Japanified World Ahead

By John Mauldin


Regular readers may have noticed me slowly losing confidence in the economy. Your impression is correct and there’s a good reason for it, as I will explain today. The facts have changed so my conclusions are changing, too.

I still think the economy is okay for now. I still see recession odds rising considerably in 2020. Maybe it will get pushed back another year or two, but at some point this growth phase will end, either in recession or an extended flat period (even flatter than the last decade, which says a lot). And I still think we are headed toward a global credit crisis I’ve dubbed The Great Reset.

What’s evolved is my judgment on the coming slowdown’s severity and duration. I think the rest of the world will enter a period something like Japan endured following 1990, and is still grappling with today. It won’t be the end of the world; Japan is still there, but the little growth it’s had was due mainly to exports. That won’t work when every major economy is in the same position.

Describing this decline as “Japanification” may be unfair to Japan but it’s the best paradigm we have. The good news is it will spread slowly. The bad news is it will end slowly, too.

I believe we will avoid literal blood in the streets but it will be a challenging time. We’ll be discussing how to get through it more specifically at the Strategic Investment Conference next month. It is now sold out but you can still buy a Virtual Pass that includes audio and video of almost the whole event. Click here for information.

Losing Decades

Before I explain why we will follow Japan, I want to briefly explain how Japan got to where it is. It was a long, slow process that, like the proverbial frog in boiling water, wasn’t fully obvious in real time.

Japan experienced rapid growth following World War II as the US and others helped rebuild its economy. That wasn’t all out of generosity; the country was geopolitically important as a Western bulwark against Russia and China. We didn’t want it to fall under the other side’s influence.

This eventually led to a roaring expansion that culminated in the 1980s Japanese asset bubble, which popped in the early 1990s. There followed what came to be called the “Lost Decade.” It was really more than a decade, as the early 2000s brought only mild recovery. GDP shrank, wages fell, and asset prices dropped or went sideways at best.

The Lost Decade had monetary roots, namely the 1985 Plaza Accord that drove the yen higher and inflated the asset bubble. The Bank of Japan tried to pop the bubble with a series of rate hikes beginning in 1989. This chart shows the BOJ’s benchmark rate.


 
Upon reaching 6% in 1992, the BOJ began cutting rates and eventually reached zero a few years later. Since then it has made two short-lived tightening attempts, shown in the red circles. Neither worked and that was it; no more rate hikes, period.

The BOJ has now kept its policy rate at or near zero for 20 years, making conventional monetary policy essentially irrelevant. The BOJ resorted to increasingly large QE-like programs that also had little effect.

Meanwhile, the government tried assorted fiscal policies: infrastructure projects, deregulation, tax cuts, etc. They had little effect, too. GDP growth has been stuck near zero, plus or minus a couple of points. So has inflation.

The only thing that really helped was driving down the yen’s exchange rate, which successive governments and central bank governors have done enthusiastically. Which I kind of understand… when your only tool is a hammer, you treat everything as a nail.

That said, the BOJ’s asset purchases certainly had an effect. They more or less bought everything that isn’t nailed down, including stock ETFs and other private assets. Japan is a prime example of the faux capitalism I described last week. All this capital is going into businesses not because they have innovative, profit-generating ideas but simply because they exist. That’s how you get zombie companies.

The result, at least so far, has been neither boom nor depression. Japan has its problems but people aren’t standing in soup lines. The bigger issue is that the population is aging rapidly. Many say the present situation can’t go on indefinitely but there’s no exit in sight. The Bank of Japan has bought every bond it can except those the government will create to fund future deficits, which is why they are buying stocks not just in Japan but in the US as well. They are trying to put yen into the system in an effort to generate inflation. It simply hasn’t worked.

When you don’t have a better answer, the default is to do more of the same. That’s the case in Japan, Europe, and soon the US. Charles Hugh Smith described it pretty well recently.
 

The other dynamic of zombification/Japanification is: past success shackles the power elites to a failed model. The greater the past glory, the stronger its hold on the national identity and the power elites.

And so the power elites do more of what's failed in increasingly extreme doses. If lowering interest rates sparked secular growth, then the power elites will lower interest rates to zero. When that fails to move the needle, they lower rates below zero, i.e. negative interest rates.

When this too fails to move the needle, they rig statistics to make it appear that all is well. In the immortal words of Mr. Junker, when it becomes serious you have to lie, and it's now serious all the time.

 
“Do more of what’s failed in increasingly extreme doses” is also a good description of Federal Reserve policy from 2008 through 2016. Zero rates having had little effect, the Fed launched QE and continued it despite the limited success and harmful side effects. The European Central Bank did the same, in even larger amounts than the Federal Reserve also with little effect.

Which brings us to the next point: why Europe and the US will follow Japan.


Too Much, Too Fast

As noted in the introduction, I change when the facts change, and in the last few months they did.

The Federal Reserve spent 2017 and 2018 trying to exit from its various extraordinary stimulus policies. It began raising short-term interest rates and reversing the QE program. I think it should have done both sooner, and not at the same time, but both needed to happen.

In hindsight, it now appears the Fed tried to do too much, too fast. Which was my point when they started the process. Either raise rates slowly or reduce the balance sheet, but not both at the same time. Reducing the balance sheet has an effect on effective rates just as actually raising rates does, but not as obvious. My friend Samuel Rines calculated that when you include the QE tapering, this Fed tightening cycle was the most aggressive since Paul Volcker’s draconian rate hikes in the early 1980s. They should have started sooner and tightened more gradually. For whatever reason, they didn’t.

And so the complaints began. Wall Street wasn’t happy but, more important, President Trump wasn’t pleased with the rate hikes. Why it surprised him, I don’t know. Jerome Powell’s hawkish bent was no secret when Trump made him Fed chair. Whatever the reason, the president has made his displeasure with Fed policy clear.

But the real deal-breaker may have been the late 2018 market tantrum. Lenders and borrowers alike grew increasingly and vocally distressed as the yield curve flattened and threatened to invert. Then this year it did invert at several points along the curve, coincident with weakening economic data. That was probably the last straw. The Fed hasn’t exactly loosened, but there’s a good chance it will later this year.

Meanwhile, across the pond, Mario Draghi had one foot out the door and until a short while ago had a tightening plan in place. That plan is now out the door before Draghi is even close to gone. So on both sides of the Atlantic, plans to exit from extraordinarily loose money now look disturbingly like those two little circles in the BOJ rate chart when it tried to hike and found it could not.

Worse, we are also replicating Japan’s fiscal policy with rapidly growing deficit spending. In fact, this year we will be exceeding it. The Japanese deficit as a percentage of GDP is projected to be below 4% while the US is closer to 5%. And given the ever-widening unfunded liabilities gap, the US deficit will grow even larger in the future.

Turning Japanese, I think we’re turning Japanese, I really think so. (With a musical nod to The Vapors.)

A $6 trillion $10 Trillion Federal Reserve Balance Sheet

Let me give you the Cliffs Notes version of how I think the next decade will play out, more or less, kinda sorta.

We already see the major developed economies beginning to slow and likely enter a global recession before the end of the year. That will drag the US into a recession soon after, unless the Federal Reserve quickly loosens policy enough to prolong the current growth cycle.

Other central banks will respond with lower rates and ever-larger rounds of quantitative easing. Let’s look again at a chart (courtesy of my friend Jim Bianco) that I showed three weeks ago, showing roughly $20 trillion of cumulative central bank balance sheets as of today. If I had told you back in 2006 this would happen by 2019 you would have first questioned my sanity, and then said “no way.” And even if it did happen, you would expect the economic world would be coming to an end. Well, it happened and the world is still here.
 


Source: Jim Bianco

 
Before 2008, no one expected zero rates in the US, negative rates for $11 trillion worth of government bonds globally, negative rates out of the ECB and the Swiss National Bank, etc. Things like TARP, QE, and ZIRP were nowhere on the radar just months before they happened. Numerous times, markets closed on Friday only to open in a whole new world on Monday.

In the next crisis, central banks and governments, in an effort to be seen to be doing something, will again resort to heretofore unprecedented balance sheet expansions. And it will have less effect than they want. Those reserves will simply pile up on the balance sheets of commercial banks which will put them right back into reserves at their respective central banks.

During the worldwide recession, there will be few qualified borrowers but a great demand for liquidity as corporate debt goes from investment grade to junk seemingly en masse. Which will disqualify them from being bought by pensions, insurance companies, and many other purchasers normally looking for yield.

The inverted yield curve is a classic sign that the central bank, in this case the Federal Reserve, has tightened monetary conditions too much. Which is why Trump wants the Fed to lower rates now (plus he doesn’t want a recession in an election year) and Powell and the Fed turned so dovish.

I will admit the Fed’s $4 trillion balance sheet expansion surprised me at the time. Fool me once, shame on you. We’ve now seen the new playbook. At a minimum, they will keep the balance sheet at its present, barely-diminished size and eventually add a lot more when we go into recession. I think $10 trillion is almost a sure thing by the mid-2020s, by which point we will have been through our second recession.

Why? Because we will see a new government at some point that raises taxes enough to actually send a still-weak economy into another recession. That’s pure speculation on my part but is what I foresee.

What assets will the Fed buy? Under current law, that’s pretty predictable: Treasury securities and a few other government-backed issues like certain mortgage bonds. That’s all the law allows. But laws can change and I think there is a real chance they will—regardless of which party holds the White House and Congress. In a crisis, people act in previously unthinkable ways. Think 2008–2009.

They will think the unthinkable in the next crisis and try everything, including the kitchen sink, but it will just increase government debt. And as Lacy Hunt has shown us from numerous sources in the academic literature, and I’ve tried to explain, that debt will be a drag on future growth.

Another reason to expect a $10-trillion Federal Reserve balance sheet is that US government debt will be north of $30 trillion. On top of that, in the next five years the credit markets have to fund $5 trillion of corporate debt rollovers, plus new debt, plus state and local debt. It won’t be coming from outside the US and there is only so much that banks and big pension funds and individuals can do. Unless the Federal Reserve steps in, interest rates will soar and the crisis will become much worse. It will have little choice but to step in and buy US government debt.

Yes, I know this is a self-fulfilling prophecy, and it has to end. But the question is when? We’re already seeing serious analysts say it really doesn’t have to end. This from none other than Goldman Sachs.

Daan Struyven and David Mericle, economists at Goldman Sachs, said the example of Japan could prove instructive as the world’s third-largest economy had not suffered a debt crisis, even though it arguably has the most public debt as a share of its GDP in the world. Japan’s government debt-to-GDP ratio sits at 236% in 2017, more than double that of the US, which stands at 108%, according to the International Monetary Fund.
 


Source: MarketWatch

 
I could spend the entire letter giving you quotes like that from mainstream economists. Note you can quibble with the exact numbers but in any case, the Bank of Japan holds at least 100% of Japanese GDP in debt, plus an enormous amount of Japanese stocks, not to mention global stocks.

The Federal Reserve holds roughly 35% (give or take) of US government debt. Can we even imagine the Federal Reserve at some point holding $20 trillion of US government debt? I don’t think the Japanese imagined that 20 years ago.

I keep saying we have to think the unthinkable as we plan for our futures because I can guarantee you that future leaders will. When there is a true crisis “they” (whoever they may be) will be looking for action and “do nothing” will not be an option. Maybe it should be, but that is a metaphysical argument for another day. They will do something. Quantitative easing is now on the table and I think will be almost a reflexive move during the next recessioncrisis.

So, will we have Japan-like flat markets and low growth for years on end? Will we create a demographic crisis by limiting immigration? Public pensions and insurers are already struggling to meet obligations after years of low rates. Those betting on 7% returns (and many are) won’t make anything close to that. This will make government debt and state/local pension fund obligations a massive problem that the Federal Reserve and the US government right now are not politically or legally capable of handling. Will we change the rules in the future? Tell me who’s going to be in charge during that crisis… and then let’s ask the question.

But will it play out over a longer period of time than we might think now? Almost surely. Yet the world will not end and, for those paying attention, will be a better world. Stay tuned and stay with me.

Mastering Private Markets

I recently did a podcast for my friends at SMH interviewing fellow Rice graduate Mike Novelli about his real estate investing experiences over the last 20+ years. I learned a lot and think you will find it interesting, too. Income-producing real estate will have value in almost any future monetary environment. Simply click here, give us a little information about who you are and you can either listen or read the transcript. (Please note that I am president and a registered representative of Mauldin Securities, LLC, member FINRA and SIPC.)

Let me know what you think, too. If you like it, I will gladly do more.

Living on Puerto Rico Time

Shane and I will have 10 days on Puerto Rico time until I travel back to Dallas to see the dentist, then to Cleveland to see the eye doctor, then to Chicago to do a speech for Brian Lockhart and my friends at Peak Capital Management. Then it’s back to Puerto Rico where I will really start getting ready for the Strategic Investment Conference in Dallas May 13–16. Almost every day, I get a phone call or an email from somebody saying they forgot to register for the SIC and can I get them in? As I’ve said in previous letters, get on the waiting list. A few spots may open but no more procrastination!

Some good news and bad news: Root canal technology is light years ahead of 30 years ago, which is the last time I had one. The bad news is that the pain afterwards is as bad as I remember it. I have to return to Dallas for a brief dentist visit to make sure all went well, then to Cleveland to check on my cataract surgeries (which did not hurt and went a lot easier than it did for my dad 40 years ago). It sounds like I’m falling apart but it is just happening all at once…

You have a great week!

Your glad healthcare technology is improving analyst,


John Mauldin
Chairman, Mauldin Economics


NATO at 70

How NATO is shaping up at 70

The Atlantic alliance has proved remarkably resilient, says Daniel Franklin. To remain relevant, it needs to go on changing



REACHING 70 IS an extraordinary achievement for the North Atlantic Treaty Organisation. Most alliances die young. External threats change; national interests diverge; costs become too burdensome. Russia’s pact with Nazi Germany survived for only two years. None of the seven coalitions of the Napoleonic wars lasted more than five years. A study in 2010 by the Brookings Institution, a Washington think-tank, counted 63 major military alliances over the previous five centuries, of which just ten lived beyond 40; the average lifespan of collective-defence alliances was 15 years.

“NATO is the strongest, most successful alliance in history”, says Jens Stoltenberg, the organisation’s secretary-general, “because we have been able to change.” It has expanded from 12 members at its birth to 29—soon to be 30 when North Macedonia joins, its dispute with Greece over its name now settled. Of the eight countries that made up its erstwhile rival, the Warsaw Pact, seven have become part of NATO, as have three former Soviet republics. The eighth one, the Soviet Union itself, has ceased to exist.

For its first four decades NATO was busy deterring the Soviet threat. Its role was to keep “the Russians out, the Americans in and the Germans down”, as its first secretary-general, Lord Ismay, put it. But after communism collapsed, the alliance did not proclaim victory and shut up shop; instead it reinvented itself, helping to stabilise the new democracies of eastern Europe.

Realising that it needed to go “out of area or out of business”, it then embarked on a period of far-flung crisis-management, from the Balkans (with interventions in Bosnia and Kosovo) to the Horn of Africa (where an anti-piracy mission ran from 2009 to 2016) and Afghanistan (where it still leads some 16,000 troops in Operation Resolute Support). NATO’s founders would have been stunned by such mission creep—as well as by the circumstances in which Article 5 of its treaty, which says that an armed attack against one member will be considered an attack against them all, was put to use. The only time the allies invoked this pledge was on September 12th 2001, the day after al-Qaeda’s terrorist attacks on America.

After Russia’s annexation of Crimea in 2014 the alliance moved swiftly back to its core business of deterrence against its eastern neighbour. Now for the first time it is having to juggle invigorated collective defence and crisis management simultaneously. At 70, it is hardly settling for an easy life.

Its birthday celebrations will be modest: just a one-day gathering of foreign ministers on April 4th in Washington, DC, where the North Atlantic Treaty was signed in 1949. NATO wants to avoid a repeat of the bruising confrontations that took place at its summit in Brussels last July, where America’s president, Donald Trump, berated his allies for not pulling their weight on defence. If they did not shape up, he said, his country might go its own way. Another damaging row is the last thing the organisation needs as it struggles with intimations of its own mortality. “We don’t have a guarantee that NATO will survive for ever,” says Mr Stoltenberg.

At times Mr Trump has seemed to suggest that he would be happy to see it die. On the campaign trail he called it “obsolete”. Once in office, he initially avoided backing its collective-security pledge; instead, he seemed to regard NATO as just another deal, in which American taxpayers were getting ripped off. In January the New York Times reported that several times last year he privately said he wanted to pull the United States out of NATO. Such reports only fuel fears that he might be doing Russia’s bidding. Mr Trump calls these suspicions “insulting”.




If he were to decide to abandon NATO he would face resistance in Congress, where bipartisan support for the alliance remains strong and control of the purse strings powerful. A record number of more than 50 senators and representatives attended the Munich Security Conference last month to show solidarity. Last July the Senate voted 97-2 to back NATO. In January the House of Representatives voted 357-22 in favour of the NATO Support Act, which would prohibit any use of federal funds for withdrawal. Though heartening for NATO, these votes highlight the sense of threat hanging over it.

Yet its pharaonic new headquarters on the outskirts of Brussels projects the permanence of an organisation preparing for its next 70 years, not one about to perish. Opinion polls show solid public support for NATO in its member countries (with the significant exceptions of Turkey and Greece). Even in America, despite Mr Trump’s attacks, 64% of those polled by Pew Research Centre are favourable towards NATO, up from 49% in 2015, and a survey last year by the Chicago Council on Global Affairs showed that more Americans than at any point since polling began in 1974 favour increasing their country’s commitment to the alliance.

NATO optimists offer three reasons for not fretting too much over Mr Trump. First, NATO is no stranger to crises, from Suez in 1956 to France quitting the integrated military command in 1966 and splits over the Iraq war in 2003. It has a record of resilience.

Second, they point out that since becoming president, Mr Trump has said that the alliance is “no longer obsolete”, that he is “committed to Article 5” and that America will be “with NATO 100%”. True, he continues to lambast his allies for failing to pay their fair share of their own defence, but on this matter his bullying is justified and useful: the allies do need to spend more.

Their third and strongest argument for remaining sanguine about Mr Trump is based on his deeds rather than his tweets. On his watch America has increased, not decreased, its defence efforts in Europe, with more equipment, more troops and more money. Funding for America’s military presence in Europe, under what is called the European Deterrence Initiative, has risen by 40%.

This is part of NATO’s determined response to the increased threat from Russia. At summits in Wales in 2014, Warsaw in 2016 and last year in Brussels—even as the world focused on Mr Trump’s bolshiness—the allies took a series of decisions designed to restore robust territorial defence. They created a Very High Readiness Joint Task Force, prepared to move within days, and put combat-ready multinational battlegroups into the three Baltic countries as well as Poland. They committed themselves to a costly “Four 30s” initiative, with the aim of having 30 mechanised battalions, 30 air squadrons and 30 warships ready to move in no more than 30 days by 2020. To ensure swift movement of forces, they planned two new commands, in Norfolk, Virginia, and Ulm in Germany.




Last autumn NATO tested its capabilities in Trident Juncture, its biggest exercise since the end of the cold war, which involved some 50,000 people in and around Norway. Gaps remain, but the erosion of defence capacity that NATO had allowed as a peace dividend after the collapse of communism is being reversed.

This special report will run a health check on NATO. It will assess the alliance’s chances of surviving through its 70s and consider how it needs to change in order to remain vigorous to 100. In the short term the wild card remains Mr Trump. For two years the allies were reassured by the presence around him of NATO-friendly “adults in the room”, especially generals such as James Mattis, the defence secretary. These grown-ups could not prevent transatlantic rows over trade and the nuclear deal with Iran, which Mr Trump has abandoned, but they could exercise some restraint. They are now gone; Mr Mattis quit in December. His resignation letter pointedly stressed the importance of “treating allies with respect”.

Even without Mr Trump, however, the cohesion and the democratic values that the alliance is supposed to share are under strain. It can still summon up solidarity, for example in response to Russia’s nerve-agent attack on Sergei Skripal, a Russian ex-spy, and his daughter Yulia in Salisbury in England. But divisions among the Europeans look worryingly wide.

Britain, usually a NATO stalwart, is consumed by Brexit, and might even elect a seasoned NATO-basher, Labour’s Jeremy Corbyn, as its next prime minister. Nationalist governments in Hungary and Poland are at odds with their EU partners. France’s relations with Italy sank so low that it recently recalled its ambassador.




Relations between America and strategically critical Turkey, which will soon be overtaking Germany as NATO’s second-most-populous country, have been strained, too. Turkey’s plan to buy a Russian air-defence system is a sore topic in Washington. The two countries have also been at odds over Turkey’s detention of an American pastor (now released) and over America’s refusal to extradite a Turkish cleric, Fethullah Gulen, whom President Recep Tayyip Erdogan blames for an attempted coup in Turkey in 2016. And they disagree over the fate of Kurds in Syria who fought alongside America but are seen as terrorists by Mr Erdogan. If relations were to sour badly, America could “devastate Turkey economically”, Mr Trump has said. Both sides seem to be working to avoid that.

These are not the best of times for the allies to be tackling an issue as thorny as intermediate-range nuclear forces (INF). On February 1st America pulled out of the 31-year-old INF treaty banning land-based missiles with a range of 500-5,500km, in response to what it called clear Russian violation. NATO has backed America’s move, but the issue threatens to become as fraught as when American cruise and Pershing II missiles were being deployed in Europe in the 1980s to counter the Soviet Union’s mid-range nuclear arsenal. Now, as then, there is a risk of holes in America’s nuclear umbrella that could leave the European allies vulnerable.

Look farther east

NATO has been very effective for 70 years, says Mike Pompeo, America’s secretary of state, who will host the anniversary meeting in Washington, “and we want to make sure that it continues to be effective for the next 70 years.” That will not be easy. The tectonic plates of geopolitics are shifting. A return to great-power rivalry is in prospect. Although Russia has a potent nuclear-tipped military force and an opportunistic willingness to disrupt the status quo, in the long run it is seen as a declining power. The emerging giant is China. The old Soviet Union peaked at less than 60% of America’s GDP and a population about a fifth bigger. In China, America faces a rival that has four times as many people and will soon outstrip its economy. As China rises, challenging America’s interests around the world, it will take up ever more of America’s attention and resources. That process started before the Trump presidency, and will continue and intensify far beyond it.

How can the transatlantic alliance hold together as America becomes less focused on Europe and more immersed in Asia? That is a vital question, but so far NATO has barely started tackling it.

Where millennials turn for financial advice

Shunned by traditional advisers, younger investors use apps and digital platforms

© Clare Mallison/FT



Put yourself in the shoes of the average metropolitan millennial. You’re moving ahead in your career, getting closer to the day you’ll finally own your own home and perhaps considering whether to start a pension or investment Isa.

You might think you’ve got to the stage where you need the services of an independent financial adviser (IFA) — but would they take on a client like you?

All too often, the answer is no. As many young professionals can attest, we simply don’t have enough money — yet — to make it worth the industry’s while.

It is possible to argue that my generation is in greater need of financial advice than those before us. We have to contend with the shadow of student debt, a collapse in home ownership and higher levels of self-employment as wages stutter.

Yet call up an IFA, and your youthful voice will be interpreted as the sound of a client with very little money and very few assets. Unless you have a high salary, large inheritance or are at the outset of a potentially lucrative career, it’s unlikely the adviser will be able to make money out of you. Even if they did take you on, it’s equally unlikely that you would be able to afford their fees.

Help is at hand. There is a crop of new, digitally delivered services attempting to bridge the “advice gap” — and some of these ideas are so innovative, slick and affordable, they might cause the traditional advice profession to fear for its future.

Bridging the advice gap

As the author of the Young Money blog, I was recently invited by Nucleus, a digital platform used by 800 IFAs, to travel around the UK to speak to different firms and see if we could bridge the generational divide.

Starting in the City of London, it didn’t begin well. I kept hearing that millennials were spending too much and saving too little, and that financial advice for most young people — bar the Kylie Jenners of this world — was a complete non-starter.

We might not have millions now — but surely some advisers might be prepared to take us on as clients?

After working for 15 years, David Gibson, a 34-year-old physiotherapist, has his own home and some spare cash to invest. But he doesn’t know what to do with it, despite extensive online research.

“I just don’t know who to trust long term for financial advice,” he says. “What I would really like is someone to look at my overall individual circumstances and say ‘this is what you should do’.”

According to the Financial Conduct Authority, only 6 per cent of 18-34-year-olds took financial advice in 2017. A separate study by Schroders found that in the same year, half of all IFAs turned away clients with less than £50,000 to invest.

Carefree youngsters have never been a core market for the UK’s £4.5bn financial advice industry, whose bread and butter is the complex business of investments, estate planning and pensions.

A huge regulatory shake-up of the way the advice industry can charge for its services is partly to blame. Six years ago, regulators outlawed commission-driven sales of seemingly “free” products.

The hope was that advisers would move away from their traditional charging model. Most now take a percentage cut of assets under management — known in the industry as the ad valorem model — even though only 6 per cent of people say they want to pay this way, according to research by advisory firm Drewberry. This model immediately makes younger, asset-light clients a less appealing prospect.

Like most people of her age group, Anna Dawson, a self-employed casting director, has never sought financial advice. The 28-year-old rents in Edinburgh and relocated from London to save for her first home on her own, a process she describes as “slow and hard”.

“I have never thought about [financial advice] because I can’t afford it. If I don’t work in a month, savings have to be put towards rent.”

Her experience underlines the challenge that financial advisers will face in finding their “next generation” of clients.

Buying a home and settling down might have been our parents’ triggers for seeking financial advice but rising house prices and changing lifestyles mean our generation is pressing the pause button — sometimes indefinitely.

With more young people working in the “gig economy”, irregular incomes from freelance working play havoc with our ability to save regularly into pensions and Isas. The extent of our problems means financial decisions are often easier to ignore. A recent BuzzFeed article about “errand paralysis” went viral, highlighting a very millennial aversion to workaday tasks, especially if they’re IRL (in real life).

But there are digitally driven services out there that not only want our business, but think they can convince millennials that saving and investing is not as anxiety-inducing as they may fear.

Robo solutions

As a young, unmarried millennial, managing most of my life and finances online, I find my biggest financial priorities are meeting freelance deadlines and keeping alive my new money plant from B&Q (ominously, the last one did not survive for long). With the amount of digital fintech services available today, the need to find an old-fashioned adviser does not seem pressing.

The millennium ushered in an online finance boom. DIY investing platforms brought money management to the masses, though you needed serious chutzpah to invest successfully on your own.

The next level is investing using a smartphone and “robo advice”, which, bizarrely, involves neither robots nor advice (as you and I understand it, anyway). Online digital wealth managers such as Nutmeg and Moneyfarm will invite wannabe investors to submit their investment time horizon and feelings about risk, suggesting the best ready-made investment fund for them. Sometimes, £1 is all you need to get started.

This approach is a boon for overwhelmed millennials who just want to get invested and get on with their lives. It’s why the Moneybox app has been a game changer. It deploys Richard Thaler’s Nobel Prize-winning “nudge theory” to round up the digital spare change from investors’ purchases — meaning the cost of a £2.90 coffee can be rounded up to £3, and the 10p difference invested in a portfolio of eye-catching stocks including Apple and Disney.

The investment algorithms are the “robots”, but at a basic level, the “advice” they provide is which of their funds best suits your self-diagnosis. The FCA last year warned that there was “scope for a mis-selling scandal” if poorly-designed robo-advice models put people into unsuitable funds, or gave guidance masquerading as advice.

This is a very important difference. An IFA can give you what’s called whole-of-market financial advice — meaning they can advise you on many different potential investments and recommend one that’s best for your individual circumstances.

A strictly regulated sector, you can’t claim to offer financial advice unless you pass strict exams, meet certain criteria and have the necessary permission. It’s one reason why the old Money Advice Service had to be rebranded recently as the Money and Pensions Service, such was the uproar among IFAs. And the regulatory burden helps explain why whole-of-market financial advice is so costly.

Even if we could afford it, would the old-fashioned model be right for us?



Max Rofagha: '[Young people] tend to have fairly similar, rather straightforward financial set-ups'


Finimize, a financial information app, was founded by 31-year-old Max Rofagha in the belief that most millennials don’t need financial advice. Young people, he says, “tend to have fairly similar, rather straightforward financial set-ups. Most haven’t bought a house yet, most aren’t married or divorced yet: their situation is simpler than somebody who is older.”

Starved of financial education but drowning in online resources, most millennials just need a push in the right direction, Mr Rofagha believes. To this end, Finimize sends cheeky, emoji-packed emails every day to more than 300,000 subscribers, explaining what’s going on in world markets in a way that’s engaging and fun. A typical subject line — “How do you spell recession?” Currently free, Finimize could, in time, become a paid subscription service.

Finimize threatens what Mr Rofagha calls the “information asymmetry” that has sustained the financial advice industry for decades — namely, that financial matters are so complex you must pay a middleman to explain them to you. However, he also reckons young people will outgrow the mysterious “black box” of robo advice.

“The financial industry has been clinging to this model of complexity and opacity,” he says. “Millennials want to have a clear understanding of what’s happening with their money.”

This is why Finimize articles provide links to an array of investment options. Sure, robo advisers are on there — but so are cryptocurrency platforms such as eToro and stock-trading apps such as Freetrade. In fact, ultra-risky cryptocurrency is very popular, dominating the league table of users’ reviews, despite Bitcoin’s price plunging by about 80 per cent in the past year.

Is there a danger that by making their own financial choices, younger investors are taking on too much risk?

Last week, FT Money reported on the rising interest in crowdfunding by young investors, even though very few businesses have ever returned cash to investors.

Hayley Ard, a 32-year-old manager at King's College London’s Entrepreneurship Institute and a Finimize user, drew on what she learnt from Finimize’s investment packs and ended up buying an Innovative Finance Isa.

She chose peer-to-peer lender RateSetter, which is currently offering a 4 per cent return and a bonus of £150 for customers who keep £10,000 or more invested for one year.

She says: “A lot of people are priced out of financial advice unless it is a big decision. There are so many options now that democratise information.”

While her choice isn’t without risk — peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme, and returns can be affected by borrower defaults — she’s satisfied that she doesn’t need financial advice. For now.

Advice, please

Nevertheless, some young investors still want a greater level of support with financial decisions. One brave online app — Multiply — is determined to provide free financial advice targeting young, self-employed professionals with an average income of £39,000. Wait — how is this even possible?

For now, Multiply only offers “guidance”, but is hopeful it will soon be able to provide “personalised and regulated” financial advice later this year, FCA permitting.

Vivek Madlani, its co-founder, says Multiply is a lecture-free zone. “Young people are fed up with being branded irresponsible,” he says. “Our users are saving for goals and looking to the future to start families. They don’t want to be slapped down for how much they’re spending on flat whites or Asos.

“They want advice to be non-judgmental, tailored to income, earnings and lifestyle. And they want it in a monthly rhythm, rather than getting a traditional financial plan which gets checked maybe once a year.”


Vivek Madlani: 'Young people...don’t want to be slapped down for how much they’re spending on flat whites or Asos' © Multiply


The traditional advisory profession will be watching Multiply’s progress with a degree of nervousness. But it is not the only financial firm to see potential in the youth advice market.

One wealth management firm has set up an intriguing offshoot — run by young people, for young people.

Neon Financial Planning has a slick website showcasing a range of fixed-fee services including a free financial health check, financial coaching at £100 for half an hour and access to a “Money Info” app at £40 a month. A full financial review costs £750.

All of these are clearly labelled as generic guidance, while “regulated personal recommendations” on investments or pensions are typically charged at 0.3 per cent of the sum invested, but will be spelt out in pounds.

“Traditional IFAs are 50-plus men, a lot of their clients are 50-plus. That is going to end at some point,” says Neon’s co-founder Jon Page. “The way these businesses are set up means younger people are not profitable to them, and don’t look like a business opportunity. But I think they are. A lot of generational wealth is coming down to these people and somebody has to look after them.”

Keep it in the family

Traditional financial advice is unaffordable for most young people. But unless the advice profession adapts to our growing digital demands, it could also become irrelevant.

Mr Page may be right to play the long game. Over the next 30 years, millennials will inherit an estimated £5.5tn from baby-boomers, according to the Centre for Economics and Business Research.

Even if their parents’ money is looked after by a 50-something in a suit, there is no guarantee that millennials will prolong their custom.

Research by Kings Court Trust shows a quarter of inheritance beneficiaries are already walking away from their parents’ or grandparents’ IFAs, typically taking £288,000 with them. Reasons given range from distance — both physical and personal — to a growing confidence that younger people can manage money for themselves.

Pimfa, the association for personal investment management and financial advice, has been looking into how it can “forge long-term relationships with future inheritors, wealth builders and auto-enrollees” — namely the 4.4m millennials who are now saving automatically into workplace pensions.

Key recommendations include talking to existing clients about their family’s needs, allowing younger clients to invest lower amounts, with “clearly defined products and prices” and finding new ways to dispense nuggets of financial wisdom — both online and at events.

Sheena Gillett at Pimfa says its research forum found that young people are still big fans of “human interaction and relationship-building” — something Mr Page agrees with.

“People still value the human touch,” he agrees. “Going on a financial website, answering a few automated questions, getting your card debited — it can be a bit scary.”

Even the robo advisers recognise that, once in a while, it’s good to talk. Nutmeg now offers a personalised service, including a 15-minute phone call, for £350. A step-up from guidance, this is known as “restricted advice” as the conversation is strictly limited to Nutmeg’s own products and portfolios. However, IFAs should note Nutmeg’s “woke” credentials — it’s the first UK wealth manager to provide environmental, social and governance scores for all 10 of its ready-made portfolios.

Lisa Caplan, Nutmeg’s head of financial advice, says: “If we find that investing isn’t right for you — for example, if you have debts that you should pay off — we will advise you to do that without charge.”

Scalable Capital also offers a free initial consultation over the phone, charging £200 for restricted advice on its range of investments.

Meanwhile, new Canadian import Wealthsimple says it offers the same level of restricted advice as Nutmeg and Scalable over the phone or email — only for free. Could this be a sign of things to come?

On my trip around the UK, I met a lot of friendly and professional advisers who were willing to help the younger generation. But the sticking points are cost, convenience and time. The solution looks to be a clever combination of apps, investment platforms and a sympathetic ear once in a while. Although some advice on keeping money plants alive wouldn’t go amiss.


The cost of old-fashioned advice

Most independent financial advisers (IFAs) were prepared to offer a new client a free initial consultation to establish whether they could help, clarify what they could do and how much it would cost.

For those advisers willing to take on young clients, initial fees quoted ranged from 0.3 per cent to 5 per cent charged on the total value of my investments.

The average fee charged by advisers on the VouchedFor online directory is 1.74 per cent.

Ongoing annual charges range from 0 to 2 per cent depending on the nature and size of your assets, with 0.79 per cent as the VouchedFor average.

In most cases, this is just what you pay for the privilege of advice — don’t forget there will be underlying charges on the investments too.

According to the website Boring Money, all-in fees for robo advice are usually less than 1 per cent.

Some IFAs were prepared to charge by the hour — but expect to pay about £180 an hour. For advice on taking out a new stocks and shares Isa, a typical quote was an initial fee of about 3-4 per cent of the amount invested, with a 0.8 per cent ongoing charge.

Trump’s Fed Attacks Cast a Chill at Global Finance Gathering

Analysts don’t expect new Fed appointees to change policy direction, but former central bankers worry about erosion of institution's nonpolitical stance

By Nick Timiraos


Federal Reserve Chairman Jerome Powell at the International Monetary Fund spring meetings in Washington, D.C. Photo: shawn thew/EPA/Shutterstock


WASHINGTON—Former Federal Reserve officials and foreign central bankers said President Trump’s combative stance toward the U.S. central bank could over time weaken the institution and its role in the global economy.

A string of central bankers, including several gathered in Washington for International Monetary Fund meetings over the weekend, expressed concern about the Fed’s political independence as Mr. Trump again criticized the central bank and as he seeks to nominate two stalwart political supporters to the organization who also disapprove of its actions.

Though the Fed signaled in recent weeks that it was done for now with interest-rate increases, Mr. Trump wrote Sunday on Twitter that the economy and stock market would be growing faster “if the Fed had done its job properly, which it has not.”

The central bankers said they are concerned the GOP president’s approach could erode nonpartisanship in the Fed’s boardroom over the long run. They cited that longstanding tradition as part of the reason the Fed is a global role model for apolitical policy-making.

“I’m certainly worried about central bank independence in other countries, especially…in the most important jurisdiction in the world,” said European Central Bank President Mario Draghi at a news conference here Saturday, referring to the U.S.


Earlier this month, White House economic adviser Lawrence Kudlow said the administration respects the Fed’s independence. While he as well as the president have called on the Fed to cut interest rates, Mr. Kudlow said: “The Fed is independent. We’re not trying to compromise that independence and never will.”

Narayana Kocherlakota, former president of the Minneapolis Fed, said it is reasonable for Mr. Trump to think the Fed is pursuing too aggressive a monetary policy and to want people who favor easier policy. But he expressed concern about Mr. Trump’s nomination to the central bank of former campaign adviser Stephen Moore and former GOP presidential candidate Herman Cain.

“What I worry about with Cain and Moore,” he said, is that their stance on monetary policy could be different if a Democrat were president right now.

Mr. Moore favored tighter monetary policy when Barack Obama, a Democrat, was president. He now says policy should be easier, and he has said that Mr. Trump’s re-election prospects could be threatened if the economy weakens.

Mr. Moore’s shifting views “could be interpreted as wanting to defeat Democrats when they’re in office and elect Republicans when they’re in office,” Mr. Kocherlakota said. “Over the longer haul if presidents fall into the rhythm of choosing Fed appointments with this thinking, that’s not a good outcome at all.”

Mr. Moore said in an email Sunday that he opposed lower interest rates when George W. Bush, a Republican, was president, which “blows up this theory that I’m for rate hikes when [Democrats] are in office and against them when [Republicans] are in office.”

Mr. Moore said he opposed the Fed’s efforts to stimulate growth earlier this decade because “the Fed can’t counteract bad real economic policy,” such as the 2009 fiscal stimulus bill and 2010 financial-regulatory overhaul pursued by Mr. Obama.

Mr. Cain and a White House spokesman didn’t respond to a request for comment. Mr. Cain’s supporters highlight the former restaurant executive’s business background as a qualification for a Fed post. Mr. Moore’s backers have said the economics commentator would bring fresh thinking to the central bank.

Mr. Trump’s picks haven’t caused heartburn in the stock and bond markets. Fed nominations are subject to Senate approval and the White House hasn’t formally submitted Mr. Cain nor Mr. Moore to the chamber.

Mr. Cain has contended with allegations of sexually harassing women, which he has denied. He faces little prospect of Senate approval, Senate Republicans said. White House officials have sought to temper expectations that Mr. Cain would be formally nominated.

Mr. Moore’s Senate chances are unclear.

In the near term, one or two outspoken critics of Fed Chairman Jerome Powell would be unlikely to change the direction of policy unless they could use data and analysis to convince others on the rate-setting Federal Open Market Committee, which comprises up to seven presidentially appointed governors and five independently selected reserve bank presidents.

“Individuals sitting around that table who are purely political in their point of view could find it very tough sledding,” said former Fed Chairman Janet Yellen in an interview.

Central bankers are more concerned about the longer run if the Fed were to lose its nonpartisan DNA. Sustained attacks on central banks can fuel the public perception that their officials are responding to political influence even when they are simply seeking to meet their mandate to control inflation, Mr. Draghi said.

Over the past three decades, many democratic countries have insulated their central banks from politics to secure more stable inflation over the long run. This can assure bond investors that governments won’t allow short-run political considerations to juice the economy.

Central bank independence has arguably “contributed to lower mortgage payments for everybody, compared to what I experienced when young,“ Bank of Canada Governor Stephen Poloz told reporters Saturday. “That’s a pretty big dividend.”

When the Fed raised rates to guard against a boom-bust growth cycle last year, Mr. Trump called the central bank “crazy.” In December, he privately fumed to his advisers about replacing Mr. Powell, his pick to lead the Fed, people familiar with the matter said at the time.

Mr. Trump likes Messrs. Moore and Cain because he thinks they have the interests of his presidency in mind, one person familiar with the White House’s thinking said last week. Fed appointments are the main way for the president to influence monetary policy.

Several central banking officials have taken note of Mr. Trump’s latest picks because they generally regarded his earlier Fed nominees as qualified pragmatists.

While Fed officials haven’t spoken publicly about either of Mr. Trump’s recent picks, former Fed policy makers said they believed Messrs. Cain and Moore both were too openly partisan to be effective in the job.

The Fed has been able to attract a world-class research staff because of its devotion to evaluating policy choices purely on their merits. “If staff come to feel the decisions are being driven by politics and not by what’s best from a policy perspective, we could have bad policy in a lot of different areas... and eventually that will drive away good staff,” said Ms. Yellen.

“In terms of economic competence, the Fed is an example for the whole world,” said former Central Bank of Chile governor José De Gregorio in an interview.

Mr. Trump’s preference for loyalists is also a signal that if he wins re-election next year, he could replace Mr. Powell when his term expires in February 2022 with someone less committed to the Fed’s independence, said former Dallas Fed President Richard Fisher in an interview.

“That is something people should be watching and concerned about,” he said.

Paul Tucker, a former deputy governor at the Bank of England, said in an interview that because the Fed’s credibility has cemented the dollar’s primacy as the global reserve currency, any erosion of that credibility would weaken the dollar’s pre-eminence.

“The stakes are potentially very high in the medium and long run for the United States, and not just the Fed,” he said.


—Brian Blackstone and Kim Mackrael contributed to this article.


What Went Wrong With Pensions — And Why The Whole World Should Be Worried

by John Rubino
  

The past decade was a uniquely smooth stretch of financial highway. Pretty much every major asset class – stocks, bonds, real estate, fine art, you name it – did well, making it hard for conventional investors to lose money and easy for them to earn outsized returns.

So why then are US public sector pensions (which own a ton of the above assets) a looming disaster that could trigger the next great financial crisis? Several reasons, ranging from negligence and criminality.

Let’s start with the fact that Wall Street preys on the ignorance of pension fund managers to extract huge fees for little or no excess return. Here’s a video in which pension expert and “forensic lawyer” Ted Siedle lays it all out for Peak Prosperity’s Chris Martenson:



An even bigger problem is the tendency – understandable but still despicable – of state and local politicians to underfund pensions and then lie about it, pushing the eventual reckoning onto their successors.
 
As baby boomer teachers, police and firefighters retire, the required pension payouts are soaring. Combine this with inadequate contributions, and the liabilities of major U.S. public pensions are up 64% since 2007 while assets are up only 30%.
 
This math is simple enough for even a politician or fund trustee to grasp, but because there’s no immediate penalty for underfunding a pension system, it has become normal practice in a long list of places.
 
Another, related problem is also mathematical, but it’s harder to manage in a boom-and-bust world: When pension plans suffer a big loss, as they tend to do in bear markets, the next few years’ returns have to go towards making up that loss before plan assets can start growing again. The following chart, from a recent Wall Street Journal article, shows pension fund assets falling behind in the past two bear markets and having increasing trouble catching up with steadily-growing liabilities.
 
pension liabilities what went wrong pensions

In some cases this puts funds permanently behind the curve and can only be fixed with massive infusions of taxpayer cash or draconian benefit cuts, neither of which are feasible in a system that punishes hard choices. The next chart shows how much more the worst offenders would have to contribute to their plans to get by with honest future return assumptions. For Illinois, Kentucky and New Jersey this will never happen.

pension contributions what went wrong pensions


What does all this mean? A few things:

In the next bear market the pension funds that are already wildly underfunded will fall into a financial black hole from which they’ll never be able to escape.

Those states and cities – many of which are issuing bonds to cover their day-to-day expenses – will be exposed as junk credits (as Chicago was recently) and will have to either pay way up to borrow or enact some combination of tax increases (politically almost impossible) or pension benefit cuts (legally impossible in many places) which will cause chaos without fixing the underlying problem.

The weakest cities and the states in which they reside will be forced to default on some of their obligations, stiffing suppliers, creditors, and/or employees. This will throw the municipal bond market into chaos as investors, worried that the next Chicago is lurking in their portfolios, dump the whole muni sector.

Faced with a cascade failure of a crucial part of the fixed income universe, the federal government will react the way it did when the mortgage market imploded in 2008, with a massive taxpayer funded bailout.

At which point there’s a good chance of the crisis spreading from pensions to currencies, as the world finally realizes that the bailouts are just beginning, with US states and cities soon to be followed by student loans, emerging markets, and European failed states. So keep an eye on Chicago and be ready to bail when that ship starts sinking.


Italy Signs Up for the Belt and Road Initiative

Rome’s decision has provoked stern but ultimately empty U.S. warnings.

By Jacob L. Shapiro

 

China’s Belt and Road Initiative has been making significant inroads in Europe despite repeated U.S. warnings to its European allies. On March 8, Italian Prime Minister Giuseppe Conte confirmed that Italy would become the 17th European country to join BRI. According to Conte, Italy will sign a memorandum of understanding during Chinese President Xi Jinping’s trip to Rome later this week. Italy’s ANSA news agency reported that Luxembourg is also in advanced negotiations with China to sign a similar agreement.

 


 

Washington was quick to respond to Conte’s remarks. The day after his announcement, the U.S. National Security Council took to Twitter to express its displeasure, warning that Italy’s participation in BRI would “bring no benefits to the Italian people.” The Italian government is also facing backlash from its own foreign policy establishment, at least some of which is aghast at the potential sale of the cornerstone of Italian strategy since 1945 – strong relations with the U.S. – for the low price of unspecified amounts of Chinese capital to build infrastructure.

MOUs are nonbinding and generally full of unrealistic aspirations rather than concrete plans. Still, the deeper problem is that Italy is counting on the U.S. to buy significant amounts of Italian debt in 2019. This is especially crucial for Italy since the European Central Bank concluded its bond-buying program in December. If the U.S. decided to voice its displeasure by, say, encouraging investors to eschew buying Italian debt, it could increase Italian borrowing costs at a time when the country is already in recession and its debt-to-gross domestic product ratio is at 133 percent. At least on the surface, Italy appears to be risking an awful lot for an awful little.

Why, then, would it be willing to make such a move? Thus far, U.S. warnings against cooperating with China have been more bark than bite. Stalwart U.S. allies such as Poland, New Zealand and Israel have also signed MOUs on BRI with little consequence. Even France and the European Commission have appeared open to cooperation with China on BRI projects in various joint declarations. Italy is debt-ridden and cash-starved, and if China is willing to throw some money its way, Italy has every reason to accept it. It’s taking a calculated risk, but considering U.S. reactions to other MOUs, it’s not an especially dangerous one.

For China, Italy’s participation in BRI is an insignificant though welcome step toward its much broader strategic ambitions. China’s success in this long-term endeavor will not be determined by the endorsement of a single country, even one as important as Italy. The broader project is to connect the entire Eurasian landmass via ports, roads and rail. Even if successful – and that’s a big if – it will be many decades before such infrastructure can be built let alone pay dividends. It will also take a lot more than MOUs for such a plan to work.

Many have described BRI as a Chinese version of the Marshall Plan. But it’s a faulty comparison because it misunderstands the scope and goals of both projects. The Marshall Plan’s aim was to rebuild Western Europe so it could hold the line against the Soviet Union. In trying to reorient Eurasia away from the Western Hemisphere and toward the Middle Kingdom, BRI is entirely different in scope. The United States would never have contemplated a Eurasian-wide Marshall Plan because it would have laid the groundwork for precisely the type of power the U.S. has been obsessed with thwarting for over two centuries.

As overly ambitious as China’s larger strategic goal may be, it is precisely that strategic aim that so irks the United States. While it doesn’t particularly care if China builds a port in Italy or high-speed rail in Poland, it does care about the potential emergence of a dominant power in Eurasia. Whether it’s China or some other power bridging the Eurasian landmass, the threat to the United States is the same. Being able to seamlessly connect markets from Shanghai to Lisbon would hamper the United States’ ability to prevent the rise of a Eurasian hegemon or a Eurasia less dependent on Washington’s support and approval.

There’s just one small problem with China’s plan: It would be nearly impossible to execute. China doesn’t possess the levels of financial and political capital needed to complete such a project. Even if it did, it would face tremendous political challenges in implementation. Many great powers have dreamed of ruling Eurasia. They have all been thwarted by Eurasia’s tremendous diversity. China’s vision of two continents stitched together by shared economic interests is wildly idealistic because not everything is about shared economic interests. Consider the European Union, and the level of discord in that multilateral organization despite its immense wealth. China has promoted the idea that Eurasian countries should cooperate to build a more prosperous and stable Eurasia. It’s a noble idea, but the promise of infrastructure spending will not be enough to encourage countries as varied as Italy, Iran and Uzbekistan to work together to build a Chinese-led Eurasian order.

Even if China’s ultimate aim to link Eurasia is more dream than reality, BRI is still potentially problematic because China’s ability to convince countries to sign MOUs undermines U.S. relationships throughout the world. The United States' insistence that its allies reject BRI funds or Huawei 5G equipment falls on deaf ears because the United States hasn’t offered any compelling alternatives. The U.S. built and sustained a global world order based on maximum freedom and independence for all actors. Countries that agreed to play by U.S. rules gained unfettered access to trade and protection from potential adversaries. At its best, the system is largely non-coercive and works in the interests of its stakeholders. But it wasn’t envisioned as a kind of American empire, in which an American emperor could direct countries not to buy the best technology available because the U.S. didn’t like who was making it. Indeed, in 1945, the U.S. was interested in destroying empires, not building one of its own.

When the U.S. takes such a heavy-handed approach on issues like BRI and 5G, it plays directly into China’s hands because such is the behavior of an empire. The aspect of U.S. policy that is most attractive to most countries is precisely how hands-off U.S. foreign policy is. The U.S. has no desire to dominate Eurasia – it simply wants to make sure no one else does. China, with its authoritarian system and historical preference for social stability over the protection of individual rights, does have an interest in dominating Eurasia, not to mention a history of conquering vast swaths of it. That’s why, at a political level, even a country as distant as Italy can’t seriously contemplate an alliance with China. Accepting investment is one thing, but Italy isn’t about to seek to replace a system that has sustained it through the most united and profitable period in Italian history since the Roman Empire.

The only thing that could really push countries like Italy and Poland into China’s waiting arms is if the U.S. breaches the rules of its own system and, in doing so, harms the national interests of those who participate in it. The U.S. is insisting other countries ban Huawei technology or not sign BRI MOUs, without providing better, or at least comparable, alternatives. If the best the U.S. can do in these situations is threaten to impose tariffs or other economic penalties, it is indicative of the kind of sclerotic self-righteousness that often appears when global superpowers either take power for granted or fail to maintain their relative advantages. Six years after China announced the Belt and Road Initiative, the U.S. response is to send angry tweets. That is far more of a boon to Chinese strategy than any MOU could ever be.