Corporate elites are overlooking deglobalisation

Last week’s market rout reflects investor worries about nationalistic politics

Rana Foroohar



All of us, no matter how wise, have our cognitive biases. Indeed, there’s research to show that elites are less likely to part with their biases than the ordinary person. This is probably because they believe themselves to be better educated and informed than the masses, which may well be true.

Yet many members of the elite were caught utterly unaware by Brexit and by the rise of Donald Trump. These events simply did not fit the mental model of the world so many of us have worked with for the past several decades.

So, what is the next big thing the global elite is missing? Quite possibly deglobalisation. Just as so many top corporate executives missed the rise of populism, so the global business establishment is in danger of missing the fact that a far-right/far-left consensus is building in the US around a nationalist economic agenda. This is in some ways reminiscent of the shared concerns of the populist Five Star and League coalition that recently came to power in Italy.

In the US, many supporters of socialist Bernie Sanders agree with Trump administration trade hawks like Peter Navarro and Robert Lighthizer who believe that America should disentangle itself from China and pursue a domestic industrial policy.

The belief systems, agendas and specific policy prescriptions of these two camps vary wildly.

But the end goal is the same — they want American companies to keep more capital, jobs and intellectual property at home.

Many corporate leaders I speak to are baffled by this confluence of interests. They argue that the separation is not possible — supply chains are too complex, the Chinese domestic market is too important and other countries cannot yet offer a comparable package of workforce, logistics, infrastructure and vendor networks.

True enough, and yet, their objections may be beside the point. The pro-labour left is seeking to slowly but surely disrupt the corporatist centre of the Democratic party, which would prefer to go back, after Mr Trump, to the previous era of free trade.

Time and numbers are on the side of the disrupters, who have come of age in a time of economic constraint, environmental degradation and political partisanship. They do not worry about classical economics, and do not recoil when critics say their ideas are “socialist”.

So far these younger voters have not shown up at the polls as regularly as their parents do. But “demographics is still destiny,” says Bruce Stokes, director of economic attitudes at the Pew Center. “It just takes longer than you think.”

Meanwhile, the trade hawks are cleverly using targeted tariffs to make it more difficult for companies to export from China. “Lighthizer wants US corporations to move into other locations,” says Arthur Kroeber, managing director of Gavekal Dragonomics. His Beijing-based research group has clients who are considering doing just that, though no one has yet pulled the trigger. “Vietnam is the obvious alternative but there are still too many potholes,” he says. Companies “don’t want to be the one to fill in the potholes. They want to wait for others to pioneer and then see if it makes sense to move.”

Like couples in a bad marriage, many chief executives keep hoping something will change without them having to do anything different. Meanwhile, forces are pushing against the old order. The updated version of the North American Free Trade Agreement aims to limit the ability of Mexicans and Canadians to negotiate independently with China.

The Chinese, for their part, want to reduce the importance of the US dollar in trade and the commodities markets, launching the renminbi denominated oil futures market in March.

Europeans are trying to create a mechanism to bypass the dollar so that they can keep on buying oil from Iran. Bans on capital flows to and from the US and China are creating regional fragmentation, particularly in the technology sector.

Kai-Fu Lee, a Chinese venture capital investor who has made a number of American investments, recently said he does not expect he will be able to make any further investments in the US. Instead, he will be focusing on the Chinese market.

Chief executives may be in denial, but investors sense all this already, in the anxious way that people know things in dreams. Last week’s market rout and the past few months of unprecedented divergence between US and emerging market equities reflect underlying worries about nationalistic politics. After all, the divergence began around the same time the US pulled out of the Iran nuclear deal, populists were victorious in the Italian elections and US-China trade tensions ramped up.

Mr Trump could find a way to cut a symbolic deal with China that mitigates growing trade tensions between the two countries, if he decides an agreement would bolster his image. Indeed, the sharp devaluation of the renminbi during the past few months indicates that Beijing may be creating room for him to do just that.

But such a deal would only be a feint ahead of the November midterm elections. The underlying impulses are not going away: the young socialists and the old trade hawks are all playing a long game. Business leaders are fooling only themselves if they fail to pay attention.

The US Plays the Long Game in the South China Sea

Washington is content to accept the status quo in the region, so long as Beijing does as well.

By Phillip Orchard         

Bitcoin Is Getting a Big New Backer in Fidelity but Investors Are Lukewarm on the News

By Avi Salzman 




Fidelity announced on Monday that it will start a new division to trade cryptocurrencies like bitcoin for institutional clients, and hold those assets in custody. It’s a significant move for a cautious and highly regulated company that holds $7.2 trillion in client assets.

The company, called Fidelity Digital Assets, will have about 100 employees, according to Tom Jessop, head of the new unit. “We’re going live with the platform in early 2019,” Jessop said at an event in New York hosted by Fidelity, Michael Novogratz’s crypto-focused hedge fund Galaxy Digital, and Bloomberg.

Large institutions, including most traditional money managers, have shied away from trading cryptocurrencies in part because they don’t feel comfortable entrusting client assets to exchanges with a history of being hacked or manipulated.

Some people think cryptocurrencies are a bubble waiting to pop just like the dot-com bubble in the early 2000s. Using that same analogy for cryptocurrency, what about blockchain, the technology behind bitcoin and Ether? Here's what you need to know.

Holding bitcoin for clients is very different from holding stocks or bonds, where dozens of trusted firms already make markets and insure assets. Most serious traders hold the bulk of their crypto in “cold storage,” disconnected from the Internet. Fidelity says it will use cold storage as well as “multi-level physical and cyber controls.” Jessop would not say who is providing insurance for the custody product.

Fidelity was one of the first major institutions to explore bitcoin, even mining it starting in 2015. But the company did little to actually offer crypto-related products to customers. Retail clients can see their Coinbase balances in their Fidelity account, but have to leave the account to trade. Meanwhile, free trading app Robinhood and Square ’sCash app already offer direct crypto trading to retail clients. Fidelity has done “four years of intense research and development,” Jessop said.

While Fidelity is focused now on institutional clients, he called this a “good first step” that could ostensibly lead to retail-focused products in the future.


“We’re seeing a lot of demand in the market even though the space is still evolving really quite rapidly,” he said.

Novogratz, sitting next to Jessop during the announcement, called it ”a big big deal” and pledged to be Fidelity’s first customer. Novogratz has said the crypto market, worth about $200 billion, is too small right now, and he thinks that Fidelity’s custody and trading services could help to change that.

Other crypto managers were also excited.

“For many institutional investors, a trusted custodian like Fidelity entering the space removes a huge obstacle to investing in cryptoassets,” said Hunter Horsley of Bitwise Asset Management, a crypto asset manager. “I think we’ll look back on 2018, and particularly this moment, as the time that crypto became cemented as a new asset class.”

And yet, for a supposedly world-changing moment, the market barely registered it. The price of bitcoin didn’t move at all on the news. It had jumped a few hours earlier in the morning, from just over $6,200 to nearly $7,000, before settling closer to $6,500. Jessop said no one knew in advance about the Fidelity announcement, and attributed the earlier volatility in the bitcoin price to news about Tether, a so-called “stablecoin” tied to the value of the dollar.

Fidelity’s announcement comes at a rough time for the cryptocurrency market, given that the price of bitcoin is down about 60% from its December peak. But Jessop said that the price wasn’t the determinant of Fidelity’s strategy.

“I think for some people price is a significant indicator of market health, but that’s not how we think about it,” he said in an interview with Barron’s. “We think about institutional demand irrespective of price. We think about the application of technology to new assets. I don’t think our success as a business is predicated upon bitcoin at a specific price. It isn’t.”

This “Bloodbath” May Be a Taste of What’s to Come

By Justin Spittler, editor, Casey Daily Dispatch


“It was a bloodbath.”

Michelle Krebs, an executive analyst for Autotrader, said this earlier this month. She was speaking about last month’s auto sales... And she wasn’t mincing words.

Auto sales fell off a cliff in September. Ford’s total sales dropped by 11%. Toyota reported a 10% decline in sales for the month, while Honda and Nissan reported declines of 7% and 12%, respectively.

These are huge declines… But there’s a reason that auto sales have hit the skids.

• Buying a car has become a lot more expensive…

This is because the cost of financing a new car is surging.

According to online auto resource company Edmunds, the average annual interest rate on a new vehicle reached 5.8% last month. That’s up from 4.8% in 2017. The number of buyers getting 0% interest rate loans has also fallen from 10.1% a year ago to 5.6% today.

Now, interest rates can rise for many reasons. But in this case, the Federal Reserve played a huge role.

Last month, the Fed lifted its key interest rate for the third time this year… and the sixth time since the start of 2017. This benchmark is now sitting at its highest level since August 2008.



That’s a problem.

The Fed’s key rate sets the tone for interest rates across the economy. So, the Fed effectively made it more expensive to finance a new car by raising rates.


• The Fed has also made it more expensive to buy a home…

Just look at the average rate on a 30-year fixed mortgage. It’s above 5%. That’s almost a full percentage point higher than a year ago.

That might not sound like much. But this move has a huge impact on home affordability.

Higher mortgage rates have increased monthly costs for homebuyers by 15%, according to real estate company Zillow. That equates to about $1,200 per year. Zillow also recently reported that rising rates have cost the typical homebuyer nearly $30,000 in purchasing power.

This is bad news for anyone in the market to buy a home. It’s also hurting the housing market at large.

• Sales of newly built homes plummeted in September…

Sales came in 5.5% lower than August, and 13.2% lower than a year ago.

New home sales are now sitting at the lowest level since December 2016. And that has taken a toll on housing stocks.




Just look at the chart above. It shows the performance of the SPDR S&P Homebuilders ETF (XHB) this year. This fund tracks the share performance of companies with exposure to homebuilding activity.

You can see that XHB is down 24% since the start of the year. The S&P 500, for comparison, is flat on the year after its recent pullback… But the broad market could be headed much lower from here.

I say this because auto and housing aren’t the only industries that depend on cheap credit.

• The entire U.S. economy is hooked on easy money…

Just look at corporate debt levels. They’ve exploded in recent years.

You can see that the amount of outstanding corporate debt, as a percentage of gross domestic product (GDP) – annual economic output – is at record highs.

This explosion in corporate debt occurred because the Fed made it incredibly cheap to borrow money.

• But the Fed isn’t holding rates near zero anymore…

It’s raising them.

That could make it very difficult for highly leveraged U.S. companies to pay off their debts. In other words, we could be on the verge of a huge spike in corporate defaults.

According to financial services company Standard & Poor’s, about $4.4 trillion of corporate debt is scheduled to mature through 2022. That includes about $1.3 trillion of junk bonds that have been issued to risky companies.

In short, the auto and housing industries were some of the first industries to feel the brunt of higher rates. But they likely won’t be the last.

Keep this in mind if you still own a lot of U.S. stocks.

• You may even want to use this as an opportunity to get defensive…

Here are a few ways you can do that…

If you have any money in the stock market right now, take a good look at your portfolio.

Avoid companies with a lot of debt. If the economy continues to weaken, heavily indebted companies will struggle to pay their lenders. You don’t want to own a company that falls behind on its loans.

We encourage you to hold more cash than usual. Setting aside cash will allow you to buy world-class businesses for cheap after the next big sell-off.

Finally, we recommend owning physical gold. As we often point out, gold is real money. It has preserved wealth for centuries because it’s a unique asset. It’s durable, easily divisible, and easy to transport.

It has also survived every major financial crisis in history. This makes it the ultimate safe-haven asset.

Why We’re Ungovernable, Part 15: After Germany’s Merkel Comes Chaos

After a long, initially-successful run promoting European integration and mass immigration, German Chancellor Angela Merkel saw the bottom fall out of her political fortunes this year.

This morning she stepped down as leader of the formerly-dominant Christian Democrat party and promised not run again when her term as Chancellor ends in 2021.

What happens next is almost certain to be chaotic, as the following chart (courtesy of this morning’s Wall Street Journal) makes clear:




Note that in August of 2017 the two least popular parties were the far right Alternative for Germany (blue line) and the far left Greens (green line). In the ensuing 14 or so months AfG’s support rose from single digits to around 17% while the Greens rocketed from the bottom of the pack to 20%.

If you didn’t know what these two parties stood for you might think, “Fine, they’re new and interesting, so let them form a coalition and govern for a while.”

Unfortunately they’re more likely to kill each other in street fights than work together, since the former want closed borders and free markets while the latter want increased regulation and unlimited immigration.

The alternative to an AfG/Green coalition then becomes some combination of the remaining, more centrist (by European standards at least) parties. But the biggest of those parties – Merkel’s Christian Democrats and their coalition partner Social Democrats – are in freefall, precisely because of what they’ve done while in power.

So there appears to be no way to put these puzzle pieces together to produce a stable government.

And – here’s where things get truly scary – a stable Germany under Merkel’s bland but firm hand has been the only thing holding the European Union and eurozone together. If Germany descends into internal turmoil without a coherent government to push the Italys and Hungarys around, European populists/nationalists will fill the resulting vacuum. Borders will be re-imposed within and without the EU, national government budgets – already above EU deficit limits in many cases – will explode.

Already-debilitating debts will keep rising, and the ECB will be forced to bail out Italy for sure and probably several other member states after that.

Since an ECB bailout of the Italian banking system means, in effect, moving Italy’s debt onto Germany’s balance sheet, the world’s one remaining rock-solid credit will join the ranks of politically unstable, increasingly indebted countries that may or may not be able to avoid financial collapse.

The end-game? A euro devaluation will be imposed by the global currency markets or announced preemptively on some future Sunday night by Merkel’s successor (assuming there is one).

The descent of the world’s second most important currency from reserve asset to modern day Italian lira will raise a lot of questions, including:

• Should we all buy the US dollar because it’s the only sound currency left?
• Should we dump dollars because the US is really not that different from Europe in terms of financial mismanagement and political incoherence?
• Should we dispense with the whole fiat currency thing and go back to sound money that requires politicians and central bankers to live within their means?
• Should we dispense with the whole “constitutional democracy” thing and hand over control to a leader who’s strong enough to put things right?

These four options seem about equally plausible at the moment. But the worlds they’ll create couldn’t be more different.

The Great Depression II

By Jeff Thomas




Whenever a movie has been a huge hit, the film industry tries to follow it up by doing a sequel.

The sequel is almost invariably far more costly, as there’s the anticipation by those who create it that it will be an even bigger blockbuster than the original.

The Great Depression of the 1930’s is seen by most people to be the be-all and end-all of economic catastrophes and there’s good reason for that. Although the economic cycle has always existed, the period leading up to October 1929 was unusual, as those in the financial sector had become unusually creative.

Brokers encouraged people to buy into the stock market as heavily as they could afford to.

When that business began to level off, they encouraged people to buy on margin. The idea was that the buyer would only put up a fraction of the money for the purchase and the broker would “guarantee” full payment to the seller. As a condition to the agreement, the buyer would have to relinquish to the broker the right to sell his stock at any point that he wished, should he feel the need to do so to get himself off the hook in the event of a significant economic change.

Both the buyer and the broker were buying stocks with money that neither one had. But the broker entered into the gamble so that he could charge commissions, which he would be paid immediately. The buyer entered into the gamble, as he had been promised by the broker that stocks were “going to the moon” and that he’d become rich.

Banks got into the game, as well. At one time, banks took money on deposit, then lent that money out at interest. They would always retain a percentage of the deposited money within the bank to assure that they could meet whatever the normal demand for withdrawals might be. But, eventually, bankers figured out that, if they were prepared to gamble, they could lend out far more money – many times the amount that they had received on deposit. As long as very few loans turned bad, they would eventually get the money back, with interest.

And so, in the 1920’s, they loaned money to people so that they could buy into the stock market more heavily. From that point forward, an investor who was tapped out and couldn’t afford to buy more stock, then bought on margin. When he was no longer able to even afford to buy on margin, he borrowed money from the bank to buy on margin.

That meant that only a tiny percentage of the “money” that passed hands actually existed. The great majority of investment funds only existed on paper. 
Of course, the very existence of this absurd anomaly depended upon a market that was thriving and moving steadily upward. If for any reason, there were a sudden loss of confidence in the banks, large numbers of depositors would demand to withdraw their deposits and there would be bank failures, as the banks had been playing with money that did not exist.


Likewise, if that loss of confidence were to take place with regard to the stock market, large numbers of stockholders would try to sell at the same time and the market would collapse, as the brokers had been playing with money that did not exist.


In the 1920’s, fortunes were being made by those who ran banks and brokerage houses – at a rate that greatly exceeded anything that had ever existed.

Unfortunately, they’d created the greatest financial bubble in history and, when it popped, as all bubbles do, it popped in a very big way.

Thousands of banks were wiped out. Thousands of brokerage houses were wiped out. And millions of investors were wiped out.

Not surprising that laws were then passed to assure that such a disaster could never occur again. Of particular importance was the Glass Steagall Act.

Then, in 1999, Glass Steagall was repealed. This was done under the advice of Fed chairman Alan Greenspan, and was accepted readily by then-president Bill Clinton, as he was assured that the repeal would mean a dramatic increase in investment, which would assure a shining legacy for him as he left office.

My own first reaction to the repeal was that, over the ensuing years, we’d see irrational investment in the real estate market, made possible through bank loans. This would lead to a crash in real estate, followed by a crash in the stock market. I believed that this debacle would be papered over by governments, eventually leading to a further crash, and that the latter crash would be of epic proportions.

But, why should this be? Why should the second crash be so much greater?

Well, the magnitude of a crash tends to be equal to the magnitude of the economic abnormality that preceded it. The crash of 1929 was greater than previous crashes, because bankers and brokers had found new ways to inflate the bubble beyond anything that had existed before.

Likewise, they’ve become even more creative this time around and have inflated the bubble far beyond what existed in 1929. The level of debt far exceeds anything the world has ever seen.

The 2008 crash was, in effect, a mini-crash. No correction ever took place. Instead, it was papered over by massive increased debt, assuring that, when the inevitable big crash did occur, the severity would be far beyond any other crash in history.








The sequel to the 1929 crash will be much like movie sequels. With movies, the producers invest more money into the sequel than they spent on the original movie, in the belief that, if they just throw enough money at it, it will somehow be better and make them even more money than the original.

Likewise in economic events, the assumption is that, if a great deal of money had been made in the buildup to the last major collapse, surely, by creating even more debt this time around, the profit to be made will be far greater than before.

And this has proven to be true. Financial institutions have entered into an era of profit that has historically been without equal. The original was a monster and the sequel will prove to be an even bigger monster.

Of course, there’s a difference between movies and economic events. With movies, the producers cash in when the moviegoers pay their admissions fee. With economic crises, the producers make their fortunes in the lead-up to the crash. The crash itself simply passes the bill for the disaster to the moviegoers.

The question that’s always asked prior to any crash is, “When will it happen?” Unfortunately, although crises can be analyzed and predicted beforehand, the date is more uncertain. The decisive factor is the loss of confidence by the general public. When they collectively get weak knees about the economic future – when they withdraw their deposits from banks and sell their shares in the market, the bubble will suddenly pop.

And so, the actual screening of this particular epic could be a year from now, or it could be next week. So, it might be premature to buy your box of popcorn now, but, when crashes come, they come suddenly and without warning.

Since it’s not possible to predict an exact date, those who don’t wish to be casualties of the collapse may wish to prepare for it – to get free of debt, to liquidate assets that will be devalued in a crisis, to turn the proceeds into real money (precious metals) and to relocate to a place that’s likely to be less impacted by the monetary and social crisis that will ensue.