The Global Impact of a Chinese Recession

Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.

Kenneth Rogoff  




CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.

Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest that an economic slowdown in China will hurt everyone. But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. Unfortunately, this might be wishful thinking.

First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.

Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.

I appreciate the usual Keynesian thinking that if any economy anywhere slows, this lowers world aggregate demand, and therefore puts downward pressure on global interest rates. But modern thinking is more nuanced. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.

Former US Federal Reserve chair Ben Bernanke famously characterized this much-studied phenomenon as a key component of the “global savings glut.” Thus, instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.

As bad as a slowdown in exports to China would be for many countries, a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates that have allowed politically paralyzed eurozone officials to skirt needed debt write-downs and restructurings in the periphery.

When the advanced countries had their financial crisis a decade ago, emerging markets recovered relatively quickly, thanks to low debt levels and strong commodity prices. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.

Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.

The good news is that trade negotiations often seem intractable until the eleventh hour. The US and China could reach an agreement before Trump’s punitive tariffs go into effect on January 1. Such an agreement, one hopes, would reflect a maturing of China’s attitude toward intellectual property rights – akin to what occurred in the US during the late nineteenth century. (In America’s high growth years, US entrepreneurs often thought little of pilfering patented inventions from the United Kingdom.)

A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.


The Desolate Wilderness

A chronicle of the Pilgrims’ arrival at Plymouth, as recorded by Nathaniel Morton.


Here beginneth the chronicle of those memorable circumstances of the year 1620, as recorded by Nathaniel Morton, keeper of the records of Plymouth Colony, based on the account of William Bradford, sometime governor thereof:

So they left that goodly and pleasant city of Leyden, which had been their resting-place for above eleven years, but they knew that they were pilgrims and strangers here below, and looked not much on these things, but lifted up their eyes to Heaven, their dearest country, where God hath prepared for them a city (Heb. XI, 16), and therein quieted their spirits.

When they came to Delfs-Haven they found the ship and all things ready, and such of their friends as could not come with them followed after them, and sundry came from Amsterdam to see them shipt, and to take their leaves of them. One night was spent with little sleep with the most, but with friendly entertainment and Christian discourse, and other real expressions of true Christian love.

The Desolate Wilderness

The next day they went on board, and their friends with them, where truly doleful was the sight of that sad and mournful parting, to hear what sighs and sobs and prayers did sound amongst them; what tears did gush from every eye, and pithy speeches pierced each other’s heart, that sundry of the Dutch strangers that stood on the Key as spectators could not refrain from tears. But the tide (which stays for no man) calling them away, that were thus loath to depart, their Reverend Pastor, falling down on his knees, and they all with him, with watery cheeks commended them with the most fervent prayers unto the Lord and His blessing; and then with mutual embraces and many tears they took their leaves one of another, which proved to be the last leave to many of them.


Being now passed the vast ocean, and a sea of troubles before them in expectations, they had now no friends to welcome them, no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour; and for the season it was winter, and they that know the winters of the country know them to be sharp and violent, subject to cruel and fierce storms, dangerous to travel to known places, much more to search unknown coasts.

Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew.

If they looked behind them, there was a mighty ocean which they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.


This editorial has appeared annually since 1961.


Inside John Malone’s World

By Andrew Bary 

      John Malone and Greg Maffei / Illustration by Michael Hoeweler



John Malone has long been a different kind of mogul.

He hasn’t been interested in creating a single conglomerate of enormous scale, or building a powerful media dynasty. Often, the billionaire deal maker is just as keen to sell as he is to buy. As a pioneer of cable television, he has helped shape the media landscape and yet lately has had little use for traditional media content.

Now 77, Malone remains the instrumental force behind 10 companies under the Liberty umbrella that have a combined market value of $80 billion. In interviews, Malone and his longtime chief lieutenant, Greg Maffei, 58, told Barron’s how they see the world of media and telecommunications and how they value businesses.

“As I get older, I’ve gotten more diversified personally,” Malone says. “It’s good to be diversified, given the technological changes that are driving changes in consumer behavior.”

The sheer number of Liberty entities—combined with often complex structures—can be daunting to investors. Those who have taken the time to understand them have been rewarded, however. Liberty Media, Malone’s main investment vehicle, took shape in 2006 and is up about tenfold since then, adjusting for a dizzying series of transactions, including the well-timed sale of DirecTV to AT&T in 2015.

This is an opportune moment to assess the Liberty empire, because many of the stocks have lagged behind the market in the past year and look appealing. And to see the world as Liberty does is to gain a valuable perspective on how media and telecommunications businesses are being transformed by fast-moving changes in technology and markets.

Investors stand to benefit from such a view. The Liberty stocks offer plays on a range of businesses like the Atlanta Braves baseball team, Formula 1 car racing, and home-shopping leader QVC, and on stocks like Charter Communications(ticker: CHTR), Expedia Group(EXPE), TripAdvisor(TRIP), and Sirius XM Holdings(SIRI).

Liberty Media itself is organized as three tracking stocks: Liberty Braves (BATRK), Liberty Formula One (FWONK), and Liberty SiriusXM(LSXMK). Malone is also chairman of Liberty Global(LBTYA), the biggest international cable company.

There are a group of Liberty entities that track other stocks: Liberty SiriusXM, Liberty Broadband(LBRDK), GCI Liberty(GLIBA), Liberty Expedia Holdings(LEXEA), and Liberty TripAdvisor Holdings(LTRPA). These all trade at discounts to the value of their stakes, making them cheap alternatives. Liberty SiriusXM, for instance, languishes at a 29% discount to its asset value, which is dominated by a 71% interest in Sirius. The widening discount on these Liberty stocks this year provides an opportunity for investors.  





“Malone has long been focused on economic return,” says Vijay Jayant, an analyst with Evercore ISI. “He’s not an empire builder for the sake of owning assets. His strategy has worked out well for the people sitting on the same side of the table as him—the shareholders in his companies.”

Warren Buffett is often a point of comparison. Among the major differences is that Malone favors creating pure-play companies, while Buffett keeps everything under one roof at Berkshire Hathaway. Malone is comfortable with financial leverage, while Buffett shuns it. “Our businesses are rationally levered with cheap money,” Malone says. “It creates a higher return on equity for our investors. There’s no reason to think the leopard will change its spots.”

Berkshire is a believer in Malone, holding about $2 billion of Liberty SiriusXM and $700 million of Liberty Global.

Liberty’s investments are concentrated in industries that appeal to Malone and Maffei, the CEO of Liberty Media: live entertainment, cable TV, and travel. Liberty will showcase them in its annual investor day on Wednesday, when Malone will make a rare public appearance. Maffei will also speak.

Malone loves cable TV. He was one of the original cable entrepreneurs in the 1970s as he built Tele-Communications Inc. into a giant, then sold it to AT&T in 1999 for $31.8 billion. He got back into cable when one of the Liberty companies bought a stake in Charter Communications in 2013.

Since then, Charter has bought Time Warner Cable and become the No. 2 cable company in the country behind Comcast(CMCSA). And Charter’s stock has tripled since Malone got involved, easily topping Comcast’s gain.

Charter trades at a higher valuation than Comcast in part because of Malone. Investors like Malone, viewing him as buyback friendly and willing to sell Charter to Verizon Communications or another buyer for the right price. Comcast CEO Brian Roberts, in contrast, is viewed as more of an empire builder who wants to keep the company in his family’s control. Many on Wall Street weren’t pleased with Roberts’ latest big deal, the $40 billion purchase of Sky, the British satellite TV company.

When it comes to content, Malone likes sports programming because of its consistent appeal to viewers in a fragmented media world, and he is particularly happy with the outlook for Formula 1, a premier auto racing business.




“Seldom have I seen an opportunity to control a global sport,” he says. Formula 1, which is popular in Europe and Latin America, wants to build a U.S. fan base. Liberty recruited as CEO the well-regarded Chase Carey, the former president of 21st Century Fox. (Fox is a sister company of Barron’s parent.) Profits are rising under Carey as Formula 1 boosts the number of sponsors.

Traditional media content like TV shows and movies “competes with everything that has ever been created, while live sports only competes against itself,” Malone says. Formula 1 controls its TV rights, as does the National Football League.

Maffei says, “I think traditional content companies, like cable networks, will be challenged by declining subscriber fees due to cord shaving, and reduced audiences, which will impact ad revenue and massively increase investment by newer entrants with better business models like Netflix(NFLX) or different business models like Amazon.com(AMZN), which will raise costs of making content, threatening pricing, and further fragment their audience.”

Cable TV providers like Charter face challenges stemming from cord-cutting and shaving (or skinnier programming bundles), but remain dominant in their best business, broadband—high-speed internet access—and retain pricing power.

Compared with media and technology giants like Amazon, Alphabet (GOOGL), Apple (AAPL), and Walt Disney(DIS), Liberty has limited cash and financial firepower for acquisitions, but Malone and Maffei have still been able to act. Liberty Media engineered a complex $8 billion deal to buy Formula 1 in early 2017, its largest transaction in recent years. Also, Sirius XM Holdings, which is controlled by Liberty Media, agreed in September to buy Pandora Media(P) the music-streaming company, for $3.5 billion in stock.

“In the past, Liberty has had more excess liquidity to do deals,” says Chris Marangi, co-chief investment officer at Mario Gabelli’s Gamco Investors, which owns $850 million of Liberty and related companies. “It has to be more creative in financing transactions. I’d love Liberty to do more transactions like Formula 1. The question is, where do they get the money to do it?”


Inside John Malone’s World
Inside John Malone’s World
Illustration by Michael Hoeweler


Here’s Malone’s take: “We’re not out there competing to buy Red Hat for $35 billion, but we have always been an opportunistic company. We try to position ourselves so that we can take advantage of opportunities through timely investments, good management, and synergies with our existing businesses.”

Malone is known for complex financial engineering and a passionate dislike of taxes, but he has a Buffett-like talent for identifying good managers and for patience.

“My No. 1 role is making sure that we have great management—aggressive CEOs who think about long-term wealth creation for our shareholders and themselves,” he says. “I can’t micromanage them. They wouldn’t take the job if I did, and I don’t have the knowledge or skills to micromanage them.”

Still, Malone and Maffei may be more engaged than they let on, says John Tinker, an analyst with Gabelli & Co. “They don’t micromanage, but they want to know the growth story and how it’s going to be achieved,” Tinker says. “They will hold management’s feet to the fire if necessary.”

Malone’s effective control of the Liberty companies allows him to take a longer-term view and insulates the businesses and their managers from outside pressures, including activists. (In a separate role, Malone is also an influential holder of Discovery(DISCA), the cable programming company, through supervoting stock.)

His method of control through supervoting stock is ingenious. He leverages relatively small economic stakes in Liberty companies—all fall below 10%—with a total value of about $5 billion into an influential voice or effective control of virtually all of them through ownership of supervoting stock.

The beauty of Malone’s approach is illustrated by Liberty Broadband, which holds a 20.6% stake in Charter. Malone’s stake in Liberty Broadband of less than 4%, worth about $500 million, gives him a strong voice at Charter—a company with a market value of $75 billion—and effective veto power over important strategic decisions. 


‘ Our businesses are rationally levered with cheap money ’


—John Malone

The Liberty companies generally have two or three sets of shares outstanding. There are one-vote shares (Class A); nonvoting shares (Class C), which trade with a K at the end of their ticker symbols; and illiquid or nontraded supervoting stock with 10 votes each (Class B), which are largely owned by Malone. Here’s a look at the 10 Liberty companies:

Liberty SiriusXM

At about $41, the shares trade at a big 29% discount to their asset value, which consists almost entirely of Sirius stock, now at $6.25 a share. The discount has widened from a range of 15% to 20% in 2017, reflecting selling by arbitrageurs and among some hedge funds after a rocky performance this year. “The discount is nutty,” Maffei says. “One way or another, the discount will go away.” That could happen from a merger of Liberty SiriusXM and Sirius, but a combination could be years away because of tax issues.

Sirius is down over 10% since its deal to buy Pandora, which has dragged down Liberty SiriusXM. The deal muddies what had been a simple Sirius story involving strong cash flow and heavy stock buybacks. The Pandora deal will probably delay any combination of Liberty SiriusXM and Sirius.

Liberty Formula One

It reflects Liberty’s ownership of Formula 1 and a 34% stake $3.9 billion in Live Nation Entertainment(LYV), the concert promoter and owner of Ticketmaster. Formula 1 is building a direct-to-consumer broadcast streaming business, and sponsorship revenue is growing. The 21 races annually feature 10 teams with two drivers each. Evercore’s Jayant says results are likely to show improvement in revenues and earnings in 2019 after ample investment spending since Liberty took control in January 2017. He carries a Buy rating and a price target of $43.

Liberty Braves

It holds the Atlanta Braves baseball team and a real estate development project called Battery Atlanta around the team’s new stadium, SunTrust Park. The shares, at about $26, are up from $15 when the tracker was created in 2016. “The Braves are one of the few public plays on sports teams,” Gabelli analyst Tinker notes, citing English soccer club Manchester United(MANU) and Madison Square Garden(MSG), owner of the New York Knicks and Rangers. That creates scarcity value. The Braves have been doing well on the field—winning the National League East this season—and financial results have improved since the new park opened last year.

Tinker thinks the Braves will be spun out of Liberty and ultimately sold at a premium to a billionaire. A spinoff could be years away because of tax issues. The shares aren’t cheap, trading for more than 30 times projected 2019 earnings before interest, taxes, depreciation, and amortization, or Ebitda, but teams trade on trophy value. The Braves are now valued at less than $1.5 billion inside the tracker. Tinker thinks the team is worth over $2 billion. He has a private-market value of $42 a share. “There’s no rush to do a spinoff of the Braves. I can’t say it won’t happen at some point,” Maffei says. “There has been a lot of valuation creation there and more to be done.”

Liberty Broadband and GCI Liberty

The two companies offer plays on Charter. Liberty Broadband is the purer of the two with a stake of 54 million shares in Charter. GCI Liberty, formed earlier this year, is more complex. It owns 24% of Liberty Broadband; 27% in LendingTree(TREE), a mortgage provider; and an Alaskan cable TV business worth about $2 billion.

Jayant is bullish on both, arguing that Charter’s profits should improve in 2019 after getting past integration issues with Time Warner Cable. Liberty Broadband, at $83, is valued at a 10% discount to the value of its Charter stake, and GCI Liberty, at $49, is effectively valued at a 19% discount to Charter. “Each step allows the purchase of Charter at a progressively larger discount, but at the cost of greater complexity and lower liquidity,” Jayant wrote earlier this year of the two companies.

Jayant sees a potential combination of Liberty Broadband and GCI Liberty as early as 2019 in which Liberty Broadband would pay a premium over GCI Liberty’s stock price but below its net asset value. A merger of Liberty Broadband and Charter that would collapse the current 10% discount could take longer, he says.

“Charter is doing great,” Malone says. “It’s still a growth vehicle.” He notes that Liberty Broadband has some debt—about $500 million—which makes it a slightly leveraged play on a leveraged Charter. “If you like Charter, you should like Liberty Broadband even more,” he says.

Qurate Retail.

Qurate(QRTEA) owns QVC, the leading home-shopping channel, and No. 2 HSN, as well as online retailer zulily. The shares, around $24, have moved little in recent years as investors have reacted to lackluster revenue growth, disappointing results from HSN, and the possibility of greater involvement by Amazon in home shopping.

“The last two years have been challenging,” says UBS analyst Eric Sheridan. “But there has been stability at core QVC, and Liberty is a supportive owner that is returning cash to shareholders through buybacks with most of its free cash flow.” The buyback “yield,” or annualized repurchases divided by market value, is running at a 7% rate. The stock is valued at about 12 times estimated 2019 free cash flow. Sheridan says its core female customers are younger at 35 to 50 years old and more affluent than is commonly perceived. Amazon is a threat, but it began a live shopping show in 2016 and ended it a year later. He has a Buy rating and $31 price target.

Liberty TripAdvisor and Liberty Expedia

The pair offers plays on TripAdvisor and Expedia, trading recently at 6% and 9% discounts to the underlying shares, respectively. Liberty TripAdvisor holds a 23% stake in TripAdvisor and a controlling 58% voting interest in the travel-review site.

TripAdvisor has gained 110% this year, making it one of the top stocks in the S&P 500. Its strategy of getting revenue from direct bookings of hotels and travel experiences like tours and museums is paying off.

Liberty TripAdvisor traded for as much as a 20% premium to TripAdvisor in 2017, reflecting the view that it would get a premium for its supervoting stock if TripAdvisor were sold to Booking.com or another buyer. A sale still could happen, but the premium has been washed out. The company is the only Liberty entity controlled by Maffei, who obtained the 2.8 million supervoting shares in a stock swap with Malone in 2014.

Liberty Expedia, at $43, is similar to Liberty TripAdvisor, holding a 16% stake and 53% voting interest in Expedia—again reflecting supervoting stock.

Liberty Global

Malone’s global cable ambitions have been thwarted in Europe, with its greater competition, tougher regulation, and lower pricing relative to the U.S. Liberty Global shares, at about $25, are little changed since 2012.

Liberty Global agreed earlier this year to sell its operations in Germany and neighboring countries to Vodafone. The sale will net the company about $12 billion in cash and leave it largely concentrated in Britain with its Virgin Media cable operations. The cash represents a good chunk of the company’s current $19 billion market value.

“The market is skeptical that the deal will close and cautious about what the company will do with the cash if it closes,” Malone says. “Would I buy the stock here? Probably not. If the deal closes, Liberty Global is very cheap. If not, it’s appropriately priced.” Malone thinks the market is too cautious on regulatory approval. He puts an 80% chance of approval.

Liberty Latin America

The company, spun off from Liberty Global in late 2017, offers a play on the Puerto Rican economic recovery and growth in telecom services throughout the Caribbean. The shares, at about $20, are little changed this year.

Liberty Latin America operates the largest cable system in Puerto Rico, which had enviable 50% cash-flow margins—against about 40% for major U.S. cable operators—before Hurricane Maria devastated the island in September 2017. Cable cash flow collapsed after the storm and is now 70% recovered to pre-hurricane levels.

James Ratcliffe of Evercore wrote last week after the company’s third-quarter earnings that “the business is gaining momentum with the Puerto Rico segment continuing its recovery.” He has an Outperform rating and a $25 price target.

How will Liberty fare in a post-Malone era? “My longtime CEOs” would have the “first right to acquire my control stock when I’m pushing up the posies,” he has said. That prospect sits well with investors, given the job done by Maffei, Discovery CEO David Zaslav, and Liberty Global CEO Mike Fries.

Malone divides his time between the Denver area, where Liberty is based; Florida, where he’s a resident; and Maine, where he owns some 7% of the state, mostly forest, making him one of the largest private landowners in the U.S. He also spends time in Ireland, where he owns a castle.

Does his Florida residency reflect the state’s lack of an income and inheritance tax? “You should see what I pay in property taxes,” Malone jokes.


The Courage and Folly of a War That Left Indelible Scars

During World War I, millions died, empires crumbled, nations were formed and maps were redrawn in ways that reverberate mightily a century later.

By Alan Cowell

An American gun crew during the Meuse-Argonne offensive in France in1918.CreditCreditUnited States Army Signal Corps



LONDON — Seconds before an armistice formally ended World War I on Nov. 11, 1918, Pvt. Henry Nicholas Gunther, an American soldier from Baltimore, mounted a final, one-man charge against a German machine-gun nest in northeastern France.

The German gunners, The Baltimore Sun reported many years later, had tried to wave him away, but he ran on, only to perish in a burst of heavy automatic fire — the last soldier of any nationality to die in the conflict — at 10.59 a.m. local time. One minute later, under the terms of an armistice signed about six hours earlier, the so-called Great War, the “war to end all wars,” was over, and the world was an altered place.

The casualties since the conflict’s first engagements in 1914 ran into many millions, both military and civilian. The very nature of warfare had changed irrevocably. Empires crumbled, new nations arose and the world’s maps were redrawn in ways that reverberate mightily a century later. With men away at the front lines, women assumed roles in the work force back home that hastened their emancipation and changed social ways forever.
German infantry troops during World War I.CreditBettman, via Getty Images

British soldiers struggled through mud with a wounded comrade during the Battle of Passchendaele in Belgium in 1917.CreditLt. John Warwick Brooke, British Army photographer, via Imperial War Museums and Getty Images  


Shelters in British trenches during the Battle of the Somme in France in 1916.Creditvia Imperial War Museums


The war’s unfolding had been punctuated by related events that would become markers in history: the Easter Rising in Ireland in 1916; the Russian Revolution a year later; the Sykes-Picot Agreement of 1916 and the Balfour Declaration of 1917, which together drew the parameters of the modern Middle East and foreshadowed the creation of Israel. In 1917, the United States entered the war with a decisive deployment of soldiers that was a first step toward taking on the status of a superpower.

Against those overarching events, Private Gunther’s charge might seem no more than a postscript. Yet his “sad, senseless end,” as The Baltimore Sun put it, endures as an emblem of the courage and folly of a war that formally ended on the 11th hour of the 11th day of the 11th month in 1918. It is a reminder, too, of a different age of gallantry and pain, before human experience was compressed into a pixelated fragment, a fleeting distillate transacted on social media.


A woman in Berlin gave flowers to a Prussian soldier leaving for the front during World War I.CreditAssociated Press


American soldiers in New York after the United States declared war in 1917.CreditUniversal History Archive/UIG, via Getty Images 

Algerian soldiers in Europe.CreditPhoto12/UIG, via Getty Images


A century on, a question remains: Will, or should, this commemoration of Veterans Day — or Armistice Day, or Remembrance Day, as the date is also known — be the last on this scale? Should the world continue to pause in silence to honor the sacrifice and bravery of those who fought it on the ground — “lions led by donkeys,” according to a phrase used to scorn the bumbling British officer class drawn from the upper crust?

Some argue that commemorations have become no more than lip service. But the warnings against collective amnesia go back a long way. Even in 1915, long before the armistice, one of the most quoted poems of the war, by the Canadian military doctor Lt. Col. John McCrae, imagined fallen soldiers warning the survivors: “If ye break faith with us who die / We shall not sleep, though poppies grow / In Flanders fields.”



A munitions warehouse in Chilwell, England, in July 1917.CreditHorace Nicholls, via Imperial War Museums and Getty Images


In today’s world of shifting international alignments, uneasy alliances and growing nationalism, World War I offers a reminder of how easily and unexpectedly an obscure spark can ignite a conflagration. In 2011, for instance, when the self-immolation of a fruit vendor in Tunisia helped start the Arab Spring, who would have imagined that, seven years later, his action could have built into crises that have spread across the region and rekindled rivalries reminiscent of the Cold War?

The 1914-18 war has found other curious, possibly inadvertent, echoes. At a campaign rally in Montana on Nov. 3, President Trump spoke about his efforts to prevent Central Americans from crossing the border into the United States, lauding what he called “all that beautiful barbed wire going up today.”

“Barbed wire, used properly, can be a beautiful sight,” he mused. 


British soldiers in their trench in about 1916.CreditHulton Archive/Getty Images

Soldiers of the 10th (Irish) Division wearing gas masks in the trenches near the Struma River, Greece, in August 1916.CreditDaily Mirror/Mirrorpix, via Getty Images 

A wounded German soldier lighting a cigarette for a wounded British soldier at a British field hospital in northern France in 1918.Credit2nd Lt. Thomas K. Aitken, British Army photographer, via Imperial War Museums


Barbed wire, which was invented in the 19th century, was long used to fence off cattle ranges in the American West. It figured, too, in the architecture of human incarceration. But in World War I, mile upon mile of coiled barbed wire wove through the blasted terrain of trench warfare to create entanglements that impeded foot soldiers and exposed them to withering fire and bombardment.

In 1918, in a poem titled “Exposure,” Wilfred Owen evoked the delusional nightmares of soldiers crouched in trenches, awaiting combat as a wintry wind howled over the battlefield. He, too, spoke of barbed wire, though not in terms of beauty. “Watching, we hear the mad gusts tugging on the wire, / Like twitching agonies of men among its brambles.” Owen died seven days before the Nov. 11 armistice stilled the guns. 

The start of World War I is generally traced to events in Sarajevo, then a part of Austria-Hungary, on June 28, 1914, when Gavrilo Princip, a young Serbian nationalist, fired a handgun and assassinated Archduke Franz Ferdinand, the heir to the Hapsburg throne, and his wife, Sophie. The event caused a chain reaction that propelled alliances, ambitions and insecurities into a global conflict driven by technological advance — poison gas and battle tanks on land, combat planes in the skies, warships above the waves, and submarines below them.



A field hospital in a church in Neuvilly-en-Argonne, France, in September 1918.CreditNational World War I Museum and, via Associated Press.

Treating the wounded at the Gare du Nord, a train station in Paris, in 1914.CreditMaurice-Louis Branger/Roger-Viollet, via Agence France-Presse

Soldiers wounded in World War I learning to walk again at a hospital in Budapest.CreditStefan Sauer/picture-alliance, via Associated Press


A flurry of declarations of war and secret pacts in August 1914 drew the broad battle lines between, on one side, Germany, Austria-Hungary, the Ottoman Empire and their allies; and, on the other, Britain, France, Japan, Russia and their supporters. Over time, the fighting spread to faraway imperial outposts, including China, the Middle East and Africa. Often, the focus was on the stalemated battles of attrition that produced horrific casualties in Europe. On the first day of the Battle of the Somme in northern France on July 1, 1916, for instance, around 20,000 British soldiers died and some 40,000 others were wounded — casualties that set a gruesome benchmark in the annals of slaughter.

Campaigns on other fronts yielded some of the most humiliating defeats in British military history, such as the campaign on the Gallipoli Peninsula, in what is Turkey today, that began in 1915; and a siege that started later that year in Kut, south of Baghdad, in what is now Iraq. 

The remains of a German soldier outside his dugout in Beaumont-Hamel, France, during the Battle of the Somme in November 1916.CreditLt. Ernest Brooks, British Army photographer, via Imperial War Museums


According to the British historian Hew Strachan, by 1916, the old Napoleonic notion of wars ending with a decisive battle had given way to campaigns that “ended with a whimper, not a bang” and “proved more indecisive than decisive.”

When the Russian Revolution ended Moscow’s appetite for the war, Germany sensed victory.

But then the United States entered the fray, with the first of its soldiers landing in France in June 1917. By 1918, big offensives on the Western Front had turned the tide. But not without punishing losses.

At the Meuse-Argonne American Cemetery in northeastern France, the largest American military graveyard in Europe, 14,246 white headstones mark the burial places of United States First Army soldiers who perished in the final, 47-day campaign that ended with the armistice.


German prisoners at the St.-Hilaire-au-Temple camp in France in April 1917.CreditHenri Roger/Roger-Viollet, via Getty Images 

Refugees in Le Mans, France.CreditEducation Images/UIG, via Getty Images


The burial of Maj. Edward Lewin Knight of the Canadian Machine Gun Corps, who was killed on Sept. 26, 1916.CreditLt. William Ivor Castle. Canadian Official photographer, via Imperial War Museums


It is worth noting that one of those headstones is that of Cpl. Freddie Stowers, the first black American to be awarded the Medal of Honor for his role in World War I as a member of a racially segregated unit. (It was awarded posthumously in 1991, more than 70 years after he was mortally wounded by machine-gun fire on Sept. 28, 1918.)

In light of America’s present-day passions over immigration, it is also worth observing that nearly a quarter of the draftees in 1918 were immigrants, the result of an influx that had transformed America’s demography into a “melting pot” of lineages — British, German, Hispanic, Italian, Slav — according to Geoffrey Wawro, a professor of history and director of the Military History Center at the University of North Texas.



Turkish soldiers took aim at Allied troops on the Gallipoli Peninsula in 1915.CreditAssociated Press


Russian soldiers surrendering after their defeat by German forces in the Second Battle of the Masurian Lakes on the Eastern Front in 1915.CreditHaeckel collection/Ullstein bild, via Getty Images



The ruins of a church and other buildings in Ypres, Belgium, in January 1915.CreditHulton Archive/Getty Images



Private Gunther was himself descended from German immigrants. His motives for his — literally — last-minute charge were unclear. According to some accounts, he had brooded over a demotion from sergeant after military censors intercepted a letter deemed to be critical of the conduct of the war. He “became obsessed with a determination to make good before his officers and fellow soldiers,” The Baltimore Sun reported. In one way, he may have succeeded: posthumously, his sergeant’s rank was restored, and he was awarded the Distinguished Service Cross.

The armistice was signed in a railroad car in the Compiègne Forest, north of Paris. It paved the way for the Treaty of Versailles in 1919, which imposed such onerous terms on the defeated Germany that it is often cited as a reason for Hitler’s Nazi ideology finding so much resonance. It was no coincidence that, when France fell to a vengeful Germany in 1940, Hitler chose the same railroad car, in the same location, for his French adversaries to accept their capitulation — as German commanders had done in 1918.


Soldiers on the Western Front celebrating the announcement of the armistice in 1918.CreditArchive Photos/Getty Images


Produced by Mona Boshnaq.


Is The Fed Losing The Thread? What May Lie Ahead

by: DoctoRx

- The Fed stood pat Thursday, but equity markets sold off.

- Official commentary from the Street could not explain the (mild) sell-off.

- I present a possible rationale: perhaps the Fed is already too tight and should, therefore, sit tight.


It's raining on one side of the street, but the Fed only sees the sunny side
 
Stock markets reacted badly Thursday to the Federal Open Market Committee's statement, even though Zero Hedge - a haven for short-sellers, gold bugs, and gloom-and-doom purveyors - reported as follows:
While there were virtually no surprises in today's FOMC statement - at least relative to expectations, with Goldman's redline statement laid out earlier a carbon copy of what the Fed eventually published - the oddly hawkish market reaction suggests that the Fed did in fact say something that was unexpected…
 
We'll see what the many Fed "whisperers" and independent analysts come up with, but here's what bothered me, in real time, about the FOMC's point of view. From the part of the statement describing the economy, the Fed sees:
...the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.
 
The Fed, or FOMC, is seeing a Goldilocks scenario. Even the one parameter it mentioned as weakening, business fixed investment, did so from a previously "rapid" pace. So that's fine with the Fed.
 
I see something different. Yes, there's that sunny side of the street the Fed describes, much of which - employment and inflation, discussed later in the statement, are backward-looking indicators. Consumer spending is more of a coincident indicator and therefore, not very helpful in guiding policies that work with, say, a 6- to 12-month lag. Business investment, however, is more of a forward-looking indicator.

What else is a good forward-looking metric related to the Fed's long march to increase interest rates, which began in December 2015 and has thus lasted longer than any rate hike period in decades?
Here's one: the housing market. Housing stocks (ITB) have taken one look at the Fed's policies and the results on the ground, and given this pattern:
Chart  ITB data by YCharts

 
That's about a one-third haircut in only about 10 months.
 
A further problem is, while ITB is weighted toward the homebuilder stocks, in aggregate, a notable part of the ETF's holdings includes more stable consumer discretionary stocks like Home Depot (HD), Lowe's (LOW), and Sherwin-Williams (SHW). ITB's largest holding is Lennar (LEN), which is down from a January high of $72.17 to close Thursday at $41.90. The second-largest holding, D.R. Horton (DHI), is down from $53 to $34.
 
ITB had not been formed yet when housing stocks peaked before the Great Recession. But a look back at LEN shows a typical homebuilder peak in and around mid-2005:
Chart  LEN data by YCharts

 
When the builders peaked around July 2005, the Fed had raised rates 9 times for a total of 225 basis points, or 2.25% percentage points. Unbeknownst to anyone, that was already enough - or too much.
 
Moving to today, perhaps the Fed's 8 rate hikes, totaling 200 basis points, plus reversal of QE, have already been enough - or too much?
 
And what held true in 2005 for housing also held true for automakers. This pattern is also seen again now.

Moving on to larger stocks, the pattern that began occurring in 2006 is occurring now. That is, the banking stocks most closely dependent on local credit conditions - the regional banks - are performing badly. Here's a chart of a large regional bank ETF (KRE) versus the S&P 500 (SPY):
Chart  KRE data by YCharts

 
Larger banks and asset managers also have been performing in weak fashion.
 
Something similar was seen during the Fed's last two tightening periods, mid-1999-2000 and 2004-2007.
 
All the above are the "rainy side of the street" that the Fed is either not seeing or, as in 2006-2007, not caring about. In that period, it was "too late." But in 2000, it was accepted, and the credit-sensitive housing sector became a source of strength during the dot-com recession of 2001.
 
I'm not predicting a recession.
 
What I'm saying is that there are major parts of the economy where the macro data has weakened and may have turned down, and where the judgment of the marketplace - which is a better-than-average indicator - says the Fed is making a mistake.
 
Strong dollars matter
 
Whether by the trade-weighted US dollar index (TWEXB - not a trading symbol, though) or the trading vehicle known as USDX (or DX) or other measures, the US dollar has neared or reached levels also reached as the boom of the '90s was peaking. A rise in the trading value of the US currency weakens exports and encourages imports, thus hurting US business. It also restrains inflation; and/or reflects waning US inflation pressures. (Note: You can track the daily value of TWEXB at a Fed webpage.)
 
A persistently rising, strong dollar has correlated with bearish-to-bullish reversals in the bond market and bullish-to-bearish reversals in the SPY. It also has correlated with weakness in commodity prices, notably gold (GLD) and crude oil. I've been publicly bearish on gold since August 2016 and on crude oil since earlier this year.
 
 
Some thoughts on cash and conflicting possibilities for stocks and bonds
 
This brief contribution is being written a little after 8 AM on Friday. The S&P 500 futures are at 2795, and bonds are down a couple of ticks in yield with the 10-year Treasury at 3.21%. The only wealthier, large country with a higher 10-year govie yield is Italy at 3.44%. France is at 0.80% and the UK is at 1.53%. Australia, typically a high-interest-rate country, is at 2.76%.
 
I have no particular bearish thoughts on the SPY for now. The November-January period is the strongest 3-month period of the year, and I saw a stat that midterm periods are typically much stronger than average for that period. So seasonality argues against the bears. The "tape" is, however, at best iffy for the bulls, so the dictum of not fighting either the Fed or the tape does not comport with a bullish posture.
 
Seasonally, interest rates should have declined the past 7-8 months, so they have acted badly, and they are soon entering their weakest multi-month period. So seasonality favors stocks and not bonds.
 
However, when the Fed gets "too" tight, at some point, interest rates drop.
 
Thus there are cross-currents for traders.
 
Some thoughts on getting to a personal investment plan follow to end this article.
 
As I've been saying since late January, for me the elephant in the room for the markets is not interest rate policy; it is the Fed's ongoing and now massive reversal of QE. The Fed is doing something unprecedented, and few are talking about it. It is shrinking the basic money supply, otherwise called its balance sheet, by $50 billion every month. It plans to do this probably into 2020 and possibly even 2021. Because the debt that matures is being replaced by new debt offerings from the Federal government and GSEs, effectively the Fed is withdrawing money from the banking system at a $600 billion annual rate. That's a lot of moolah. Bank loans and leases are $9.46 trillion. Thus, this metric may be diminishing by 6.3% ($0.6/9.46). This rate exceeds the current growth rate of loans and leases, which the linked FRED site shows as 4.4%.

Note, I'm not an economist or any sort of expert on these metrics, so I'm not saying these are the only ways to look at the system. But directionally, I'm comfortable presenting the above concepts and numbers for your consideration. Also important to note is that, of course, Fed policy is not everything in market action. It's a big world out there! So I look at this as one piece of the puzzle - but a major one that can be analyzed.
 
Given all the cross-currents and given that the Fed is shrinking the supply of cash, I look at cash as a once-hated asset that is returning toward acceptance as an asset that for now gives a positive yield - roughly zero after inflation - but that allows both traders and long-term investors to keep dry powder.
 
At some point, perhaps there will be clear trading opportunities or better bargains in some asset class.
 
Not long ago, Yogi Berra might have said that cash was the place no one wanted to go because the Fed had made it too crowded. That's changing with reverse QE.
 
All in all, and noting the contention in the body politic, my humble opinion is that these are not easy times to suss out what's really going on and what is coming around the corner. Serious Fed mistake or Fed policy reversal leading to markets soaring? Trade war worsening or remitting?
 
Risk on or risk off?
 
Summary
 
Traders may well be wondering if the Fed is too hawkish and is deciding on policy by looking too much at coincidental or backward-looking indicators, ignoring the worsening fundamentals and price action of credit-sensitive sectors of the economy and the markets. That's one risk to investors in equities. A related risk is that this sort of weakness spreads further through the economy.
 
A possibly bigger risk to asset values is the reversal of QE. Because the Fed did QE to help the economy via a wealth effect, isn't reversing it bearish for the real economy? And since the wealth effect involved driving up equity prices, isn't the major goal of reverse QE to drive P/Es down? If so, why is this not being discussed non-stop in the financial media?

I, therefore, see this as a challenging period in the markets and possibly in the US economy.