very real, but it comes not from Brussels but from Berlin.


Universal health care, worldwide, is within reach

The case for it is a powerful one—including in poor countries

BY MANY measures the world has never been in better health. Since 2000 the number of children who die before they are five has fallen by almost half, to 5.6m. Life expectancy has reached 71, a gain of five years. More children than ever are vaccinated. Malaria, TB and HIV/AIDS are in retreat.

Yet the gap between this progress and the still greater potential that medicine offers has perhaps never been wider. At least half the world is without access to what the World Health Organisation deems essential, including antenatal care, insecticide-treated bednets, screening for cervical cancer and vaccinations against diphtheria, tetanus and whooping cough. Safe, basic surgery is out of reach for 5bn people.

Those who can get to see a doctor often pay a crippling price. More than 800m people spend over 10% of their annual household income on medical expenses; nearly 180m spend over 25%.

The quality of what they get in return is often woeful. In studies of consultations in rural Indian and Chinese clinics, just 12-26% of patients received a correct diagnosis.

That is a terrible waste. As this week’s special report shows, the goal of universal basic health care is sensible, affordable and practical, even in poor countries. Without it, the potential of modern medicine will be squandered.

How the other half dies

Universal basic health care is sensible in the way that, say, universal basic education is sensible—because it yields benefits to society as well as to individuals. In some quarters the very idea leads to a dangerous elevation of the blood pressure, because it suggests paternalism, coercion or worse. There is no hiding that public health-insurance schemes require the rich to subsidise the poor, the young to subsidise the old and the healthy to underwrite the sick. And universal schemes must have a way of forcing people to pay, through taxes, say, or by mandating that they buy insurance.

But there is a principled, liberal case for universal health care. Good health is something everyone can reasonably be assumed to want in order to realise their full individual potential. Universal care is a way of providing it that is pro-growth. The costs of inaccessible, expensive and abject treatment are enormous. The sick struggle to get an education or to be productive at work. Land cannot be developed if it is full of disease-carrying parasites. According to several studies, confidence about health makes people more likely to set up their own businesses.

Universal basic health care is also affordable. A country need not wait to be rich before it can have comprehensive, if rudimentary, treatment. Health care is a labour-intensive industry, and community health workers, paid relatively little compared with doctors and nurses, can make a big difference in poor countries. There is also already a lot of spending on health in poor countries, but it is often inefficient. In India and Nigeria, for example, more than 60% of health spending is through out-of-pocket payments. More services could be provided if that money—and the risk of falling ill—were pooled.

The evidence for the feasibility of universal health care goes beyond theories jotted on the back of prescription pads. It is supported by several pioneering examples. Chile and Costa Rica spend about an eighth of what America does per person on health and have similar life expectancies. Thailand spends $220 per person a year on health, and yet has outcomes nearly as good as in the OECD. Its rate of deaths related to pregnancy, for example, is just over half that of African-American mothers. Rwanda has introduced ultrabasic health insurance for more than 90% of its people; infant mortality has fallen from 120 per 1,000 live births in 2000 to under 30 last year.

And universal health care is practical. It is a way to prevent free-riders from passing on the costs of not being covered to others, for example by clogging up emergency rooms or by spreading contagious diseases. It does not have to mean big government. Private insurers and providers can still play an important role.

Indeed such a practical approach is just what the low-cost revolution needs. Take, for instance, the design of health-insurance schemes. Many countries start by making a small group of people eligible for a large number of benefits, in the expectation that other groups will be added later. (Civil servants are, mysteriously, common beneficiaries.) This is not only unfair and inefficient, but also risks creating a constituency opposed to extending insurance to others. The better option is to cover as many people as possible, even if the services available are sparse, as under Mexico’s Seguro Popular scheme.

Small amounts of spending can go a long way. Research led by Dean Jamison, a health economist, has identified over 200 effective interventions, including immunisations and neglected procedures such as basic surgery. In total, these would cost poor countries about an extra $1 per week per person and cut the number of premature deaths there by more than a quarter. Around half that funding would go to primary health centres, not city hospitals, which today receive more than their fair share of the money.

The health of nations

Consider, too, the $37bn spent each year on health aid. Since 2000, this has helped save millions from infectious diseases. But international health organisations can distort domestic institutions, for example by setting up parallel programmes or by diverting health workers into pet projects. A better approach, seen in Rwanda, is when programmes targeting a particular disease bring broader benefits. One example is the way that the Global Fund to Fight AIDS, Tuberculosis and Malaria finances community health workers who treat patients with HIV but also those with other diseases.

Europeans have long wondered why the United States shuns the efficiencies and health gains from universal care, but its potential in developing countries is less understood. So long as half the world goes without essential treatment, the fruits of centuries of medical science will be wasted. Universal basic health care can help realise its promise.

China Goes Long On Gold

By David Smith

China Dollar

A cursory look at Chinese history can convince you that China should not be underestimated when it sets its sights on a particular goal.

Even before Mao Zedong took over the reins in 1949, and the first Five Year Plan began in 1953, centuries of history demonstrated that long-term planning, while not always meeting expectations, is a core behavioral trait of the Chinese psyche.

And more often than not, it has enabled them to hit the mark.

Expect eventual success for the One Belt, One Road Initiative – the world's largest construction project, estimated to cost $80 trillion dollars – linking the Asian mainland, (including Central Asia) with Europe via high speed rail, communications links and vibrant financial trading platforms.

And expect this project to be a major factor in bringing about what Doug Casey and others believe could become the greatest commodities bull-run that most of us now living are going to see. And now, China has officially launched a petro-yuan contract at the Shanghai International Energy Exchange. It marks the first-time overseas investors have been able to access a Chinese commodity market – in this case an oil futures contract – that can be settled, not only with U.S. dollars, but also Chinese Yuan - and eventually gold.

Asian Analyst, Pepe Escobar sees clearly where this is heading, saying:

As the yuan progressively reaches full consolidation in trade settlement, the petro-yuan threat to the US dollar, inscribed in a complex, long-term process, will disseminate the Holy Grail: crude oil futures contracts priced in yuan fully convertible into gold...

That means China’s vast array of trade partners will be able to convert yuan into gold without having to keep funds in Chinese assets or turn them into U.S. dollars... Still, the whole petrodollar edifice lies on OPEC – and the House of Saud– pricing oil in U.S. dollars; as everyone needs greenbacks to buy oil, everyone needs to buy (spiraling) U.S. debt. Beijing is set to break the system – as long as it takes.

Meanwhile gold will continue rising to a level where at some point, Beijing decides to set a conversion rate. When this "golden moment" arrives, the effects on global oil trade – and U.S. continued supremacy in this arena – will be profound. Mining Analyst, Byron King doesn't mince any words about it. Says he,

China’s vast array of trade partners will be able to convert yuan into gold without having to keep funds in Chinese assets or turn them into U.S. dollars. It’s a straight-up way to bypass the buck.

And what if Saudi Arabia – among China’s largest oil suppliers – agrees to accept yuan instead of dollars? It’ll be a bomb-down-the-funnel for U.S. dollar hegemony in the world.

Gold-for-Oil is just one element which will take precious metals to new all-time highs.

Once this trend fully gets under way – sooner than most expect – the price you're looking at for physical gold (and silver with its 90% directional gold- correlation price movement) will quickly recede in the rear-view mirror.

Here are just a few recent commentaries that should give you a sense of the structural changes in these markets, making them increasingly subject to explosive moves on the upside – without sending you an invitation to board the train beforehand. 

The bottom line is gold is nearing a major bull breakout above $1365. That will turn psychology bullish and bring traders back in droves. Gold is rallying ever closer to new bull-market highs as evidenced by its massive multi-year ascending-triangle chart pattern now nearing a bullish climax.
Today gold is only a couple percent below that decisive breakout, which will finally blast it back onto the radars of investors. - Adam Hamilton, Zeal Speculation and Investment

“We see a massive base building in gold. Massive. It’s a four-year, five-year base in gold. If we break above this resistance line, one can expect gold to go up by, like, a $1,000. . .” Doubleline CEO, Jeff Gundlach, the "Bond King"

"With the growth of high-end consumption and the development in second and third-tier cities, the Chinese market will show its substantial demand, mostly unexplored, for physical gold, as more and more people start to realize gold's stored and retaining values in the long term." - Song Xin, China Gold Association, April 18, 2018.

So how should you consider handling this situation?

Yes, we've been waiting "quite awhile" for this trend to get underway, creating fireworks for metals' holders. And yes, a few people have become impatient, and actually sold back their metal – which may have taken years to accumulate. But just remember, it's less a question of if, rather than when this all comes together.

Successful metals' owners who have prospered since the beginning of the bull run in 2000, got there – and stayed onboard – by following a few sensible rules.

(Click to enlarge)/Does this look like an established trend? (Courtesy

They listen to the "experts" and pay attention to big changes, like the Chinese yuan-for-oil event we're discussing here.
In addition, they look at what the charts tell them – that Asia continues to suck up gold and silver from the West like a proverbial vacuum cleaner. The Silk Road Gold Total Reserves Plus Demand chart nearby confirms this in spades. They touch base with risk tolerance, taking stock of their financial capability to participate. And acquire metal on a regular basis (without going 'all in' at any particular price point), regardless of that the price is doing that month.
They understand that profoundly positive things come to those who are patient, have a plan... and who then act on it. So, ask yourself today, "Am I willing – like the Chinese – to persevere for 'as long as it takes'"?

 America’s Dumbest Companies Repeat Their Biggest Mistakes  

Back in 2005 a reporter took a tour of General Motors’ headquarters, and in the resulting article one thing stood out: The executives and engineers the reporter interviewed were only modestly enthused about their sedans and sub-compacts. But they really liked talking about their expanded line of Hummers.

Then oil spiked and gas prices hit records. And GM’s bet on massive gas guzzlers blew up in its face. In 2009:
GM bankruptcy: End of an era 
(CNNMoney – General Motors filed for bankruptcy protection early Monday, a move once viewed as unthinkable that became inevitable after years of losses and market share declines capped by a dramatic plunge in sales in recent months. 
The bankruptcy is likely to lead to major changes and job cuts at the battered automaker. But President Obama and GM CEO Fritz Henderson both promised that a more viable GM will emerge from bankruptcy. 
In the end, even $19.4 billion in federal help wasn’t enough to keep the nation’s largest automaker out of bankruptcy. The government will pour another $30 billion into GM to fund operations during its reorganization. 
Taxpayers will end up with a 60% stake in GM, with the union, its creditors and federal and provincial governments in Canada owning the remainder of the Company. 
GM will shed its Pontiac, Saturn, Hummer and Saab brands and cut loose more than 2,000 of its 6,000 U.S. dealerships by next year. That could result in more than 100,000 additional job losses if those dealerships are forced to close. 
Assembly lines at a plant in Pontiac, Mich., which make full-size pickup trucks, will be closed later this year. A Wilmington, Del.-based facility that makes roadsters for the Pontiac and Saturn brands will also close later this year. 
Pain for retirees, investors 
More than 650,000 retirees and their family members who depend on the company for health insurance will experience cutbacks in their coverage, although their pension benefits are unaffected for now. 
Investors in $27 billion worth of GM bonds, including mutual funds and thousands of individual investors, will end up with new stock in a reorganized GM worth a fraction of their original investment. 
Owners of current GM (GM, Fortune 500) shares, which closed at just 75 cents a share on Friday, will have their investments essentially wiped out.

Now fast forward to this week, when conditions are similar to those of 2005. Gas has been relatively cheap for a few years and Americans – always ready to extrapolate short-term trends into the indefinite future – only want SUVs and pickups. So Ford is adopting the GM strategy of betting its corporate future on continued cheap gas and profligate customers.
Ford Will Be A Truck Company By 2020 
(CNN Money) — Car buyers these days love SUVs. They don’t, however, love actual cars like hatchbacks and sedans – as Ford has learned. 
Ford said on Wednesday the only passenger car models it plans to keep on the market in North America will be the Mustang and the upcoming Ford Focus Active, a crossover-like hatchback that’s slated to debut in 2019. 
That means the Fiesta, Taurus, Fusion and the regular Focus will disappear in the United States and Canada. 
Ford will, however, continue to offer its full gamut of trucks, SUVs and crossovers.
By 2020, “almost 90 percent of the Ford portfolio in North America will be trucks, utilities and commercial vehicles,” the press release says.  
Ford has hinted it might decide to retire much of its sedan portfolio. Earlier this year, James Farley, the company’s president of global markets, said Ford is “shifting from cars to utilities,” which have been a bigger profit driver. It also reallocated $7 billion of research funds from cars to SUVs and trucks. 
And it’s not just Ford. Fiat Chrysler did away with the Dodge Dart and Chrysler 200 more than a year ago. And General Motors decided to scale back production of the Chevy Cruze, Chevy Impala, Buick LaCrosse and the Cadillac ATS and CTS.

Meanwhile, out in the real world:

Ford Oil Price

The conclusion: Detroit may have handed short sellers yet another sure thing.