Investors need to position for a US-China clash of civilisations

A ‘great decoupling’ is under way between the incumbent superpower and its challenger

Diana Choyleva

A U.S. one-hundred dollar banknote and a Chinese one-hundred yuan banknote are arranged for a photograph in Hong Kong, China, on Monday, April 15, 2019. China's holdings of Treasury securities rose for a third month as the Asian nation took on more U.S. government debt amid the trade war between the world’s two biggest economies. Photographer: Paul Yeung/Bloomberg
© Bloomberg


Financial markets welcomed last month’s truce in the long-running trade war between Washington and Beijing. But the “phase one” deal should fool no one. By parking core US complaints, including China’s weak intellectual property protection, forced technology transfer and pervasive state subsidies, the ceasefire merely drew attention to the difficulty of reconciling two fundamentally opposed systems.

This comprehensive contest for supremacy between the two nations demands a fundamental rethink of the approach to global investment. Two issues stand out: which economic and political model offers higher returns, and where will the underlying assets be more secure.

China’s handling of the coronavirus epidemic only accelerates this “great decoupling” between the incumbent superpower and its rising challenger. The sluggish response by local officials, evidently petrified of delivering bad news to their all-powerful bosses in Beijing, has highlighted the shortcomings of an autocratic regime that is obsessed with stability.

Foreign companies will understandably be tempted to join those that have already shifted production to countries such as Vietnam and Mexico because of US tariffs and rising costs in China. Beijing, in response, can be expected to redouble its efforts to become more self-sufficient, if not dominant, in a clutch of high-tech sectors such as artificial intelligence that hold the key to future growth.

US policymakers recognise that the battle with China will be fought in the technology arena — hence the ban on Huawei and attempts to get the UK and other allies to deny the telecoms company a role in their new 5G networks.

Be it in technology, trade or finance, the bifurcation between the US and China will be long and messy, but two main macroeconomic consequences are clear.

First, global productivity will suffer as efficiencies in production are sacrificed for political advantage. Meanwhile, deepening mutual mistrust will slow scientific and technological co-operation.

Complex cross-border supply chains are being shortened. That has been reflected in a slowdown in world trade, as businesses respond to tariffs and anticipate more sand being thrown into the gears of global commerce.

Second, prices will rise. Initially, the impact of tariffs can be viewed as a relative price adjustment, with higher costs eating into US real consumer incomes. Researchers at the US Federal Reserve have confirmed such effects.

But as global supply chains are rerouted — not in one fell swoop but in a process taking years — cost-push inflation is likely to take hold. The cost of capital is also set to rise, especially if financial integration goes into reverse, preventing savings from being put to their best use. In short, stagflation is set to raise its ugly head.

What does all this mean for investors?

If harnessing and analysing vast troves of data is the most valuable asset in an age of information, then Alibaba and Tencent might look a better bet than, say, Amazon. That is because of the absence of data privacy laws in China and the support — explicit and implicit — that Beijing lends to its tech giants.

But there are broader considerations. Importantly, investors who see opportunities in the Chinese economic sphere should not take the continued relatively free movement of capital for granted. Beijing has pledged to open its financial sector to foreign capital and competition, but a digital cold war will make that goal immeasurably harder.

Moreover, in China’s communist regime, the owners of capital can be sure they will be the last in the queue when Beijing, like many governments across the globe, comes to address the pressing problem of income inequality.

Investors have long viewed China with suspicion because of government intervention. The fear that they might not be able to cash in their investments or pull their money out of the country has grown as president Xi Jinping has taken an authoritarian, Mao-style grip on power.

And then there is the exchange rate. If Beijing fails to lift productivity growth substantially through sweeping structural changes — a task that the Great Decoupling will make tougher — a weaker renminbi will eventually become the only policy valve left to relieve pressure on the economy.

More broadly, as two different systems of values clash, the danger of miscalculations and mistakes will grow. Against this background, the equity risk premium around the world — the excess return investors demand to compensate them for holding shares instead of risk-free assets — is set to rise.

No matter who wins November’s US presidential election, the schism with China is here to stay.

Patience with Beijing has worn thin across the spectrum of US political and public opinion.

That sets up an all-encompassing contest for dominance that will reshape the world political and economic order. Investors need a new road map to navigate it.


Diana Choyleva is chief economist at Enodo Economics in London

Marching orders

As its covid-19 epidemic slows, China tries to get back to work

Officials shift their focus to reviving growth. But that isn’t easy




IF CHINA IS the world’s factory, Yiwu International Trade City is the factory’s showroom. It is the world’s biggest wholesale market, spacious enough to fit 770 football pitches, with stalls selling everything from leather purses to motorcycle mufflers.

On February 24th, as is customary for its reopening after the lunar new year, performers held long fabric dragons aloft on poles and danced to the beat of drums, hoping to bring good fortune to the 200,000 merchants and buyers who normally throng the market each day.

But these are not normal times. The reopening was delayed by two weeks because of the covid-19 virus, the crowd was sparse and the dragon dancers, like everyone else, donned white face-masks for protection. The ceremony complete, business began. All those entering the market had to pass health checks and were told to be silent during meal breaks, lest they spread germs by talking.

The muted restart of the Yiwu market resembles that of the broader Chinese economy. The government has decided that the epidemic is under control to the point that much of the country can go back to work. That is far from simple. More than 100m migrant workers, the people who make the economy tick, are still in their hometowns, and officials are trying hard to transport them to the factories and shops that need them.

Yiwu has chartered dozens of trains and buses to bring in workers from around the country. It also wants to lure in buyers from around the world: it has offered to cover the full cost of their flights and accommodation if they arrive before February 29th.

The market is, little by little, getting busier. But merchants lucky enough to find new customers have an even bigger challenge in fulfilling their orders. Wang Meixiao is a plastic-jewellery wholesaler, the walls of her store groaning with bead necklaces of every size and colour. But her company’s factories in Yiwu and in Haikou, 1,750km to the south-west, do not yet have enough workers to operate.

Many are reluctant to leave their hometowns, fearful of the virus and unwilling to trek across the country only to have to endure 14-day quarantines at their destinations. “I tell my customers they just have to wait another couple of weeks, but that’s a guess. No one knows,” she says.

Since the outbreak of the coronavirus, economists and investors have tried to grasp the basics of epidemiology, analysing such matters as the potential incubation period of the disease and the dangers of asymptomatic transmission. Recently, they have turned their attention back to more familiar terrain, tracking the state of the economy.

To gauge whether production is resuming, they examine an array of daily figures, including coal consumption, traffic congestion and property sales. All have started to rise (see chart). But all remain far below the levels indicative of a healthy economy.



One gauge has been far more upbeat—unrealistically so. China’s stockmarket fell by more than 10% after the coronavirus spread in late January but has since made up all of that ground. It even held on to its gains in recent days when global markets fell sharply because of concerns about the rise in coronavirus infections in Iran, Italy and South Korea.

The bullishness in China partly stems from the belief that the government could soon unleash a big stimulus to boost growth. So far, however, it has only offered targeted support: state-owned banks are extending loans, the finance ministry is cutting taxes on a temporary basis and landlords, guided by the government, are trimming rents.

Yet China has unquestionably shifted its focus, as underlined on February 23rd when President Xi Jinping spoke via teleconference to cadres around the country, as many as 170,000 watching him. In areas where the virus is no longer a big danger, it is time for companies to resume operations, he said, adding that China still wants to meet its economic targets this year. His words, taken literally, suggest that the government wants growth of at least 5.5% in 2020, a rate that would be hard to achieve if large-scale production outages dragged on into March.
So along with reporting the number of new infections every day, officials are now reporting on the number of reopened businesses in their territories. The province of Zhejiang, a manufacturing powerhouse and home to Yiwu, leads the country so far, with 90% of its large industrial enterprises having restarted.

But many of these are running at low capacities. Jason Wang is a manager with a clothing company that sells winter coats at Yiwu International Trade City. His factory started up again but only half of his employees have returned. “The government, enterprises, workers—everyone is making a gamble in restarting. But we have no choice, we have to make a living,” he says.

Like factory managers around the country, Mr Wang is taking precautions. Workers have their temperatures monitored throughout the day. They are required to keep empty seats between them in the canteen. Inside the factory, they must always wear masks (the one industry running at full tilt in China is the production of masks, which are required now of anyone taking a bus or going to work). But the pressure is intense. The government has told companies that if any of their workers become infected, they may be forced to shut.

All going well, the base case of many analysts is that China’s businesses will be back to full capacity, more or less, by the end of March. Economists at big banks think this resumption could allow first-quarter growth to reach about 4%, year-on-year. That would be the weakest since quarterly records began in 1992, but anything above zero will inevitably raise questions about whether the statistics bureau has toyed with the numbers.

The balance of risks is also changing as the virus hits other countries. Just as China tries to get its businesses on track, it now faces the prospect of much weaker global demand and the danger that the epidemic, controlled within its borders, re-enters from abroad.

Even if other countries succeed in limiting the spread of the epidemic, Yiwu is testimony to some of the ways in which people far and wide will feel its economic effects. Agnes Taiwo, a businesswoman from Lagos, arrived in China just as it started to implement its strict controls to stop the outbreak. She had hoped to book a large shipment of children’s shoes and get back to Nigeria by early February.

But nearly one month on, snarled by all the closures and delays, she has not yet been able to complete her order. And her return to Nigeria has been complicated because EgyptAir, the airline she took on the way over, has cancelled all flights to China.

“This is serious,” she says. It is a sentiment that many others around the world are starting to share.

The Coronavirus Scare: This Time Is Different

Even if health authorities get a grip on the outbreaks, counting on an economic and market recovery may be wishful thinking

By Spencer Jakab, Stephen Wilmot and Justin Lahart


The World Health Organization’s director-general, Tedros Adhanom Ghebreyesus, left, with U.N. Secretary-General António Guterres at WHO headquarters. / Photo: pool/Reuters .


This is the first column in a five part Heard on the Street series about the market and economic impact of the coronavirus epidemic.

They say that the four most dangerous words in investing are “this time is different.” Taking that sage advice too literally with the coronavirus crisis looks like a mistake, though.

Epidemics are of course older than humanity and economic scares as old as markets, but the confluence of a potential pandemic with today’s complicated and interconnected world is unique. Globalization has magnified local disruptions, government stimulus is already at once-unthinkable levels and, both ominously and hopefully, technology is far more advanced than during the last truly global pandemic.

The SARS epidemic, while deadlier for those who caught it, provides a faulty template for understanding the Covid-19 outbreak because it was contained fairly quickly. The 1918 “Spanish flu” pandemic, with a lower fatality rate but global, occurred in a world before jet travel, widespread stock ownership or complex supply chains.

Yet many on Wall Street are still adhering to the SARS analogy, even as evidence mounts that the coronavirus outbreak will last longer and spread much farther. Expectations that it will remain centered in China, and that Chinese economic growth will get just a couple of percentage points knocked off it before a “V-shaped” recovery takes hold in the second quarter, appear extremely optimistic.



There realistically are now two broad scenarios.

One is that the virus is contained through herculean efforts by health workers in China, South Korea, Japan, Italy, Iran and wherever else it crops up.

That will mean rolling disruptions for months.

The scarier scenario is that all that occurs and the virus spreads globally anyway.

Epidemiologists simply don’t have enough data to even put reasonable odds on that, says Alessandro Vespignani, an infectious disease modeler at Northeastern University. Slower growth in the number of new cases in China, for example, could mean the tide there has turned, but there may still be many undetected cases.

Moreover, there is no telling what may happen when China relaxes the unprecedented efforts it has put in place, including quarantining more than 60 million people.

Elsewhere, information is too patchy to get even a rough idea of how far the virus has spread.

Last Friday morning, Italy had just three confirmed coronavirus cases. As of Monday, it had 229.

“The next 7 to 10 days will determine the fate of this epidemic,” says Mr. Vespignani.


Last Friday morning, Italy had just three confirmed coronavirus cases. As of Monday, it had 229. Here, people are seen wearing protective masks in Milan./ Photo: miguel medina/Agence France-Presse/Getty Images .


Already the interruption of the supply chain from China and now South Korea is more significant than many appreciate and could worsen even if the virus is contained.

Manufacturing has become increasingly dependent on sourcing components from suppliers, often with little spare inventory. The auto industry is a case in point: If even minor parts are missing because China-based suppliers are unable to make them, it could force assemblers around the world to halt production. The country’s exports of car parts were worth $53 billion last year, according to customs data.

So far close neighbors South Korea and Japan seem to have experienced the worst problems: Hyundai and Nissan have both had to halt production in their respective home countries.

Others may be managing the problem by sacrificing their already slim margins. British manufacturer Jaguar Land Rover has resorted to flying components from China in suitcases, its boss told the Financial Times last week.

Volkswagen, the Western car manufacturer probably most dependent on cash flows from China, said Monday that most of its joint-venture factories were up and running again.

Tellingly, though, it also warned that they faced a “slow national supply chain and logistics ramp-up.” Such problems could remain in the system for months.



And what if the virus goes global?

While Chinese-style quarantines are tough to pull off in less-authoritarian societies, for better or worse, individuals’ reactions will have ripple effects. Hoarding, absenteeism and social avoidance may lift some sliver of the service economy, but will damage most consumer-facing businesses like bricks-and-mortar retailers, travel stocks and restaurant chains.

The upshot of either coronavirus scenario, and especially the latter, may be far steeper market drops and at least local recessions. Governments used fiscal and monetary stimulus to mitigate the last economic crisis.

This may be a tougher fight. Aside from the fact that the U.S. budget deficit is at a record high in a boom time and interest rates world-wide are at or near record lows, pouring on stimulus just may not work very well.

Technology, meanwhile, is a two-edged sword. Jet travel and social media have made the spread of epidemics and “infodemics” faster, but they also allow people to weather a period of social avoidance.

Working, filling your refrigerator or entertaining your family remotely makes limiting contact with strangers easier. Even education can be achieved remotely, as we have seen in China.

And when it comes to an eventual treatment, decoding the coronavirus genome and possibly being able to create a vaccine in record time based on that alone was science fiction when SARS hit 17 years ago. During the 1918 pandemic penicillin didn’t even exist to fight secondary infections.

Investors scrambling for a coronavirus playbook may have to accept that we just don’t have one.




China has quarantined millions of people in its efforts to fight the outbreak. Here, a nearly empty road in Beijing on Monday. / Photo: Kevin Frayer/Getty Images


Ironically, It Needs To Get Worse

by: The Heisenberg

Summary
- COVID-2019 is spreading beyond China, and the assumed deleterious ramifications for global growth have deep-sixed the reflation trade.

- Markets have now succumbed to "a full capitulation into deflation assets," to quote BofA's latest global fund manager survey.

- For the contrarians among you, I've a got a "pain trade" you might be interested in.

- But beyond any tactical considerations, it's going to take a more severe shock to engender the type of policy response needed for a secular rethink.
"Perversely however, in order to see that capitulation into a 'stickier' fiscal stimulus willingness and drive an investor secular rethink, you would actually need to see things get worse first," Nomura's Charlie McElligott wrote Thursday.
Hours earlier, the PBoC cut both loan prime rate tenors, completing February's round of monetary easing. The one-year LPR was slashed by 10bps, matching the medium-term lending rate cut from February 17 and the reductions to the 7- and 14-day repo rates delivered earlier this month.
The one-year LPR is now at a 30bps discount to the old benchmark rate. The balance of the outstanding loan stock in China will be converted to the LPR rate over the next several months, so each cut to the LPR (which became the de facto benchmark back in August, when its calculation was revamped) matters not just for new lending but also for existing debt.
.
(Heisenberg)
On Saturday, there were more nods to fiscal and monetary stimulus out of Beijing, as statements released following a Politburo meeting tipped proactive fiscal policy, accelerated construction projects and a move by the PBoC to allow some lenders to free up more reserves. China's last RRR cut came in early January. Another seems imminent.
But it likely won't be enough. Even before the coronavirus deep-sixed the pro-cyclical rotation narrative which defined the market zeitgeist in the fourth quarter of 2019, the market was already falling back into old habits, bidding up bonds, and rotating away from cyclicals in favor of the same "slow-flation" plays in equities.
The coronavirus epidemic accelerated this tendency. By mid-February, markets had fallen back in love with duration in what BofA's Michael Hartnett called "a full capitulation into deflation assets," detailed in the latest edition of the bank's closely-watched global fund manager survey.
(BofA)
This has, of course, inflated the US equities factor bubble even further. In fact, it's now twice as egregious as it was on the eve of the dot-com bust, by some measures.
"Our view that cyclical and value assets should rally in the first quarter was set back by the COVID-19 epidemic," JPMorgan's Marko Kolanovic wrote Wednesday, adding that "bonds, momentum stocks, and low volatility stocks rallied, pushing the valuation spread between defensive and cyclical stocks to a level 2x worse than during the peak of the late-‘90s tech bubble."
(JPMorgan)
This potentially sets the market up for a snap-back similar to what unfolded in September, when, on the heels of August's "biblical" (to quote Nomura's McElligott) bond rally, yields reversed course, leading to multi-standard deviation factor reversals under the hood in equities.

A repeat of that episode (illustrated crudely, but effectively, in the visual below) would be the market's "max pain" trade.
(Heisenberg)
For the contrarians among you, just know that if, for whatever reason, the long-end of the US curve were to suddenly sell off, the attendant bear steepener would mechanically force an unwind in all manner of equities expressions tied to the "duration infatuation," including, but not limited to, min. vol. vehicles, momentum products, secular growth, defensives and, obviously, traditional bond proxies.
But, circling back to the quote used here at the outset, that's not even on anyone's radar right now, which is precisely what makes it the ultimate, contrarian "max pain" play. Instead, the coronavirus scare has catalyzed yet another acute growth panic, and that's being exacerbated each and every day by scary-looking visuals like this one:
(Heisenberg)
That shows auto sales in China plunged 92% during the first two weeks of February, which makes sense considering the almost total lockdown imposed across various locales. Estimates for Chinese growth in Q1 vary widely, but suffice to say the numbers are going to be very, very bad.
But what really spooked markets on Friday, was how quickly the virus appeared to show up in US PMIs. The flash reads for February from IHS Markit were alarmingly bad. Not only did the composite gauge print in contraction-territory for the first time since early 2016, the services PMI printed 49.4, a horrible miss to consensus (53.4) and the first contractionary read in four years. The word “virus” showed up a half-dozen times in the accompanying commentary from IHS Markit.
(Heisenberg)
The numbers suggested the US economy, which was growing at a 2% clip just last month, decelerated to a 0.6% pace of growth in February.
This is why nobody is buying into the reflation narrative anymore and why any bond selloff (i.e., higher long-end yields) will likely prove fleeting.
"In an investor universe which remains utterly cynical about the long-term secular prospects for inflation due to the '3Ds,' a 'good news' [trade] triggered by an easing of the coronavirus/global growth [fears] would likely require a more powerful fiscal stimulus input in order to sustain [itself] and actually cause a rethink of the current disinflationary macro regime," McElligott went on to say, in the same Thursday note.
That is, perhaps, the most crucial point out there. As you might have noticed, 30-year yields in the US hit record lows on Friday. I've mentioned previously that you should be sure you understand all of the dynamics involved when you try to assess what the bond market is "saying." Although the duration rally on Thursday and Friday was absolutely attributable in part to growth concerns and the flight-to-safety trade, buying from Japanese accounts and dealer hedging of positions tied to Formosa issuance likely magnified the move.
To the extent things have overshot to the downside (on yields) as they did in August (when convexity flows accounted for more than half of the move lower in 10-year yields, according to JPMorgan's estimates), that makes the argument for the kind of "snap-back," contrarian trade mentioned above stronger.
But, again, that's likely to be just a "trade," until there's some reason for market participants to engage in an actual secular rethink.
At this point, most folks have given up on the idea that monetary policy is sufficient to stave off the disinflationary impulse. The February edition of BofA's fund manager survey found more than a quarter of participants choosing Modern Monetary Theory as perhaps the only thing capable of restoring the reflationary impulse in a sustainable way. (It's the "only Stephanie Kelton can save us now" answer.)
.
(BofA)
That brings us full circle, and as such, I'll give you the longer quote from McElligott.
To wit (and this is verbatim - Charlie employs lots of emphasis, all-caps and short-hand):
Perversely however, in order to see that political capitulation into a “stickier” FISCAL stimulus willingness (and drive an investor “secular re-think), you would actually need to see things get worse first—i.e. COVID-19 escalating and forcing PBoC back into a “property easing” / “PSL 2.0” policy adjustment (the closest the Chinese have come to QE); or a US recession into the election which could tilt the Presidential / Senate / House races more towards a “hard left” outcome, with potentially “reflationary” MMT- / Universal Income- / Infrastructure- odds increasing as a result (although I am personally of the view that this could create a stagflationary mess, especially as tax policy and “re-regulation” could drive an enormous NEGATIVE GROWTH SHOCK)
In the near-term, the Fed has to decide what to do. As detailed here a few days ago, the dollar's relentless surge (which took a breather on Friday following the PMI debacle) means additional rate cuts are all but inevitable, even as Richard Clarida tried to push back on that twice this week (see here and here).
Clarida's protestations notwithstanding, it's going to be pretty hard to keep resisting. The 2s10s has now erased almost 25bps of the Q4 steepening, the 3-month-10-year curve has re-inverted and the market is now pricing two full cuts by year-end.
.
(Heisenberg)
So, that's the state of play. Are you still in the game?

The Height of Idiocy

by Doug Casey




"The only element in the universe more common than hydrogen is stupidity."

– Einstein


I’m not a fortune teller. In fact, the only things anybody knows about predicting – even if you gussy the concept up by calling it "forecasting" – are 1.) Predict often and 2.) Never give both the time and the event.

The worst offenders are those who pretend they know where the economy’s headed.

Statistics – so often the basis of conjecture with regard to the economy – are so subject to interpretation, and so easy to take out of context, that most of the time they’re best used as fodder for cocktail party conversations.

Still, as potentially wrong-headed and tendentious as the subject is, "the economy" is occasionally worth talking about simply to establish a clear point of view.

In fact, I place the phrase "the economy" in quotes because I don’t even accept the validity of the concept, nor that of "the GDP"; they’re both chimeras.

The idea of GDP gives the impression that it is not individuals that produce goods and services, but rather a machine called "the economy." This leaves the door open to all manner of nonsense, like the assertion that what may be good for individuals may not be good for the economy, and vice-versa.

For instance, an advance in the GDP doesn’t necessarily mean increased prosperity: What if the government embarked on a massive pyramid building program, an archetypical example of public works?

GDP might rise, but it would add absolutely nothing to the well-being of individuals. To the contrary, the building of the pyramid would only divert capital from wealth-generating activities.

On the other hand, if a scientific breakthrough was made which cut energy consumption by 80% for the same net output, or magically eliminated all disease, the GDP would collapse because it would bankrupt the energy and health industries.

But people would be vastly better off.

Entirely apart from that, the whole idea of GDP gives the impression that there actually is such a thing as the national output.

In the real world, however, wealth is produced by someone and belongs to somebody. We’re not ants or bees working for the hive. The whole idea of a GDP just allows the "authorities" to bamboozle people into believing they can actually control "the economy," as if it were some giant machine.

The officials pretend to be the Wizard of Oz, and Boobus americanus is trained to think they’re omniscient. Thus whenever the rate of growth slips "too low," officials are expected to give "the economy" a suitable push. Conversely, whenever "the economy" is growing too fast, the officials are supposed to step in to "cool" it.

It’s all an embarrassing and destructive charade.

Nonetheless…

I remain of the opinion that we’re headed into the biggest economic smashup in history.

That’s an outrageous statement, and it’s always dangerous to say something like that.

After all, the longest trend in motion is the Ascent of Man, and that trend is unlikely to change; indeed, it’s likely to accelerate. And it’s usually a mistake to bet against an established trend.

Furthermore, science and technology will continue advancing, people will continue working and saving, entrepreneurs will continue to create. And downturns in the economy have always been brief. There’s a good case for staying bullish.

Even most of those who talk of a recession tend to write it off as either a simple reversal of recent "irrational exuberance," or a passing change in people’s psychology, or a temporary shock.

Unfortunately, it goes much deeper than that. Those things have very little to do with what recessions are all about.

A recession, according to the conventional parlance, is a period when economic activity declines for two or more quarters. That’s a description of what happens, but it’s really not very helpful, much like saying a fever is a period during which your temperature is above 98.6 F. A better definition of a fever might be a period when the body’s temperature is elevated as a consequence of fighting an infection, in that it gives you some insight into the cause as well as the effect.

That’s why I prefer to say a recession is "a period of time when distortions and misallocations of capital caused by the business cycle are liquidated."

What causes the business cycle?

Excess creation of credit by a central bank (e.g., the Fed). The injection of artificially created money and credit into a country’s economy gives both producers and consumers false signals, causing them to do things which they otherwise would not do. The longer the upswing of a business cycle continues, the longer and more severe the down cycle will be.

A depression is just a really bad recession.

One thing that – contrary to popular opinion – can help get an economy out of a recession is a large pool of savings; savings give people the money to invest in new production, as well as the money to buy that production.

That’s why it’s the height of idiocy for pundits to talk about how patriotic it is to go out and shop. It can only deplete the capital that will be needed in the future, and deepen the bottom with more bankruptcies, stealing consumption from the future.

That’s why the Fed’s artificially low interest rates is such a bad idea; it encourages people to save less and borrow more. This engineered decline may well, after a certain lag time, cause a cyclical upturn – but it will only aggravate the underlying problem, guaranteeing yet a bigger bust.

This isn’t just an American problem, because the U.S. is truly the engine of the world’s economy. But a lot of the drive behind the engine is the gigantic trade deficit. The hundreds of billions the U.S. sent abroad in the last year alone, after over a decade of increasing deficits, has caused a lot of capital investment that will become uneconomic, and created a lot of economic activity that will come to a screeching halt when that deficit inevitably reverses.

The whole world is levered on what happens in the U.S.

The effect in economies around the world will be devastating. The Smoot Hawley tariff of 1930, which acted to collapse world trade, greatly exacerbated the last depression. It could be that economic conditions in the U.S. alone could do it this time, without the overt "assistance" of the government.
I don’t believe we’re looking at just another cyclical downturn this time.

We could be – but I don’t think so.

Of course, since the dollar is by far the biggest market in the world, constituting the reserves of almost every government on the planet, the de facto currency of probably 50 countries, and the savings of hundreds of millions of people around the world, when it collapses, it will cause a financial earthquake, Magnitude 10.

Use any rallies as selling opportunities. Diversify your assets out of the U.S. Build a good position in gold. Buy gold stocks with speculative capital. Get your debt, if any, down to comfortable levels.

Does Trump’s Peace Plan Matter?

By: Hilal Khashan


Last week, U.S. President Donald Trump announced a plan to end the Israeli-Palestinian conflict.

Although the Palestinians immediately rejected the proposal, many Arab states embraced it. In fact, the ambassadors of the United Arab Emirates, Oman and Bahrain attended the press conference where the plan was announced – though the ambassadors of Egypt and Saudi Arabia, two core Arab countries that have also endorsed the proposal, were conspicuously absent.

Nonetheless, the presence of representatives from three small Arab states was aimed at giving the plan a modicum of Arab legitimacy. Ultimately, however, Trump’s peace plan will not bring peace to the Middle East.

Changing Attitudes Toward Israel

Arabs did not enter the 1948 war against Israel enthusiastically. The Egyptian Cabinet was opposed to it; the Hashemites joined it to grab their part of Palestine as per the 1947 partition plan; and the Syrians had a rudimentary and poorly led army. Until 1967, when the Six-Day War broke out, Egyptian President Gamal Abdel Nasser insisted that he had no intention of going to war with Israel, and that he would only consider a defensive war to repel an Israeli attack.

He demanded the implementation of United Nations resolutions for ending the conflict with Israel, especially U.N. Resolution 194, which called for repatriating or compensating Palestinian refugees. But in 1967, Nasser miscalculated when he closed the Tiran Strait to Israeli shipping. This gave Israel the pretext to go to war, complete the unfinished 1948 conflict and seize all of historical Palestine.

Over time, however, attitudes among some Arab states toward Israel have begun to change. Israel signed the Camp David Accords with Egypt in 1978 and the Wadi Araba Peace Treaty with Jordan in 1994. The 2002 Arab Peace Initiative would have recognized Israel’s right to exist and extended official legitimacy to it, though Israeli Prime Minister Ariel Sharon never agreed to the proposal.

Arab countries are eager to bury the hatchet with Israel and engage on economic, political and defense matters. They have a vested interest in aligning with Israel militarily against what they see as a looming Iranian threat and politically against an increasingly aggressive Turkish foreign policy in the Gulf, Red Sea and Eastern Mediterranean. In fact, they have been cooperating with Israel on economic and intelligence issues for years. But most of the Arab-Israeli cooperation has been taking place covertly.

This is why Arab states are eager to find a deal that would solve the Palestinian issue. Arab tradition places great emphasis on honor, so having an agreement between the Israelis and Palestinians would allow the Arabs to deal with Israel openly without being accused of selling out.

But agreeing to a deal has proved exceedingly difficult. For Israel, negotiating peace agreements with Egypt and Jordan was fairly easy. Its territorial claims on Sinai were flexible; after occupying it three times in 1948, 1956 and 1967, it always proved willing to return it to Egyptian rule.

The 1974 Arab summit in Algiers relieved Jordan of its claim to the West Bank, which made making peace with Israel more manageable. However, the Golan Heights and the West Bank are a different matter. The Israelis believe they have a right to these areas – that they already paid a high price for the security they would afford. The West Bank also has religious significance for Israelis, so they will not give up their claims to it quietly.

The Palestinians feel betrayed by their fellow Arabs who made peace with Israel without defending their rights and transformed the Arab-Israeli conflict into a Palestinian-Israeli conflict. It should be no surprise, therefore, that the latest plan has been met with mixed responses from the region.

A Breakthrough Deal?

While U.S. officials have hailed Trump’s “deal of the century” as a breakthrough, the Palestinians have fiercely denounced it as the “slap of the century.” Peace treaties usually reflect the economic, political and military balance of power in the conflicts they are meant to resolve. But this concept often does not apply in matters of high principle such as the Israeli-Palestinian conflict.

Israel has won every conventional war against Arabs, and the Palestinians realize that they are the weaker party in the negotiating process. But the financial incentives in Trump’s plan have not convinced the Palestinians to accept the loss of East Jerusalem as their capital and all but 15 percent of Palestinian-claimed land.


Conceptual Map of U.S.-Proposed Peace Deal


The Israeli position on accommodating Palestinian national aspirations has not changed since the 1978 Camp David Accords, which promised to grant the Palestinians a self-governing authority within five years but only under a permanent Israel Defense Forces presence inside the West Bank.

This was followed by the 1993 Declaration of Principles to establish interim Palestinian self-rule that would lead to a permanent settlement of the conflict within five years on the basis of Security Council resolutions 242 and 338. The same resolutions governed the formulation of the Oslo I (1993) and Oslo II (1995) agreements.

Trump’s plan gives the Palestinians four years to comply with certain prerequisites of statehood, including recognizing Israel as a Jewish state (despite the fact that 21 percent of its population are Arabs). The Palestinians believe that by the end of the four years, Israel will conclude that they have defaulted on the deal and continue to build settlements and change the reality on the ground.

Indeed, both the Israelis and the Palestinians view each other with suspicion and distrust. The Israelis believe that the ultimate objective of the Palestinians is to see the destruction of their state, whereas the Palestinians argue that Israel is stonewalling any attempts at peace. They would cite as an example the 2002 Quartet on the Middle East, which introduced a roadmap to peace that would help the Palestinians prepare for statehood. The roadmap ultimately went nowhere.

The latest proposed peace deal also seems destined to go nowhere. Though the Palestinians have rejected it, Arab countries like Morocco, Egypt, Oman, Bahrain and the UAE have embraced it. Arab rulers are undeterred by the plan’s recognition of Jerusalem as Israel’s undivided capital; they understand that Trump’s peace plan is an attempt to appeal to his evangelical base ahead of U.S. elections in November.

On Feb. 1, Arab foreign ministers gathered for an emergency meeting requested by the Palestinian Authority. This is just one more sign of the growing divide between the Palestinians and Arab countries that want to move beyond the Palestinian question.

No End in Sight

The stateless Palestinians are the weakest link in the Arab world. Yet, they possess the strongest bargaining chip vis-a-vis Israel, because as long as there is no agreement on their status, there will be no peace in the Middle East. Israelis demand that Palestinians accept Israel as a Jewish state but are willing to make few concessions.

The Palestinians argue that the creation of the state of Israel in 1948 and their expulsion from their homeland was an injustice. They believe that the Hashemites and Ibn Saud colluded with the British and the Zionist movement to facilitate the rise of the Jewish state at their expense.

The center of gravity for Arab politics has shifted over the past 40 years from Egypt, Iraq and Syria to the Gulf – namely, Saudi Arabia and the UAE, countries that do not view Israel as their enemy. They want to establish an alliance with Israel to neutralize the threat from Iran and Turkey. (Egypt and Morocco are not concerned about Iran because, as a Shiite country, Iran is incapable of religiously influencing their populations.

They are, however, concerned about Turkey, a Sunni country currently governed by the pan-Islamist Justice and Development Party, or AKP.)

The Palestinians know that they will continue to live under Israeli surveillance with or without a peace treaty. They have endured conflict for more than a century, and it has no end in sight.

Their rejection of Trump’s plan will preclude the establishment of an open alliance between Arab states and Israel. Without Palestinian endorsement, there’s little hope that Arab-Israeli cooperation can move forward.

Clash of the Titans

By: Peter Schiff



In the decades that I have been listening to politicians clumsily trying to explain the economy there has never been a period, with the possible exception of the early Reagan years, in which major party leaders were able to present a solid grasp of economic principles. But I have never seen a time in which the levels of ignorance coming from those in leadership positions is so extreme.

The state of affairs can be illustrated by two interviews last week by Donald Trump and Alexandria Ocasio-Cortez for the Democrats, the two undisputed leaders of our major political parties. Both put forth visions this week that are illogical, incoherent, and that completely ignore both data and experience. But these leaders are putting out beacons under which the vast majority of Americans are congregating. It’s worse than the blind leading the blind, and it bodes very poorly for our ability to deal with the next economic crisis, which I believe is certainly slouching towards Washington, waiting to be born.

Before I get into particulars, let’s dispense with the notion that AOC does not speak for the Democrats. She is the leader of the progressives, and the progressives are in control. The recent dust up between Elizabeth Warren and Bernie Sanders shows how far the moderate wing of the Party has fallen.

While it may be true that Warren is just as far left as Sanders, the Democrat establishment is more comfortable with her, as they know she would be willing to fake moderation and to “tack” toward the center if she wins the nomination. On the other hand, Sanders has been an unrepentant communist his entire life and is unlikely to alter that message one iota if he faces Trump in the Fall. (In a 1981 Today Show interview, Sanders stated clearly that he does not support the “capitalist idea of competition” and that people work better under a cooperative system.

In other words, he believes in the absurd Marxist proposition that people are just as likely to work for the benefit of strangers than they would for themselves.) Establishment Democrats fear that Trump will win that contest going away, so they are in full panic. Last week they took the gloves off.

It began with Warren’s calculated allegations that Sanders, in a private conversation between the two, had claimed that a woman could not be elected president. The allegation was pressed by establishment allies at CNN through supportive commentaries and stilted questioning at the CNN-sponsored debate. Leading pundits fell in line behind Warren with an awkward twist on the “believe all women” mantra of the me-too movement. They painted Sanders as out of touch at best, and sexist at worst.

The next anti-Bernie attack came a few days later when Hillary Clinton let loose, calling him unlikable and ineffective. She even failed to commit to endorsing him if he were to win the nomination.(J.Easley & A. Parnes, The Hill, 1/22/20) This simply made Hillary look like a more corrupt and opportunistic figure than many democratic activists previously thought.

But these attacks failed spectacularly and simply deepened mistrust about the Clinton wing of the Party and reaffirmed Warren’s reputation as an opportunist. Despite the full court press, the Warren campaign is now in free fall and the Sanders campaign is surging.

The establishment is left hoping that doddery Joe Biden can somehow revivify over the next 10 months, and escape any contamination from the Ukraine affair. But no one who is not receiving a paycheck from the DNC really believes this. It’s no accident that a major poll this week showed Biden trailing Sanders for the first time nationally.

And while Bernie has now emerged as the soul of Democrats, everyone knows that he is not the Party’s future. That honor is increasingly falling on his young and telegenic protégé from the Bronx, who would be running for president right now if she had enough candles on her cake to constitutionally qualify (she will be eligible in 2024).

For all his leftist authenticity, Sanders is also an old white man, a trio of sins that modern woke progressives have a hard time forgiving. On the other hand, Alexandria Ocasio-Cortez is the fulfillment of their wish list: she’s ethnic, young, female, and sees the United States as a notably racist, sexist, and tyrannical country that continues to be a slave state for its own citizens and an oppressor to the rest of the world.

And despite the fact that her resume is thin enough to be written on half a napkin, she is bold enough to challenge the most senior members of her own party (without paying the slightest price politically). Those in the establishment dare not cross her and her statements, no matter how absurd; they are treated as wisdom from the burning bush. In that sense, she looms over the Democrats much the way that Trump looms over the GOP.

As absurd as it may sound, there are remarkable similarities between the appeal of Trump and AOC. Both are political outsiders who use social media fueled demagoguery to appeal directly to the people, and are largely contemptuous of party establishments. Both shoot from the hip and spin stories that are completely unrelated to history or economic reality. So, with that preamble, let’s see what these two economic luminaries are now saying.

On January 22, in a sit down at the World Economic Forum in Davos, with CNBC’s reliably pro-Trump anchor Joe Kernan, the President delivered a self-congratulatory turn that was brazen by even Trump’s legendary standards. With a series of wildly inaccurate statements (and I’m not just talking about his idea that Thomas Edison invented the wheel), Trump claimed that the U.S. economy is now experiencing “unprecedented economic growth that the world has never seen before.” This statement is absurd on its face.

In his first three years in office, the U.S. economy has expanded at about 2.6% annually, based on GDP statistics from FRB St. Louis. While this is just slightly higher than the growth seen in Obama’s second term (which President Trump described in his inaugural address as “American carnage”), it is strikingly lower than the average growth rate we have had over the last 90 years, based on GDP data from the U.S. Bureau of Economic Analysis (BEA). There are also many three or four year periods in our history in which GDP growth was multiples higher than the current growth rate. And that doesn’t even address the growth rates that have been seen in recent history in Asian countries. For much of the past 20 years, Chinese growth has been north of 8% annually? Does he not know that?

Trump claimed that during his term in office, the net worth of the bottom half of wage earners has increased by 47%. I don’t know where he got this statistic. I have looked, but I can’t find it. But it does not pass the smell test. Median wage in the U.S. is about $63,000 (U.S. Census Bureau, 2018). The bottom half of earners must earn less than that by definition. People making that kind of money often have little to no assets or savings.

What savings they may have are usually more than compensated by household debt. What factors would have resulted in a near 50% expansion of their net worth? Trump simply may be assuming that the 50% growth in the stock market since his election has created similar growth patterns in the broader economy. But that is not the case at all.

As proof of economic success, Trump noted that for the first time there are more women in the workforce than men, according to data from the U.S. Labor Department. But what does that prove? Perhaps it points to the contraction of those sectors that have typically employed more men, such as manufacturing and construction, while the service sector jobs in education and health care, which typically employ more women, have been expanding. This reality is in stark contrast to Trump’s typical boast that his policies have led to a boom in domestic manufacturing. Manufacturing jobs have declined consistently during his presidency.

Trump also spent a lot of time with Kernan talking about his opposition to interest rate increases or attempts to shrink the Fed’s balance sheet, and his desire for negative interest rates. Showing no understanding of why debt is a drag on growth or why high rates would be good for the economy, Trump believes that negative rates would boost the stock market further and help the country pay off the debt.

In reality, negative rates would only make it easier for the government to borrow more. He then repeated the rhetorical question he asked at the signing ceremony for the Phase 1 China deal, regarding just who is dumb enough to buy negative yielding bonds. The obvious answer, that somehow eludes the President, is central banks. So Trump wants the Fed to be dumb so that he can look smart and keep pretending the economy is booming.

This then led to a discussion about Trump’s plan to tackle the growing deficits, which in the first three years of his presidency are significantly higher than in Obama’s second term. Kernan asked if Trump would favor relying more on tax increases or spending cuts to achieve that objective. Trump replied that he would do neither, and that additional tax cuts in his second term would solve the problem. It mattered little to Trump that the tax cuts in his first term led to much larger deficits.

Trump then went on to claim that he favors a strong dollar, but immediately followed up on how great it would be for the economy if the dollar gets weaker instead. Ironically, I think Trump’s wish will be granted. But I suspect a weaker dollar will not deliver the benefits Trump is hoping for. It will push up interest rates and consumer prices, and prick the bubble that Trump so proudly claims constitutes the greatest economic boom in history.

For her part, Alexandria Ocasio-Cortez sat down in NYC for a Martin Luther King Day event with an equally sympathetic questioner, Ta-Nehisi Coates, the black author and activist. In their extraordinary exchange, AOC gave her clearest view to date of her absolute opposition to capitalism, business ownership, and economic freedom, and her clear support for state seizure of wealth and the control of the means of production. In other words, she went full-throated Bolshevik.

The sad part is that unlike her mentor Benie Sanders, AOC probably never studied anything about the Russian revolution and its subsequent evils and failures. While it’s true that she only lived for 11 years in the 20th Century, I would have hoped that it would have come up once or twice in her history or economics classes at Boston University. But she behaves as if she is completely unaware of anything that happened before the 2016 election.

In her interview with Coates, AOC offered further development of the controversial “you didn’t build that” claim made by Barack Obama in which the former President claimed that American business only succeed because of investments the government makes in education and infrastructure. And while that statement is widely off the mark, it’s nothing compared to AOC’s comment that in America “No one ever makes a billion dollars. You take a billion dollars.”

Her theory is rooted in Marxist theories of labor, which assumes that workers produce all the value of a company’s products and services, while owners simply ‘sit on the couch’ and count the profits. She sees profits coming solely from worker exploitation, and that private ownership of capital is a modern version of slavery. When asked how a billionaire entrepreneur like Jeff Bezos could regain his status as a “moral” person, AOC says that the answer is simple “turn your company into a worker cooperative.”

Of course, AOC never delineated a threshold by which an owner of a company becomes an evil bloodsucker. We know that she would apply that label to a billionaire with 1,000 employees. But how about a less successful entrepreneur with only 100 employees and $10m net worth? How about a store owner with 10 employees and $1m in the bank? Is it only the scale that makes the billionaire immoral? Who decides when that line is crossed? Clearly, AOC’s experience taking classes at Boston University and mixing drinks in New York provide her with that expertise.

AOC claims that she wants to democratically transform the U.S. economy so that we finally give power to the people. But what she really wants to do is to take the power the people already have and give it to the government instead. AOC does not realize that capitalism empowers workers to decide where they want to work, where they want to live, and how they spend their money. The entire system is based on the process of getting consumers more of what they want for less money. Jeff Bezos became a billionaire because he made shopping easier for hundreds of millions of people. Collectively, the world has benefitted more than Bezos from his innovations. AOC wants to replace the free market with a command economy, where decisions are made by coercion rather than choice.

She further described capitalism as a fleeting and outmoded economic model. She argues that a “worker collective” in which the workers themselves own the companies they work for is a better model. She does not seem to realize that such structures are perfectly legal in the U.S. and that business partnerships happen all the time. However, she does not grasp how those structures become unworkable at large scale as executive authority is critical to making the decisions that keep a company alive.

She also does not understand that the vast majority of workers do not want to be business owners. That requires sacrifices and risks that they are unwilling to assume. Business owners don’t just lie back on a couch as she imagines. They often put in far more hours than their paid employees. Workers want the security of a steady paycheck, something business owners forego.


They also don’t want to risk their savings on a business venture that may fail. Workers at any business are free to quit and join together to form their own cooperatives. But few are willing to take the chance. AOC’s solution is to let someone else take the chance, make the sacrifices, and do all the work, and then if they succeed, employees can use their votes and the power of the state to steal the business. Apart from the immorality of legalized theft, history shows that once confiscated, successful businesses are quickly run into the ground.

If AOC knew anything about history, she would be familiar with the mass experiments in socialization that have come to ruin and misery in the recent past. She is similarly blind to the enormous strides in living standards that the developing world has made in recent years by embracing capitalism and rejecting socialism. And, of course, she fails to understand the history of her own country, which owes its prosperity to the system she despises.

So, that’s what this has come to, Clash of the Titans. Two people, whose collective ignorance of economics is staggering to behold, vie for the soul of the country. Lord help us.

Unfortunately, I think a worst-case scenario may be the most likely one. And it goes something like this: Disarray in the Democrat Party allows for the nomination of Bernie Sanders, who loses to Trump in the general election. But then the danger arises. Trump and the Republicans could not have taken credit more forcefully for the current economy. When the current bubble pops during Trump’s second term, there will be no way for them to avoid the blame. The more we cling to the ridiculous idea that the current economy is booming because of Trump, the more we create the conditions for Bernie Sanders and AOC to make us the next Venezuela.

Alternatively, Sanders actually beats Trump: If the bubble pops on his watch, this might actually provide a ray of hope. Since, I believe, the economy will be in far worse shape in 2024 than it will be in 2020, perhaps a true free market advocate may be able to put the blame where it belongs. If we stop digging the hole deeper, we may one day actually get out, and fulfill Trump’s unkept promise of making America great again. But if Trump stays in office for two full terms, AOC’s America may be a very difficult trap to escape.