Who controls the conversation

How to deal with free speech on social media

It is too important to be determined by a handful of tech executives



It is the biggest antitrust suit in two decades. On October 20th the Department of Justice (doj) alleged that Google ties up phone-makers, networks and browsers in deals that make it the default search engine. The department says this harms consumers, who are deprived of alternatives. 

The arrangement is sustained by Google’s dominance of search which, because of a global market share of roughly 90%, generates the advertising profits that pay for the deals. The doj has not yet said what remedy it wants, but it could force Google and its parent, Alphabet, to change how they structure their business. Don’t hold your breath, though: Google dismisses the suit as nonsense, so the case could drag on for years.

Action against Google may seem far from the storm gathering against Facebook, Twitter and social media. One is laser-focused on a type of corporate contract, the other a category 5 hurricane of popular outrage buffeting unaccountable tech firms for supposedly destroying society. 

The left says that, from the conspiracy theories of QAnon to the incitement of white supremacists, social media are drowning users in hatred and falsehood. The right accuses the tech firms of censorship, including last week of a dubious article alleging corruption in the family of Joe Biden, the Democratic presidential nominee. 

And yet the question of what to do about social media is best seen through the same four stages as the case against Google: harm, dominance, remedies and delay. At stake is who controls the rules of public speech.

A tenth of Americans think social media are beneficial; almost two-thirds that they cause harm. Since February YouTube has identified over 200,000 “dangerous or misleading” videos on covid-19. 

Before the vote in 2016, 110m-130m adult Americans saw fake news. 

In Myanmar Facebook has been used to incite genocidal attacks against the Rohingyas, a Muslim minority (see article). Last week Samuel Paty, a teacher in France who used cartoons of the Prophet Muhammad to talk about free speech, was murdered after a social-media campaign against him (see Obituary). The killer tweeted an image of Mr Paty’s severed head, lying in the street.

The tech firms’ shifting attempts to sterilise this cesspool mean that a handful of unelected executives are setting the boundaries of free speech (see Briefing). True, radio and tv share the responsibility for misinformation and Republican claims of bias are unproven—right-wing sources often top lists of the most popular items on Facebook and Twitter. 

But pressure is growing on the tech firms to restrict ever more material. In America the right fears that, urged on by a Democratic White House, Congress and their own employees, the firms’ bosses will follow left-leaning definitions of what is acceptable. Contrast that with the First Amendment’s broad licence to cause offence.

Elsewhere, governments have also used social media companies to go beyond the law, often without public debate. In London the Metropolitan Police requests that they take down legal, but troubling, posts. 

In June France’s Constitutional Council struck down a deal between the government and the tech companies because it curbed free speech—an initiative that is sure to be revisited after Mr Paty’s murder. Citing Western precedents, more authoritarian governments in countries such as Singapore expect the tech firms to restrict “fake news”—potentially including irksome criticism from opponents.

This might not matter were the networks less dominant. If people could switch as easily as they change breakfast cereal, they could avoid rules they dislike. But switching is like giving up your mobile-phone number: it cuts you off from your friends. Social networks have also become so central to distributing news and opinion that they are, says Mark Zuckerberg, Facebook’s founder, a “town square”. If you want to be part of the conversation you have no choice but to be there, soapbox in hand.

This hold over users has one further dismal implication for truth and decency. In order to sell more ads, the tech companies’ algorithms send you news and posts that they think will grab your attention. Political cynics, con artists and extremists take advantage of this bias towards virality to spread lies and hatred. 

Bots and deep fakes, realistic posts of public figures doing or saying things that never happened, make their job cheaper and easier. They are rapidly becoming more sophisticated.

The purest remedy for this would be to change the tech firms’ business model and introduce more competition. That is already working well in other areas of tech, like the cloud. One idea is for people to own their data individually or collectively (see Schumpeter). 

The social networks would become utilities paid a flat fee, while people or collectives earned the rent from advertisers and set the parameters for what was served up to them. At a stroke that would align the gains from advertising with the burden upon the people being advertised to. If users could port their data to another network, the tech firms would have to compete to provide a good service.

The obstacles to this are immense. The tech firms’ value would tumble by hundreds of billions of dollars. It is not clear you own the data about your online connections. You could not migrate to a new network without losing the friends who stayed behind unless the platforms were interoperable, as mobile-phone networks are. Perhaps the authorities could impose less sweeping remedies, such as giving users the right to choose feeds set by a neutral rule, not an attention-grabbing algorithm.

The keys to the hype house

Such ideas cannot be implemented quickly, but societies need solutions today. 

Inevitably, governments will want to set the basic rules at the national level, just as they do for speech. They should define a framework covering obscenity, incitement and defamation and leave judgments about individual posts to others. International human-rights law is a good starting-point, because it leans towards free speech and requires restrictions to be relevant and proportionate, but allows local carve-outs.

Social-media firms should take those standards as their basis. If they want to go further, attaching warnings to or limiting content that is legal, the lodestars should be predictability and transparency. As guardians of the town square, they ought to open their processes to scrutiny and particular decisions to appeal. 

Ad hoc rule changes by top executives, as with the recent Biden decision, are wrong because they seem arbitrary and political. Hard cases, like kicking opponents of Bashar al-Assad in Syria off a platform for mentioning terrorists, should be open to review by representative non-statutory boards with more power than the one Facebook has created. 

Independent researchers need much freer access to anonymised data so that they can see how platforms work and recommend reform. Such rule-making should be open to scrutiny. In America politicians can use removing the protection from prosecution granted by Section 230 of the Communications Decency Act as a lever to bring about change.

This will be messy, especially in politics. When societies are divided and the boundary between private and political speech is blurred, decisions to intervene are certain to cause controversy. The tech firms may want to flag abuses, including in post-election presidential tweets, but they should resist getting dragged into every debate. 

Short of incitement to violence, they should not block political speech. Politicians’ flaws are better exposed by noisy argument than enforced silence. 

The world must counter China’s dominance of rare earths

Country has grip on swath of minerals crucial to future key industries

James Conway and Peter Ackerman 

China now accounts for 90 per cent of the world’s rare earths production and also controls the refining and processing sectors © FT montage; Bloomberg


In 2019, a sentence in a Chinese government-funded report made clear Beijing’s strategic advantage behind capturing the supply chains of critical minerals. If the US-China trade war intensified, the report noted “China will not rule out using rare earth exports as leverage to deal with the situation”.

Having flooded the market with cheap supply since the 1980s, China now accounts for 90 per cent of the world’s rare earths production. China also controls the refining and processing sectors — critical bottlenecks for security requirements in the US and around the world, as rare earths form the foundation of American high-end defence systems.

But Chinese dominance in rare earths is just the tip of the iceberg. The country has gained — and is determined to retain — a tight grip on a broad swath of minerals that form the foundations of tomorrow’s most important industries.

In its Made in China 2025 initiative, Beijing has identified a diverse array of industries with considerable emerging strategic and economic significance, including connected, autonomous, shared and electric vehicles and the batteries that power them. The country that leads this transition will be the nation that sets the standards and terms of trade for the future of transportation.

Key to leading this transition is ownership of the electric vehicle (EV) supply chain, from minerals to markets, and China has worked hard to exert vast control over the mining and processing of the critical minerals necessary for the batteries and components in EVs and other advanced fuel vehicles.

China’s lead is at present indisputable. More than 70 per cent of global EV battery manufacturing capacity is in China, while the US has less than 10 per cent. Of the 142 lithium-ion battery megafactories under construction worldwide, China will be home to 107 of them. Just nine will be in the US.

China also produces more than 60 per cent of the world’s cathodes and 80 per cent of anodes for batteries, and the majority of the world’s permanent magnets used in EV motors.

If left unchecked, this dominance will become a devastating strategic vulnerability for the US and EU, especially as our climate policy goals push us toward zero-emissions vehicles.

We risk a scenario in which we swap our dependence on a chaotic oil market dominated by Opec countries that do not share our strategic goals, for a reliance on China for our future transportation needs.

Like Opec’s leveraging of its oil production advantages in the past to suit its governments’ strategic goals — from the 1973 oil crisis to the 2020 Saudi-Russian price war — there is little to stop China using this supply chain dominance to advance its own priorities. And while oil is a global industry, minerals processing and EV component manufacturing is almost exclusively Chinese.

It also jeopardises the auto industry in both Europe and America, a sector in the US which supports 10m jobs, 3 per cent of the country’s gross domestic product, and forms the advanced manufacturing backbone of our economy. 

The best solution for the US and its partners is to not need such minerals at all. Committing to long-term research and development funding for recycling and developing substitute materials should be a governmental priority, freeing the country from supply chain vulnerabilities — and providing a long-term, sustainable boost to energy security.

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But until viable alternatives are found, we need to develop a critical minerals supply chain less dependent on China.

Recognising that co-operation is key to strengthening minerals supply chains, the US must charter a rare earths co-operative to build and operate an integrated refining, processing and metallurgical facility.

It is essential to develop a domestic supply chain for critical minerals, with reasonable mining and permitting processes to enable our companies to compete. To ensure this can happen, extraction and processing must take place in return for a commitment to strict environmental standards, recycling and R&D for new material research.

For the minerals unavailable domestically, the international allies must diversify supply, working together to limit Chinese investment in critical resource reserves.

The national security weaknesses of relying on China for rare earths are simply too great to remain stuck with the status quo.


General James Conway is the 34th Commandant of the US Marine Corps and Peter Ackerman, the founding chair of the International Center on Nonviolent Conflict, co-chair of the international advisory committee of the United States Institute of Peace and a member of the executive committee of the board of the Atlantic Council. Both are members of the Energy Security Leadership Council, a project of Securing America’s Future Energy.

Biden’s Precarious Victory

After surviving a grueling election campaign and a cliff-hanger election, Joe Biden will most likely enter the White House with a significant achievement under his belt, but little to look forward to. Congressional Republicans and a right-wing Supreme Court will ensure that any attempt at meaningful reform or governance is dead on arrival.

Eric Posner


CHICAGO – Joe Biden has survived a grueling election campaign and a cliff-hanger election. Next, he must fend off legal challenges from US President Donald Trump’s campaign. While he will most likely enter the White House on January 20, 2021, he will wonder when he gets there whether the prize he sought for so long is a poisoned chalice.

After surviving a grueling election campaign and a cliff-hanger election, Joe Biden will most likely enter the White House with a significant achievement under his belt, but little to look forward to. Congressional Republicans and a right-wing Supreme Court will ensure that any attempt at meaningful reform or governance is dead on arrival. 

A President Biden will enter office confronting widespread economic distress, the seasonal escalation of a deadly pandemic, and a brutal international environment. 

These challenges would test even the most skilled leader. But Biden will be further hampered by a divided government, a hostile judiciary, a weakened federal bureaucracy, and lingering Trumpian populism among the public.

In the past, a newly elected president could expect some cooperation from the opposing party in passing legislation. Biden should expect nothing of the kind. Republican members of Congress largely beat expectations in the election and will see no reason for compromise. 

If Republicans retain their majority in the Senate, they can and will try to undermine the Biden administration, to create the conditions for an anti-Democratic backlash in the 2022 midterm elections. Progressive bills will be dead on arrival, and sorely needed constitutional reforms of the Electoral College, voting laws, and the presidency will not occur. More likely, Americans will have to endure sporadic government shutdowns amid a cold civil war that maintains a status quo of paralysis – at best.

Many of Biden’s nominations will also face hostility in a Republican-controlled Senate. Republicans probably will not deny him a secretary of state or an attorney general, but they will ensure that the executive branch is understaffed. Having incurred no electoral punishment for their hardball tactics over judicial nominations, they will block and delay all confirmations of federal judges.

Even if Democrats win a majority in the Senate, Biden will face formidable obstacles. With the confirmation of Amy Coney Barrett a week before the election, Republicans will enjoy a 6-3 majority on a Supreme Court that was already leaning more rightward than any court since the 1930s. Today’s Court will continue chipping away at the legal foundations of US regulatory agencies and advancing socially conservative values, as it has for the last two decades. 

Even if Biden can push progressive legislation through a divided Congress, he will still face the prospect of the Court striking it down. Indeed, the Court might finally deal a deathblow to the Affordable Care Act, the signature achievement of Biden’s former boss, Barack Obama.

With a likely understaffed executive branch and a hostile judiciary, Biden will have trouble exercising executive power. Federal agencies have suffered a loss of morale – and qualified staff – during the Trump era, and will most likely take quite a while to regroup. 

Efforts to undo the damage that Trump did to environmental, health, and safety regulation will come slowly from the depleted agencies, and all changes will be met with judicial skepticism from Republican-appointed – and especially Trump-appointed – federal judges.

Similarly, ambitious uses of regulatory and executive power to reform immigration or address climate change (on the model pioneered by Obama) will receive a frigid reception at the Court. Biden will inherit substantial legal authority to take measures to contain the pandemic; but Trump-appointed judges will push back when that authority conflicts with religious liberty and property rights, as they have already done when governors issued similar orders.

Finally, there is the elusive issue of public opinion. Though Biden won the popular vote, the American electorate remains deeply divided. Trump’s lawsuits claiming electoral fraud are unlikely to succeed, but his attempts to persuade Republican voters that Democrats stole the election will likely have a lasting effect. 

If Trump succeeds in delegitimizing the outcome in the eyes of enough voters, Biden will have even more trouble securing support for his policies from alienated Republicans and their elected representatives. Moreover, Biden also will be contending with a fractious Democratic coalition that could explode at any moment into a battle among leftists, moderates, and anti-Trump independents.

For all of these reasons, Biden will not benefit from the traditional honeymoon period that other newly elected presidents have enjoyed. He ran as a unifier, but, like Obama before him, he will quickly learn that you cannot win over those who despise you.1

That said, Trump’s defeat is a triumph for American democracy. Trump has been the most divisive and destructive president of modern times. His failure to win a second term, despite the numerous advantages of incumbency, will send a signal to ambitious politicians that populism and demagoguery are not the keys to victory. The moment should be savored for that reason – if for nothing else.


Eric Posner, a professor at the University of Chicago Law School, is the author, most recently, of The Demagogue’s Playbook: The Battle for American Democracy from the Founders to Trump.

The presidential election

America changes course, while remaining very much the same

A familiar election story unfolds


Liu xiaobo, China’s heroic anti-Communist dissident, was a great admirer of American democracy. “What interests me most”, he once wrote, “is the obvious evidence of how the American democratic system can correct itself…especially in moments of great crisis.” 

Shortly after he made that observation, Liu was imprisoned for the rest of his life. Yet the point stands. Viewed from sufficient distance, American voters seem to have again acted decisively in a moment of crisis and removed an incumbent president, something that has happened only once in the past 40 years.

Viewed from up close, the conclusions to draw from the results of the elections on November 3rd are less sweeping. Opinion polls, which showed Joe Biden with a vast lead going into election day, conditioned Democratic hopes and Republican fears for what would happen. Those polls turned out to be off—maybe even more so than they were in 2016.

The result is tight enough that even though Mr Biden seems likely to win enough electoral-college votes to make him the next president, there will be legal challenges, and the cathartic moment when one candidate wins and the other concedes still looks far off. 

If this is a repudiation of the president, the mechanics of the electoral college meant it is a marginal, equivocal one, which shows the grip of partisanship on the country.

Despite the covid-19 epidemic, turnout was the highest it has been since 1900—meaning that Mr Biden won more votes than any other candidate in American history. 

The states that run federal elections have yet again been unable to count votes as quickly as other big democracies manage to. In its general election last year, India counted 600m votes in a few hours, compared with the days it will have taken to tally about 140m votes in America. 

Yet so much was uncertain in the administration of this election, including the widespread use of voting by mail for the first time in some states, that such high turnout is still an achievement worth celebrating, even if it was mainly a product of something approaching existential terror on both sides.

High turnout did not, however, deliver the dividend that Democrats, as well as most analysts, were expecting. Since at least 2004, the last time a Republican won the popular vote, Democrats have assumed that high-turnout national elections are necessarily good for their party. 

And Mr Biden did win the popular vote comfortably, underlining the Democrats’ status as the party consistently favoured by a majority of American voters. 

This extends the Democratic run in the popular vote to seven of the past eight presidential elections, an achievement that receives no prize beyond the ability to claim that the country is not really as conservative as it seems. But increased turnout did not favour Mr Biden decisively. Instead, a cast of occasional voters who sat out 2016 made their voices heard and, in the end, came close to cancelling each other out.




That in turn underlines a second striking feature of the result, which is the degree to which 2020 looks like almost any other recent presidential election. North Carolina and Pennsylvania will not report definitively for a while. 

But thus far, with a few exceptions—notably Florida and possibly Arizona—the electoral map looks much as it did in 2012, when Barack Obama narrowly beat Mitt Romney. 

Despite everything that has happened over the past four years, in other words, this race ended up looking very much like what would occur if a generic Republican ran against a generic Democrat in a year when not much of note took place.

This is remarkable when you pause to remember all the things that have failed to break the partisan deadlock in 2020. Over the past year Donald Trump has been impeached by the House of Representatives, making him only the third president in American history to suffer this rebuke. 

Covid-19 has killed more than 230,000 Americans and caused the economy to oscillate wildly. The country saw well-publicised killings of unarmed African-Americans by police officers, the largest civil-rights protests in American history and episodes of violence in some cities.

California suffered awful wildfires, far-right thugs plotted to kidnap the governor of Michigan and the president had perhaps the worst first-debate performance ever seen. 

The president also nominated a third Supreme Court judge, securing a conservative majority on the highest court for decades to come. 

Hunter Biden’s laptop divulged its emails after the president’s lawyer somehow made sure it found its way to a friendly tabloid. At the end of all that, hardly any Americans had changed their mind about who they wanted to be the next president. 

It is possible to argue that all these things simply cancelled each other out. More likely, they were made irrelevant by the power of partisan bias to shape how voters interpret such events.

American elections used to be able to deliver landslides in moments of great turmoil. 

They no longer can. Ever since Ronald Reagan beat Walter Mondale by 525 electoral-college votes to 13 in 1984, though, partisan attachment has been growing in strength to the point where voters overwhelmingly vote the way they did last time, irrespective of the candidate, the policies, or what is going on in the country or the world. 

More than 90% of voters who voted for Mr Trump in 2016 had voted for Mr Romney four years earlier. Despite all the attention on Never-Trumpers, it is a safe bet that more than 90% of those who voted for Mr Trump in 2016 did so again this year. The president’s approval rating has barely budged in the past four years. 

Both sides dream of delivering a knockout blow that will allow them to govern as they wish; neither can manage more than a few jabs.

Hispanic lessons

The small number of voters who did switch in key states this time will be the object of fascination and study, as more data become available (hard-core election nerds will base their findings on the American National Election Study, which will be released in January). 

In 2016 the Obama-Trump voters in Pennsylvania, Michigan and Wisconsin were almost outnumbered by the journalists and sociologists who set forth to study them in their natural habitat. County-level results from 2020 suggest that Hispanic Republican voters may get the same treatment this time.

That group delivered the president both Florida and Texas. The Sunshine State now looks more like a reliably Republican place than a true swing state. In Texas Democrats are once again left arguing that demographic change will hand them the state at some unspecified point in the future—an argument that the party has been making to reassure itself for too long (the best expression of this optimistic thesis, “The Emerging Democratic Majority” by John Judis and Ruy Teixeira, is now almost 20 years old).

Democrats seemingly have to learn the same lesson over and over again: that Hispanic voters are not monolithic and that a more welcoming policy towards immigrants does not automatically translate into more votes from immigrants. In fact, county-level returns suggest the best predictor of a swing towards Mr Trump was the presence of lots of Latino voters.

Conversely, the best predictor of a swing towards Mr Biden was the clustering of college-educated Americans. In demographic terms, the story of the election is therefore a slight lessening of racial polarisation (the phenomenon of minority voters attaching themselves to the Democratic Party) and a slight increase in educational polarisation (the phenomenon of college-educated voters deserting the Republican Party). 

It is unwise to plot trend lines far into the future, but this looks like good news for the future prospects of Republicans, given how diverse the country is becoming, and given that only 36% of Americans have a bachelor’s degree.

Telling it how it isn’t

Despite their relatively small number, college graduates have disproportionate cultural sway in America. This tends to distort perceptions of what the country is really like, both from inside America and from outside. A very large share of college-educated Americans believed that Mr Trump was both a disastrous president and also a threat to America’s governing institutions. 

They also believed he was a racist, whose dog-whistles about immigrants and African-Americans would make him toxic to non-whites. This view is not as widely shared as they assumed it was.

Why might that be so? A survey from the Cato Institute, a libertarian think-tank, earlier this year found that “strong liberals” were the only ideological group in the country who felt free to express their political opinions without causing offence. Everyone else, from regular liberals to “strong conservatives”, felt somewhat muzzled by the political culture in which they sought to express those opinions. 

If this is accurate, there may be no amount of reweighting that can make polls accurate. A further, possibly related problem for prognosticators is that a lot of voters just do not trust pollsters enough to answer their questions: in 2016 fewer than 1 in 200 calls made by polling firms resulted in an interview with a voter. The same will probably have been true this time.

Mr Biden, then, looks set to become the 46th president, but by a narrow margin. His just-about victory will reignite a long-running argument in the Democratic Party about whether left-wing populism might be a better antidote to right-wing populism, a dispute that Mr Biden’s victory in the primaries seemed to have put to rest. The result looks likely to keep the Republican Party in thrall to Mr Trump and Trumpism for the foreseeable future. 

And it means that Mr Biden, if he is indeed sworn in come January 20th, will be highly constrained when it comes to domestic policy. Yet if the president it elects is the most visible measure of its values, America really has changed course. 

Market Surges As Election Turns Into Optimal Outcome

After reducing equity risk in portfolios over the last few weeks, we suggested last week the "selling" was likely overdone.

It was quite the reversal. The rally pushed the market back above the 50-dma and lower highs' previous downtrend. Such sets the market up for a retest of all-time highs next week.

However, before you get all excited and go throwing your money into the market, you may want to step back and re-evaluate your risk.


Market Surges As Election Remains Unclear

After reducing equity risk in portfolios over the last few weeks, we suggested last week the "selling" was likely overdone.

"All of our "sell signals" have been intact for the last few weeks, suggesting more downside risk near term. Those signals have now reversed to the point where we are likely to see a decent reflex rally starting as early as Monday. As noted in the year-to-date performance chart below, the market is 2-standard deviations below its 50-dma and is close to the September low support."

Just for comparison purposes, here is the chart from last week.


And it is updated through Friday's close.



It was quite the reversal. The rally pushed the market back above the 50-dma and lower highs' previous downtrend. Such sets the market up for a retest of all-time highs next week.

Not Out Of The Woods

However, before you get all excited and go throwing your money into the market, you may want to step back and re-evaluate your risk. If you haven't liked the ups and downs in the market over the last couple of months, you have too much "risk" in your portfolio.

The volatility isn't over. Particularly as we head into 2021.

Furthermore, while we did expect this rally and added exposure in our portfolios, the previous "oversold" condition has now been largely reversed. As shown below, the market is now back to more "overbought" conditions, which suggests limited upside from current levels. Also, the deviation from the 200-dma is now back to levels that have previously led to mild, short-term corrections.


Still A Sellable Rally

"Such a rally will provide an opportunity to rebalance portfolio risks accordingly. As we will discuss momentarily, the markets will begin to process the election's impact on various sectors and the market itself. 

However, the economy's disconnect remains longer term, which cannot last as earnings come from economic activity. While the very short-term trading environment is conducive for a rally, the longer-term 'investing' environment is still problematic with weakening relative strength, participation, and fundamental issues.

Keep a watch on the Advance-Decline line. Over the last few trading days, the rapid surge in prices pushed that indicator back to more extreme overbought conditions, typically denote short- to intermediate-term tops.


For all of these reasons, aggressively positioned investors can use any rally to adjust portfolio volatility and risk.

Remember, investing isn't a competition for who can say they "beat the market." There are no "trophies." However, there is a heavy penalty to your retirement goals if you are wrong.

Gridlock Is Best For Markets

On Thursday, in our daily "3-Minutes" video, I discussed why the markets were rallying despite a hotly contested election.


As noted, it doesn't matter who the President is. With the GOP potentially maintaining control of the Senate and narrowing the majority in the House, such vastly reduces significant policy changes such as:

  • Higher taxes.
  • Massive stimulus packages.
  • Extreme regulation on the oil and gas industry.
  • Large spending packages on "green energy."
  • Major reform or socialization of health care.
  • An inflationary spike.

Such bodes well for the markets as noted by MarketWatch:

"The likely reason that Wall Street likes gridlock is that it reduces the possibility that any major policy changes will take effect. Sam Stovall, chief investment strategist at CFRA, noted in an email to clients that the increasingly likely gridlock 'lessens the prospects for an increase in regulations and taxes.' In addition, he added, the gridlock reduces the likelihood of 'additional fiscal stimulus' - and that reduced likelihood in turn eases potential inflationary pressures down the road."

As noted last week, such also aligns with historical Presidential election years. 

The weakness in September and October turns to strength in November and December.

A Continuation Of The Rally Into Year-End

My colleague Doug Kass confirms our view of a rally into year-end.

"With the perception, in part, of election uncertainty and the quicker spread of Covid-19, market participants have been positioned defensively and cautiously. We have exited the weakest period of the calendar (August to October) and are entering a two-month period where stocks are seasonally strong.

The evolving market structure change, in which the market is dominated by products and strategies chasing price and momentum, could catapult the markets higher rather swiftly. In 'risk parity' and other quant strategies, 'buyers live higher and sellers live lower.' They are and might continue to buy high."

He is correct. 

Combine his thesis with a lack of significant policy changes from Washington, and it is likely money will continue to chase "risk assets" given no other alternative currently. With yield spreads compressed, interest rates at zero, the "T.I.N.A" (There Is No Alternative) narrative continues to reign.

However, as noted, beware 2021.

The Focus Turns Back To The Fed

Once we start to analyze what "Gridlock" will mean for policy, it should become apparent what the "risks" are.

As we have noted previously, earnings growth rates continue to drop as we head into next year. With stock prices back near all-time highs, this continues to be a market that is driven solely by valuation expansion.


The majority of that "price chase" has been based solely on the premise of more liquidity coming from the Federal Reserve. The hope, of course, is that eventually, earnings will play "catchup" with valuations. Historically, such has never been the case.

As we head into 2021, a "gridlocked" Congress potentially means less stimulus, less infrastructure spending, and more battles over the debt and deficit. The regular "debt ceiling" fights will return, and smaller stimulus packages will compound time delays.

Such translates into three critical factors for the financial markets:

  1. Less direct stimulus to households means reduced spending and lower rates of economic growth.
  2. Less stimulus means there is less debt issued, which keeps the Federal Reserve trapped with interest rates at zero.
  3. The combination of less stimulus and Fed monetization will lead to increased deflationary pressures.

In 2021, the odds of another recessionary bout will increase, putting downward pressure on stocks. The only question will be if the Federal Reserve can bail it out again as the "effective benefit" continues to decline.

The Fed Remains Stuck At Zero

This past week, the Federal Open Market Committee (FOMC) concluded their meeting. Not surprisingly, given the embattled election and lack of stimulus, they provided "happy talk" to the markets.

In other words, they said "nothing." As Mish Shedlock noted in his post:

"The Fed is stuck in glue. It did not change interest rates. Nor did it change much of its announcement."

However, it is more important to understand their dilemma.

"The Fed is stuck and will not lower rates below zero nor can it raise them without killing housing. Meanwhile, the bubbles keep getting bigger increasing the odds of a deflationary collapse."

Such is indeed the most significant risk to both the economy and the markets. As we noted in yesterday's "Rescues Are Ruining Capitalism."

"The rest of the world followed the Fed. As interest rates fell toward zero, the world's debts - including households, governments and nonfinancial companies - more than tripled between 1980 and 2007 to more than three times the size of the global economy.

It was taking more debt to fuel the same amount of growth, because more debt was going to unproductive borrowers. Capitalism was bogging down." - Sharma

Each successive round of stimulus pulls forward future consumption, which leaves a void. That void then has to be filled with more stimulus, which leaves a larger void in the future.

Eventually, the void will become too large to fill.

"The continuous bailouts continue to distort the market's price signals, which makes the markets less efficient in allocating capital. Such has led to the rising number of "zombies" and monopolies, the widening of wealth inequality, and lower productivity and growth.

The deformation of capitalism will be an economic plague that continues to lead to further dysfunction alienating younger generations. Social unrest and revolt will be the eventual result."

Portfolio Positioning Update

Over the last few weeks, we discussed that we had gradually raised cash and rebalanced portfolio risks ahead of the Presidential election. After the election passed, and we could see where the markets were positioning themselves, we reallocated that cash and took our equity exposure back to target weightings.

There were two primary reasons for the reversal. The first was that the sell-off had removed short-term risk over the last few weeks. The second was the outcome of the election perceived as favorable to the markets, as discussed above. There are still risks to that view until the election is officially over. Therefore, we will keep a close watch on holdings and tighten up our stops.

As we discussed recently in "Policies Over Politics," what matters most long term are taxes, debt, and deficits. Unfortunately, we will probably head the wrong way on all three.

Last week, I stated that we would "not buy the market's low." We did wait for the market to "tell us," what it was going to do, and then we acted quickly to put capital to work. We are currently near full exposure to equities, are slightly underweight in bonds with a shortened duration, and have tightened current stop-losses.

While the next two months tend to be positively biased, there is still a considerable risk to the markets. Markets remain deviated from long-term means, economic growth remains weak, and further stimulus will remain elusive.

As such, it is worth remaining vigilant over portfolios and using rallies to rebalance portfolio risks as needed.

To win the "investing war," it is essential to pick and choose our "battles" wisely. If you aren't sure about the battleground, it is always better to retreat and "live to fight another day."

Gold Will Surge, Just Not Yet

Peter Krauth


Summary

- The election cycle and exploding Fed balance sheet will help push gold up.

- On a number of metrics, gold remains cheap.

- In the very near term, gold will be pressured until catalysts emerge.  But then it promises to head much, much higher.


I know, gold feels like it’s going nowhere in a hurry. I mean, it’s still at the same price it was three months ago in late July. And you’re asking yourself, “Will it ever rally again?” If that’s what you’re thinking, you may need to arm yourself with a little more patience.

Yes, gold is in a bull market. Yes, all the fundamental reasons for it to keep rising are still in place. Yes, gold is going to the moon. It’s just not going there overnight. Although gold is not gaining any real traction right now, it will soon. I’ll show you why, and when it might.

Through Election Cycles and Exploding Balance Sheets

In the past 40 years, when Democrats won, gold softened for about 1 month after the election, then rose. When the Republicans won, gold moved sideways then dropped markedly three months later, before starting to recuperate.

The US election is just two weeks away, and there’s still no stimulus package. The White House is proposing $1.8 trillion, while the Democrats want $2.2 trillion.

At the risk of alienating some voters, the Democrats are reticent towards doing a deal that could help Trump get re-elected.

Even if a deal were to get done before the election, I don’t think another round of stimulus checks would be part of it. If that comes, it will likely only come later.

But more money will flow, and that’s why gold will rally.


As the above chart shows, whoever sits in the oval office, the markets are likely to head higher next year. I’m betting that’s going to be a continuation of the current “Melt Up” fueled by ongoing low interest rates, stimulus, and money printing.

The Fed’s balance sheet is now seven times the size it was before the 2008 financial crisis.


In the last year alone, it has gone from $3.75 trillion to $7 trillion. That’s a great reason to own gold.

Billionaire investor Leon Cooperman agrees. Speaking to RealVision recently, he said, "I bought gold for the first time in my life a week ago. I understand the case for gold. We're on the way to some banana republic situation. Nobody’s worrying about the debt that’s being created.”

On a fundamental basis, gold has all the ingredients to head higher.

Gold Is Still A Bargain

Here are a couple of other metrics showing why gold's outlook remains strong. As energy represents about 50% of the cost of production, it’s useful to examine the gold/oil ratio on a long-term basis.


Other than the major collapse in oil prices this past April, the ratio has been steadily increasing over the past decade. That means gold mining remains very profitable, a trend that’s likely to continue for some time.

Pierre Lassonde, co-founder of Franco-Nevada told Kitco news recently that “gold miners never had it so good”, saying as well that, “margins they are producing are the fattest, the best, the absolute unbelievable margins they’ve ever had.”

Now, look at gold versus the Dow Jones Industrial Average going back to 1970.


Even gold’s $1,900 peak in 2011 is hardly a blip compared to gold’s $800 peak in 1980. That’s why I believe gold still has much, much, much higher to go before topping.

Near-Term Gold


Since peaking in August, gold’s been trending downwards to sideways as it waits for a catalyst to emerge. 

Meanwhile, the RSI has been drifting mostly sideways as the 50-day moving average has rolled over, and gold remains below that level.

Right now, my sense is that gold is likely to start moving only after the election. 

I think the two most likely catalysts are some sort of election chaos/extended uncertainty, or the next major stimulus package.

That’s something we can expect no matter who’s sitting in the oval office. 

Stay long gold, and buy the dips. 

Don’t worry... gold is going up.

Inequality and Its Discontents

Former US President John F. Kennedy famously proclaimed that “a rising tide lifts all boats.” In a growing economy, the absolute well-being of those near the top and the bottom are positively correlated, so the most important policies to pursue are those that promote strong economic growth and full employment.

Michael J. Boskin



STANFORD – Inequality has been seizing ever more of the public’s attention in recent years, reflected everywhere from papal encyclicals and economic tomes by French socialists to technical academic debates and the demotic language of politicians and pundits. The health and economic effects of the COVID-19 pandemic have further elevated these concerns.

But which aspect of inequality should we be worried about? There are inequalities of opportunity and inequalities of outcome; there is overall inequality, and there is inequality at the tails of the distribution. 

Should we be more worried about absolute or relative positions – mobility or stability? What is really more important, the distribution of the economic pie or the level and growth of living standards?

In China over the past four decades, inequality has soared, even as hundreds of millions of people have been lifted out of abject poverty. In the United States today, after-tax per capita GDP is 50% higher than in less unequal Denmark and Sweden, where higher taxes fund huge welfare systems. Among the American states, California has the highest poverty rate once one adjusts for its 20% higher average household size and 15% higher cost of living.

Moreover, consumption and disposable income are considerably less unequal than the oft-quoted market income figures. Average measures taken over a longer term tend to show less inequality, reflecting the fact that many people are poor or rich only temporarily. Many of my university students currently have low incomes, but will almost certainly be very well off later in their lives. 

It is not surprising that natural age-earnings profiles and measures of life-cycle wealth accumulation would show considerable inequality at any point in time. All data sources have strengths and limitations, be it sample size, frequency, item coverage, or comparability (especially relevant in the case of international data).

Accounting as best as I can for these factors, I have compiled the following summary of major trends in US inequality in recent decades. Since around 1980, the skill premium in wages has grown substantially, whereas lower-skill real (inflation-adjusted) wages have grown more slowly (not to be confused with a decline). This reflects technology’s bias toward skilled labor, globalization’s negative effects on less-skilled wage earners, and the composition of labor-skill supply and demand.

During this period, overall inequality increased in almost all advanced economies (though some believe it will reverse), suggesting that domestic policies could not have been the primary cause. Similarly, after a long period of stability, labor’s share of national income has declined in all major economies.

Indeed, there has been a huge increase in cash and in-kind transfer payments. One-sixth of US income comes from such payments, and the rate in Western Europe’s social-welfare states is even higher. America’s unfunded entitlements liabilities have grown to several times the already-high national debt.

While inequality in disposable income (and even more so in consumption) remains substantial, it is much lower than inequality in market incomes. After adding transfers and subtracting taxes, one finds that the income of the top 1% in the US falls by over one-third, while that of the bottom 20% triples.

Finally, until recently, only limited progress was made in combating poverty, despite the proliferation of several scores of programs costing $1.2 trillion per year. In the three years prior to the COVID-19 crisis, however, the acceleration of economic growth was accompanied by a reduction in poverty to the lowest level ever. Median incomes rose far more than in the preceding eight years, and wages grew most rapidly at the bottom. The income gap between those with a college degree and those without narrowed, as did the gap between whites and minorities.

Where do these broad trends leave us? Former US President John F. Kennedy famously proclaimed that “a rising tide lifts all boats.” (More accurately, a rising tide lifts the most boats and leaves the fewest grounded or sunk.) 

In a growing economy, the absolute well-being of those near the top and the bottom are positively correlated, so the most important policies to pursue are those that promote strong economic growth and full employment.

In this context, there is not much scope for major expansion of the welfare state without seriously harming economic growth and thus inter-generational equity. Any such expansion is limited by the ever-larger unfunded liabilities for Social Security, Medicare, and their state and local analogs, as well as by the negative incentive effects of higher explicit and implicit taxes (reflecting the rate at which recipients lose benefits as income rises).

By consolidating, modernizing, and better targeting existing programs, the US could free up resources for where they are most needed. The federal government does not need 47 job-training programs in nine agencies, costing some $20 billion per year and yielding poor results. 

Likewise, slowing the growth of Social Security spending on those who already have considerable other resources could reduce the need for higher future taxes and help achieve President Franklin D. Roosevelt’s original goal of providing a “measure of protection … against poverty-ridden old age.”

Moreover, educational reforms, such as greater school choice and merit pay, can improve opportunities for disadvantaged children. And taxing a broader base of economic activity and people can keep rates as low as possible while still adequately funding the necessary functions of government.

While some on the left and libertarian right push for a universal basic income, it would be far better simply to subsidize low wages for those able to work. 

That would raise incomes, provide stronger work incentives, and get more people onto the economic ladder than would high minimum-wage mandates that price people out of the market and create welfare dependency. And while the direct costs of wage subsidies would be substantial, they would be heavily offset by the reduction in payments from existing programs.

It is time to start harnessing the power of the market rather than the government. That is how we will replace dependency with opportunity and upward mobility.


Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.