All Things Bearish

“There is only one side of the market and it is not the bull side or the bear side but the right side.”

– Jesse Livermore
“At least us old men remember what a real bear market is like. The young men haven’t got a clue.”

– Jeremy Grantham

Image: John Solaro via Flickr
With regard to the stock market, some people are true perma-bears while others merely adopt a bearish outlook when indicators suggest trouble ahead. There’s a big difference between the two.
Call it nature, nurture, or something else, but some people have a reliably bearish outlook. You know before they say a word which way they will lean. The same is true of perpetual bulls.
Perma-bulls and perma-bears serve a useful function: They pay attention to information the rest of us may overlook because it doesn’t fit our own biases. Occasionally they unearth important information we should heed. So, it’s important not to discount everything the perma-types say.
As for me, I’m not perma-anything. Academic research confirms that my attitude is the proper one: cautious optimism. I look for opportunity where I can find it. And I find opportunity all the time, even though some of it is out of my financial reach. There would be a dearth of financial activity if investors and entrepreneurs did not aggressively seek opportunity. Perma-bears may never get around to joining in the fun (unless maybe they think gold will rise), and perma-bulls get periodically taken to the slaughterhouse when a business-cycle recession unfolds.
Today we’ll review some unusually bearish indicators from several sources, not all of them perma-bears, who lean bearish right now, even as US benchmarks post new highs. You can discount what follows if you wish – but don’t ignore it. Next week I’ll do an “All Things Bullish” letter. Please note, I am not necessarily calling for an end to this amazing bull market. I’m agnostic about that right now, because the traditional forecasting tools have been taken to the woodshed, an issue I’ve talked about in many previous letters. So we simply have to diversify trading strategies as opposed to being permanently long or short anything.
OK, let’s take the plunge.
Evaluating Value
What’s a fair price for a share of stock? In theory, it’s easy to define. The fairest price lies at the intersection of the company’s supply and demand curves. The market price at any given moment reveals exactly where that point is. The averaged prices of all stocks in an index, appropriately weighted, tell us the same for market benchmarks.
In practice, the calculation is not so simple, because it is human beings who make the decisions – if not themselves then by telling their computers how to decide.
Humans don’t always make rational choices. The stock market is the scene of a never-ending debate over who is the most rational actor.
My good friend Steve Blumenthal of CMG and I wrote a joint letter earlier this year called “Stock Market Valuations and Hamburgers.” Four months later, that letter is even more relevant. So are charts that my friends at Skenderberg Alternative Investments shared in their latest monthly review. (It’s free, by the way, and you should definitely ask to join their list. Just be aware, they seem to have a permanently bearish view, or at least they have recently. They are a fascinating source of all things bearish each month.)
We begin with this Bank of America chart. Look how many hours the average worker has to work in order to buy a notional share of the S&P 500. Amazing. Kudos to the B of A analyst who worked this data up.
You can see how valuations that are measured in this way skyrocketed in the 1990s bull market, then plunged in the following bear market and recession. They climbed again ahead of the 2008 crash yet could not reach their late-1990s peak – but now they have.
Equity capital is now at a historical high (going back to 1964) relative to labor. Two factors could tug the line down to a more normal level: sharply higher wages or sharply lower stock prices. Of course, I guess prices could go sideways for a few decades as wages rise. But on the probability scale I put that outcome pretty close to zero.
The S&P 500 is just one index, of course. There are many others. In fact, choosing an index is now even harder than choosing a stock is.
The upper line is staggering: Since 1995, the number of listed stocks has fallen 42%? What market force could be causing that? Actually, I can think of several. The financialization of the markets since 1995, making it cheaper to buy your competitors than to actually invest in equipment to compete, has produced a constant stream of mergers. This is not creative destruction. It has not resulted in new jobs and greater competition. It is, rather, a result of the central banks of the world messing with the free market and of businessmen optimizing the value of their earnings and cash.
When cash is cheap, buy your competitors.
Another clear culprit is regulatory overreach, making it harder for small companies to go public. I am closely aligned with a few private companies. They could easily go public at nine-figure valuations, but the thought of being public companies is simply abhorrent to their management. It’s a been-there, done-that, have-the-scars-on-my-back-and-don’t-want-to-go-there-anymore attitude. Serving on the boards of two small public companies (mostly as a learning experience, because they do suck time) has inoculated me against fantasies of going public. When Uber and Air BNB and a host of their fellow unicorns do not go public and thereby allow the general market to participate in their growth, something is clearly wrong with the system. Congress should step in and take control of their regulatory creations, but it appears they can’t even do the simple stuff like healthcare and tax reform.
In any case, just in the last year the number of indexes crossed above the number of stocks – and is pointed higher still. The increasing popularity of index-based ETFs is driving this trend, but at some point momentum has to slow. But I don’t think that is going to happen soon, because the money that is being made by successful ETFs is such a lure that anybody with the distribution process thinks he or she can do it.
Duplicating somebody else’s ETF? Not a problem; it’s all in your distribution chain.
And the market is eating the index ETFs up.
Frankly, while I nostalgically wish for the old world of investing, I’m focusing my own money management and assets on using these new ETFs as trading vehicles, which is what they are perfectly designed for. A “passive” index ETF that can trade exactly like a stock is an ideal vehicle for expressing a diversified trading strategy.
Our next chart comes from my friend, the always-interesting John Hussman, in his August 14 letter. It shows the S&P 500 Index value (left scale) against the percentage of US stocks trading above their 200-day moving average (right scale). Stocks in that category are usually said to be in long-term uptrends.
This chart reveals a major disconnect. Even as the index moves steadily higher, the number of bullishly trending stocks has dropped considerably. On the other hand, it’s still above 50%, so we can’t yet say most stocks are losing momentum. This is a figure the bears are watching, though.
The significance of momentum was brought home to me last week when I visited with one of my favorite hedge fund managers. I normally think of him as a “left tail risk” guy, as he has made a great deal of money shorting the right things over the past decade or so. So I was somewhat surprised when I found him in an extraordinarily bullish mood. He was seeing value everywhere. We sat in front of his Bloomberg screen and watched it light up. Even as we talked, he was punching buttons and buying and selling, giving trade orders to his staff.
He pointed out that we have been in a “rolling bear market.” Different sectors have gone into a bear-market phase, but the overall market has kept on chugging upward. His remark brought to mind something I wrote about in 2006, when everyone was saying housing prices couldn’t go down. The reality was that every region I looked at had had a bear market in its housing prices, just not at the same time as the rest of the country. Thus the housing price index for the country looked quite sustainable. But for those of us in Texas, scarred by memories of being able to buy homes at auction on the county courthouse steps in Houston, the concept of falling home prices was very real.
I work closely with managers who “deconstruct” the S&P 500 and invest in various sectors from time to time. Not quite sector rotation but a close cousin. A few years ago I think everybody realized you didn’t want to be in energy stocks. But the overall index kept steaming right along.
Recession Watch
Stock valuations are the discounted values of future earnings. Future earnings depend on future revenue, which may diminish whenever the future includes a recession. So broad economic conditions are another factor to watch.
Broad economic conditions depend ultimately on the consumer’s ability and willingness to spend money. Last week’s July retail sales report gave us a peek at that. Core retail sales rose 0.6% from June. The uptick was more than analysts expected, and most categories were up, too. The exceptions were clothing and electronics sales. The latter may have to do with potential smartphone buyers waiting to see new iPhone models expected to debut this fall.
Peter Boockvar summed up the bigger picture:
Bottom line, after the slowest y/o/y core sales gain since March 2016 in June of 2.5%, they rose by 3.6% y/o/y in July, which is about in line with the 5-year average of 3.3%. This pace though still remains well below the 5%+ growth rates in the two prior recoveries. Here are some reasons why: many consumers have jobs, but we know accelerating wage gains remain spotty; the savings rate is near the lowest level since 2008; and credit card debt, student loans, and car loans each total $1T+. Lastly, we know healthcare spending (high deductibles) and rent have dominated the budgets of many.
Consumer spending, at least according to this report, is up compared to the recent past but far lower than it should be at this point in the cycle. Peter mentions debt as one factor. The New York Federal Reserve Bank just updated its consumer debt chart, giving us an enlightening breakdown.
The bulk of consumer debt (68%) is still in residential mortgages. Balances have climbed in recent years but remain below the 2007 peak. Both auto and, most significantly (and perhaps ominously), student loan balances have grown enough to offset the lower mortgage balances. Total debt is close to where it was at the beginning of the last recession.
Keep in mind also that debt totals don’t capture all the obligations a typical household faces. Vehicle and apartment leases, for example, don’t show up in this chart. But they are nonetheless monthly bills that consumers must pay.
That little omission might be important when (not if) the next recession strikes. This could be soon, if an indicator Michael Lebowitz uncovered proves reliable.
Real value added is the inflation-adjusted version of gross value added. Here’s how Michael explains it:
GVA is a measure of economic activity, like GDP, but formulated from the production side of the economy. It measures the dollar value of all goods and services produced less all the costs required to produce those goods or services. For example, if 720Global buys $100 worth of wood, $20 worth of other materials, and employs $30 worth of labor to build a chair, we have produced a good for $150. If that good is sold for $200, 720Global has created $50 of economic value.
Over time, GVA tracks nominal GDP closely, but they can diverge in the short run. That is happening right now. Three of the last four quarters brought Real GDP growth – albeit not much – while RVA was negative. RVA below zero, as plotted above, is closely associated with the onset of recessions.
This measurement technique is a little offbeat, but it is intriguing. Maybe this time is different, but we know from all kinds of other data that a recession should strike soon – by which I mean that one is quite possible in the next 12–18 months.
Federal Follies
Assume for the sake of argument that we find out in early 2018 that the US economy is, in fact, in recession. What will the Fed do?
That question should be easy to answer. The Fed will do what it has always done: cut interest rates to stimulate economic activity. Except that this time, the Fed has little room to cut. Past recessions saw the Fed reduce the benchmark rate an average of 4–5 percentage points. Doing the same this time would put the federal funds rate well below zero.
That’s right – NIRP in America. It can happen here. Worse, some people want it to happen here, among them Harvard economist Kenneth Rogoff. In a recent paper reported by Bloomberg, Rogoff wrote: “The growth of electronic payment systems and the increasing marginalization of cash in legal transactions creates a much smoother path to negative-rate policy today than even two decades ago.”
I am on record as saying NIRP will be a disaster if imposed in the US. I still believe it. I would like to be able to assure you that whoever takes the reins at the Federal Reserve next year will agree with me that NIRP is dangerous, but we don’t know who that will be. President Trump is in no hurry to remove that uncertainty, either. It is entirely possible that the Fed’s Board of Governors will have an entirely new ruling coalition this time next year, and it might well include NIRP advocates like Marvin Goodfriend.
Where that outcome would lead us is anyone’s guess, but I’m confident it would not be bullish for US stocks.
The S&P 500: Just Say No!
My friend James Montier, now at GMO, and his associate Matt Kadnar have written a compelling piece on why passive investors should avoid the S&P 500. Their essay, entitled “The S&P: Just Say No,” argues that the forward growth potential of the S&P 500 is significantly lower than that of other opportunities, especially emerging markets. Let’s look at a few of their charts.
The chart above breaks the total return from the beginning of the current bull market in the S&P 500 into its four main components: increasing multiples, margin expansion, growth, and dividends. He notes that this total return is more than double the level of long-term real return growth since 1970.
If earnings and dividends are remarkably stable (and they are), to believe that the S&P will continue delivering the wonderful returns we have experienced over the last seven years is to believe that P/Es and margins will continue to expand just as they have over the last seven years. The historical record for this assumption is quite thin, to put it kindly. It is remarkably easy to assume that the recent past should continue indefinitely, but it is an extremely dangerous assumption when it comes to asset markets. Particularly expensive ones, as the S&P 500 appears to be.
More bluntly put, the historical record supporting this assumption is nonexistent. It never happened. Just saying…
The authors then describe how they build their seven-year forecasts of S&P 500 returns. They argue that for the next seven years returns will be a negative 3.9%. Note that GMO is not a perma-bear money-management business. Their forecasts were extremely bullish in February 2009. They are a valuation shop, pure and simple. Investors – typically large institutions and pension funds – that are leaving Grantham’s management firm now are going to regret it. The consultants or managers who suggested that move are going to need to polish their résumés.
The bottom line? “The cruel reality of today’s investment opportunity set is that we believe there are no good choices from an absolute viewpoint – that is, everything is expensive (see Exhibit 10). You are reduced to trying to pick the least potent poison,” the duo says. Their Exhibit 10 is shown below.
For a relative investor (following the edicts of value investing), we believe the choice is clear: Own as much international and emerging market equity as you can, and as little US equity as you can. If you must own US equities, we believe Quality is very attractive relative to the market. While Quality has done well versus the US market, long international and emerging versus the US has been a painful position for the last few years, but it couldn’t be any other way.
Valuation attractiveness is generally created by underperformance (in absolute and/or relative terms). As Keynes long ago noted, a valuation-driven investor is likely seen as “eccentric, unconventional, and rash in the eyes of average opinion.”
In absolute terms, the opportunity set is extremely challenging. However, when assets are priced for perfection as they currently are, it takes very little disappointment to lead to significant shifts in the pricing of assets. Hence our advice (and positioning) is to hold significant amounts of dry powder, recalling the immortal advice of Winnie-the-Pooh, “Never underestimate the value of doing nothing” or, if you prefer, remember – when there is nothing to do, do nothing.
Markets appear to be governed by complacency at the current juncture. Indeed, looking at the options market, it is possible to imply the expected probability of a significant decline in asset prices. According to the Minneapolis Federal Reserve, the probability of a 25% or greater decline in US equity prices occurring over the next 12 months implied in the options market is only around 10% (see Exhibit 12). Now we have no idea what the true likelihood of such an event is, but when faced with the third most expensive US market in history, we would suggest that 10% seems very low.
Those are wise words indeed.
Colorado, Chicago, Lisbon, Denver, and Lugano
I don’t feel as though I’ve traveled that much this year, but my American Airlines AAdvantage account says I’ve flown 122,000 miles so far. I will be traveling a great deal more between now and Christmas. Late next week Shane and I will go to Colorado for four days at Beaver Creek and then spend four days in Denver for a little R&R before the serious work begins this fall. Late in September I will be in Chicago for two days for a speech, fly out the next day for Lisbon, and return to Dallas to speak at the Dallas Money Show on October 5–6.
I will be speaking at an alternative investments conference in Denver October 23–24 (details in future letters). I will again be in Denver November 6 and 7, speaking for the CFA Society and holding meetings. After a lot of small back-and-forth flights in November, I’ll end up in Lugano, Switzerland right before Thanksgiving. Busy times.
It is time to hit the send button. You have a great week!
Your cautiously optimistic analyst,

John Mauldin

Crisis of Confidence

Doug Nolan

Global markets are indicating heightened vulnerability. Thursday trading saw the S&P500 decline 1.54%, the second biggest decline of 2017. The session also saw the junk bond market under pressure. A notable $2.18bn of junk fund outflows this week spurred the headline, “Risk Exodus Gets Real With Biggest Fund Redemptions in 6 Months.” Currency markets are increasingly unstable. The euro traded to 1.1838 on Monday and fell to a trading low of 1.1662 on Thursday. The dollar/yen rose to 110.95 on Wednesday before reversing course to a near nine-month low of 108.60 during Friday trading. Gold traded to $1,300 in early Friday trading, the high going back to the election. Early-week market relief over the North Korean situation quickly shifted to unease over festering domestic issues.

August 16 – Wall Street Journal (Gabriel Wildau): “One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked. Charlene Chu built her reputation as China banking analyst at credit rating agency Fitch, where she was among the earliest to warn of risks from rising debt, especially in the country’s shadow banking system… In her latest report, Ms Chu estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34%, well above the official 5.3% ratio for those two categories at the end of June… ‘What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,’ she said. ‘The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.’”

As is typical, China’s Credit expansion slowed during the month of July. Growth in Total Aggregate Social Finance declined to about $180bn. New loans increased $124bn, the slowest rise since last November - but still stronger-than-expected and much stronger than July 2016. In a data point to follow closely, loans to households (mostly mortgages) slowed from June’s strong pace. Shadow banking contracted during June (first since October), although y-o-y growth remained a robust 16.5%. At 9.2%, y-o-y money supply growth was the slowest in decades.

It’s worth mentioning that Chinese data generally disappointed this week. Retail sales (up 10.4%) were down marginally from June and were below estimates (10.8%). Growth in Fixed Investment (8.3%) and Industrial Production (6.4%) were similarly down m-o-m and below forecasts.

August 13 – Bloomberg: “China’s home sales grew last month at the slowest pace in more than two years amid regulators’ moves to rein in soaring prices. The value of new homes sold rose 4.3% to 779 billion yuan ($117bn) in July from a year earlier… The increase is the smallest since March 2015, when the home market started to take off on policies to encourage demand from buyers.”

There is significant uncertainty associated with Chinese Credit and economic prospects.

Through July, the growth in Total Aggregate Finance is tracking 20% above 2016’s record level. The first-half boom in Chinese Credit growth – especially household mortgage borrowings – goes a long way in explaining economic resiliency. There are certainly indications that Chinese officials are increasingly concerned with overall system Credit growth, but there is also the view that no tough measures will be adopted that would risk instability heading into this fall’s communist party gathering.

August 15 – Financial Times (Tom Mitchell): “China’s economy will grow faster than expected over the next three years because of the government’s reluctance to rein in ‘dangerous’ levels of debt, the International Monetary Fund warned… In an annual review of the world’s second-largest economy, IMF staff said China’s annual economic growth would average 6.4% in 2018-20, compared with a previous estimate of 6%. The IMF is also predicting that the Chinese economy will expand 6.7% this year, up from its earlier forecast of 6.2% growth. The Chinese government, which pledged to double the size of the economy between 2010 and 2020, has tolerated a rapid run-up in debt in order to meet its target. ‘The [Chinese] authorities will do what it takes to attain the 2020 GDP target,’ the IMF said. As a result, the IMF now expects China’s non-financial sector debt to exceed 290% of GDP by 2022, compared with 235% last year. The fund had previously estimated that debt levels would stabilise at 270% of GDP over the next five years.”

Looking out past the next few months, there’s significant uncertainty associated with Chinese policymaking, finance and economic performance. And before we segue to the mess in Washington, there are as well major near-term uncertainties with respect to global monetary management. There were indications this week that both the ECB and Federal Reserve lack the confidence and consensus necessary to communicate a plan for unwinding what have been years of unprecedented monetary stimulus. It’s not confidence inspiring.

August 17 – Wall Street Journal (Todd Buell): “The European Central Bank is wary of pulling the plug too soon on its large bond-buying program, and worried that any move in that direction will push the euro higher, the accounts of its latest meeting showed… The comments suggest that ECB President Mario Draghi will move with immense caution as he approaches two major public appearances in the coming weeks…”

August 17 – Bloomberg (Craig Torres): “Federal Reserve officials are looking under the hood of their most basic inflation models and starting to ask if something is wrong. Minutes from the July 25-26 Federal Open Market Committee meeting showed a revealing debate over why the economy isn’t producing more inflation in a time of easy financial conditions, tight labor markets and solid economic growth. The central bank has missed its 2% price goal for most of the past five years. Still, a majority of FOMC participants favor further rate increases. The July minutes showed an intensifying debate over whether that is the right policy response. ‘These minutes to me were troubling,’ said Ward McCarthy, chief financial economist at Jefferies… ‘They don’t have their confidence in their policy decisions; and they don’t have confidence that they can provide the right kind of guidance.’”

August 16 – Wall Street Journal (David Harrison): “New doubts over sagging inflation in the past few months are driving a split at the Federal Reserve about the timing of the next increase in interest rates. The internal debate raises the possibility that the Fed could deviate from its plans for a third rate increase this year. Soft inflation has bedeviled Fed officials, forcing them to pull back on plans to raise rates multiple times in 2015 and 2016. Minutes from the July 25-26 meeting released Wednesday reveal growing concern among some officials that recent soft inflation numbers could be a sign that something has fundamentally changed in the economy, leading them to suggest holding off on raising rates again for the time being.”

China is in an historic Bubble, and this has created extraordinary uncertainty for the future. Global central banks have been engaged in an unprecedented and prolonged monetary inflation, and this has created extraordinary uncertainty for the future. An important facet of the problem is that years of extreme monetary stimulus have ensured that way too much “money” has gravitated to highly speculative global securities and derivatives markets. This has profoundly distorted inflationary dynamics in the securities markets as well as in the global economy overall.

Central bankers are increasingly perplexed as to how to proceed with normalization. While markets remain convinced that monetary policies globally will stay loose indefinitely, I believe indecision at the major central banks creates uncertainties that will increasingly weigh on risk-taking (especially with leverage). Watch the currencies. With the backdrop set, let’s move on to Washington.

The Trump Administration now confronts a full-fledged Crisis of Confidence. Even Republican supporters are calling for radical change. And it would at this point appear that some degree of radical departure will be required for the President to muster enough support to move forward with his agenda. I assume the administration will adopt a razor-sharp focus on tax cuts and reform in an attempt to stabilize a sinking ship.

As for the stock market, this week saw the “Trump Rally” conveniently morph to the “Cohn Rally.” Rumors of a Gary Cohn departure were said to be behind market selling pressure. It would be shocking to see Cohn abandoned Washington. He may now be the second most powerful individual in the country, with the most powerful enveloped in mayhem.

Importantly, “Risk Off” is gathering some momentum. Over recent years we’ve witnessed the markets repeatedly disregard – or at least downplay – major political developments. For the most part, markets were this week generally resilient in the face of a distressing and rapidly deteriorating political landscape. So far, the monetary and economic backdrops have remained constructive.

This week saw a stronger-than-expected reading in the Empire Manufacturing Index. Monthly Retail Sales were stronger-than-expected, as was the National Home Builders Housing Market Index (although Starts and Permits lagged). The weekly Bloomberg Consumer Comfort index rose to the highest level since 2001. The Bloomberg National Economy Expectations index surged back to near multi-year highs.

It’s worth noting that 10-year Treasury yields declined less than four basis points during Thursday’s stock market swoon. For a week that saw U.S. risk markets under some pressure and the VIX spike for the second straight week, it was notable that Treasury yields rose slightly. This should raise concerns that Treasuries may not provide much of a hedge during the next bout of “Risk Off.” And if Treasury gains are limited in the event of “Risk Off,” what are the ramifications for an overheated corporate debt marketplace?

Unprecedented risk has accumulated across the markets over the past nine years. “Money” has flooded into passive strategies that are essentially a speculation that the bull market – in equities and corporate Credit – will run unabated. Myriad derivatives strategies have flourished, with the proliferation of many products that are essentially writing market insurance (“flood insurance during a drought”).

Markets have experience “flash crashes” in the recent past, so I assume there will be more. For good reason, market participants these days presume that central banks will use their balance sheets to ensure that markets remain abundantly liquid. At the same time, the reality is that global central bankers have limited policy tools available in the event of market instability. The downside of delaying policy normalization (for years) is that we’re in the late innings of a global Bubble yet rates remain at or near zero around the globe. Central banks have little room to cut interest-rates, while pressure builds to wind down extraordinary balance sheet operations.

I am somewhat reminded of when accounting fraud issues precluded Fannie and Freddie from providing the MBS marketplace a liquidity backstop. It was a pivotal development, though market players were content to ignore ramifications for several years. With booming markets anticipating liquidity abundance indefinitely, it wasn’t until the 2008 de-leveraging episode that the absence of the GSE backstop bid mattered.

I don’t want to get too far ahead of myself here, but it’s worth noting that bank CDS has begun to price in rising risk. For the most part, CDS price reversals are modest and come from multi-year lows. But bank CDS risk has been increasing now for going on a month. And on a global basis, it’s kind of the same old potential problem children that have experienced the biggest gains – Dexia, Deutsche Bank, Societe Generale, UBS, BNP Paribas and Credit Suisse. Some of the big European banks saw CDS rise to two month highs this week. U.S. banks are now also seeing a modest rise in CDS prices, in many cases ending the week at one-month highs. It’s worth noting as well that the broker/dealer equities index (XBD) declined more than 2% Thursday and was hit 1.4% for the week. Japan’s TOPIX Bank Index dropped 2.4% this week.

August 15 – Financial Times (Eric Platt): “Amazon sealed the year’s fourth-largest corporate bond sale on Tuesday as the technology and online retail group locked in $16bn to fund its takeover of premium grocer Whole Foods… The company, founded by Jeff Bezos, borrowed the $16bn across seven tranches, ranging from three- to 40-year maturities. Orders for the multibillion-dollar deal climbed to nearly $49bn as banks closed their books…”

I’ll also be closely monitoring indicators of corporate Credit risk. According to Dealogic, August’s $110 billion of U.S. corporate debt sales pushed y-t-d issuance to $1.2 TN. And while corporate debt prices for the most part held their own this week, spreads have widened meaningfully from July. Even the investment-grade market is indicating a changing backdrop.

I feel compelled to offer brief comments on the sad state of our great nation. Sure, the stock market is close all-time highs and unemployment is at multi-year lows. Business and consumer confidence are strong, which is understandable considering the prolonged Bubble period. That there are such widespread feelings of acrimony and animosity - and that our country can be so bitterly divided - in the midst of today’s economic/market backdrop must be alarming to anyone paying attention. I hate to think of the environment after the Bubble bursts – the type of hostility and insecurity that would seem to ensure an epic bear market.

It’s almost unbelievable that the November election offered a choice between about the two most divisive figures in American politics. It’s as if there are two completely divergent and irreconcilable views of how the world works, how the economy should operate and the role of the federal government. Somehow we’ve gotten to the point where there cannot even be a civil discussion – let along a meeting of the minds - on the most basic issues.

As has become a popular (Daniel Moynihan) quote to recite, “Everyone is entitled to their own opinions, but they are not entitled to their own facts.” These days, facts are in dispute and they’re often disputed hatefully. Okay, let’s assume the Administration does see some legislative success. What happens after the mid-terms?

It’s too easy to blame the political class. Yet politicians do what politicians do. There should be little doubt that the boom and bust dynamics experienced over recent decades have taken a toll on our nation’s social and economic fabric. And while many want to blame “globalization,” I believe much that we label “globalization” would be more accurately understood as fallout from years of unfettered global finance. Could NAFTA have been as destabilizing to U.S. manufacturing without endless cheap finance flooding into Mexico (and EM more generally). How dominant would China be today without essentially limitless amounts of virtually free “money” to finance over-investment the likes of which the world has never experienced?

I strongly believe that unfettered finance has been instrumental in the long period of U.S. deindustrialization – the transformation from a manufacturing powerhouse into an experiment in a consumption and services-based economic structure. Bubbling securities markets and booming Wall Street finance were integral to this fateful structural shift.

Millions of skilled jobs have been lost, replaced by millions of service sector positions where workers can toil for years and still possess skills of only marginal value. It’s now been decades of malinvestment and structural impairment. There has been profound overinvest in almost all things consumption related, which impinges both economic productivity and wage growth.

Unimaginable monetary stimulus has spurred asset inflation and spending, but we’re now left with a historic Bubble and only deeper structural maladjustment.

Understandably, much of the population feels they’ve been shortchanged or even cheated. The ongoing inequitable redistribution of wealth becomes only more conspicuous as those fortunate enough to participate in the Bubble accumulate incredible wealth. There’s a general sense that the system is unfair and untrustworthy. Too many citizens no longer trust Washington and Wall Street, and they’re as well losing trust in our institutions more generally. There’s tremendous deep-seated anger for large groups of citizens that feel cheated and marginalized. Two-decades of spectacular boom and bust dynamics have left a tremendous amount of damage.

It’s all been so frustratingly predictable. Certainly not for the first time in history, the scourge of unsound money and inflationism has been so subtle that it goes virtually undetected. Instead of being appreciated as the root cause of economic, social, political and geopolitical trouble, monetary inflation is viewed as integral to the solution. Just a little more – just one more round of monetary inflation will do the trick and we’ll get back to normal. Right… It ensures hopeless addiction – with tremendous collateral damage. It was a troubling week where the absurdity of it all seemed on full display.

It could happen

How to avoid nuclear war with North Korea

There are no good options to curb Kim Jong Un. But blundering into war would be the worst

IT IS odd that North Korea causes so much trouble. It is not exactly a superpower. Its economy is only a fiftieth as big as that of its democratic capitalist cousin, South Korea. Americans spend twice its total GDP on their pets. Yet Kim Jong Un’s backward little dictatorship has grabbed the attention of the whole world, and even of America’s president, with its nuclear brinkmanship. On July 28th it tested an intercontinental ballistic missile that could hit Los Angeles. Before long, it will be able to mount nuclear warheads on such missiles, as it already can on missiles aimed at South Korea and Japan. In charge of this terrifying arsenal is a man who was brought up as a demigod and cares nothing for human life—witness the innocents beaten to death with hammers in his gigantic gulag. Last week his foreign ministry vowed that if the regime’s “supreme dignity” is threatened, it will “pre-emptively annihilate” the countries that threaten it, with all means “including the nuclear ones”. Only a fool could fail to be alarmed.

What another Korean war might look like

Yet the most serious danger is not that one side will suddenly try to devastate the other. It is that both sides will miscalculate, and that a spiral of escalation will lead to a catastrophe that no one wants. Our briefing this week lays out, step by step, one way that America and North Korea might blunder into a nuclear war. It also lists some of the likely consequences. These include: for North Korea, the destruction of its regime and the death of hundreds of thousands of people. For South Korea, the destruction of Seoul, a city of 10m within easy range of 1,000 of the North’s conventional artillery pieces. For America, the possibility of a nuclear attack on one of its garrisons in East Asia, or even on an American city. And don’t forget the danger of an armed confrontation between America and China, the North’s neighbour and grudging ally. It seems distasteful to mention the economic effects of another Korean war, but they would of course be awful, too.

President Donald Trump has vowed to stop North Korea from perfecting a nuclear warhead that could threaten the American mainland, tweeting that “it won’t happen!” Some pundits suggest shooting down future test missiles on the launchpad or, improbably, in the air. Others suggest using force to overthrow the regime or pre-emptive strikes to destroy Mr Kim’s nuclear arsenal before he has a chance to use it.

Yet it is just this sort of military action that risks a ruinous escalation. Mr Kim’s bombs and missile-launchers are scattered and well hidden. America’s armed forces, for all their might, cannot reliably neutralise the North Korean nuclear threat before Mr Kim has a chance to retaliate. The task would be difficult even if the Pentagon had good intelligence about North Korea; it does not. The only justification for a pre-emptive strike would be to prevent an imminent nuclear attack on America or one of its allies.

Can Mr Kim be cajoled or bribed into giving up his nuclear ambitions? It is worth trying, but has little chance of success. In 1994 President Bill Clinton secured a deal whereby Kim Jong Il (the current despot’s father) agreed to stop producing the raw material for nuclear bombs in return for a huge injection of aid. Kim took the money and technical help, but immediately started cheating. Another deal in 2005 failed, for the same reason. The younger Kim, like his father, sees nuclear weapons as the only way to guarantee the survival of his regime. It is hard to imagine circumstances in which he would voluntarily give up what he calls his “treasured sword of justice”.

If military action is reckless and diplomacy insufficient, the only remaining option is to deter and contain Mr Kim. Mr Trump should make clear—in a scripted speech, not a tweet or via his secretary of state—that America is not about to start a war, nuclear or conventional. However, he should reaffirm that a nuclear attack by North Korea on America or one of its allies will immediately be matched. Mr Kim cares about his own skin. He enjoys the life of a dissolute deity, living in a palace and with the power to kill or bed any of his subjects. If he were to unleash a nuclear weapon, he would lose his luxuries and his life. So would his cronies. That means they can be deterred.

To contain Mr Kim, America and its allies should apply pressure that cannot be misconstrued as a declaration of war. They should ramp up economic sanctions not only against the North Korean regime but also against the Chinese companies that trade with it or handle its money.

America should formally extend its nuclear guarantee to South Korea and Japan, and boost the missile defences that protect both countries. This would help ensure that they do not build nuclear weapons of their own. America should convince the South Koreans, who will suffer greatly if war breaks out, that it will not act without consulting them. China is fed up with the Kim regime, but fears that if it were to collapse, a reunified Korea would mean American troops on China’s border. Mr Trump’s team should guarantee that this will not happen, and try to persuade China that in the long run it is better off with a united, prosperous neighbour than a poor, violent and unpredictable one.

Everyone stay calm

All the options for dealing with the North are bad. Although America should not recognise it as a legitimate nuclear power, it must base its policy on the reality that it is already an illegitimate one. Mr Kim may gamble that his nukes give him the freedom to behave more provocatively, perhaps sponsoring terrorism in the South. He may also sell weapons to other cruel regimes or terrorist groups. The world must do what it can to thwart such plots, though some will doubtless succeed.

It is worth recalling that America has been here before. When Stalin and Mao were building their first atom bombs, some in the West urged pre-emptive strikes to stop them. Happily, cooler heads prevailed. Since then, the logic of deterrence has ensured that these terrible weapons have never been used. Some day, perhaps by coup or popular uprising, North Koreans will be rid of their repulsive ruler, and the peninsula will reunite as a democracy, like Germany. Until then, the world must keep calm and contain Mr Kim.

Why Jobs, Wages and Savings Mean Weaker Profits

Weak wage growth has Americans saving less. That can’t go on forever.

By Justin Lahart

Personal Savings Rate

The U.S. economy has reached a turning point: If companies don’t start paying employees more soon, consumer spending may slow. But the alternative—faster wage growth—would raise companies’ costs.

Either way, it is hard to very optimistic about where profits are heading.

July was another good month for hiring, with the Labor Department reporting that the U.S. added another 209,000 jobs, and that the unemployment rate slipped to 4.3%. Yet wage growth remains uninspired, with average hourly earnings up just 2.5% from their year-ago level, about the level it has been at all year. The strong jobs number is further evidence that wages will rise, as most economists believe. But they have been believing that for a while now.

Without solid wage increases, Americans are maintaining their spending by saving far less than previously thought. Last week’s gross domestic product report showed that personal saving rate—money saved as a share of after-tax income—came to just 3.8% in the second quarter, while the first-quarter saving rate was revised to 3.9% from 5.1%. Up until a year ago, the rate was hovering between 5% and 6%.

The saving rate isn’t quite as low as it got during the housing bubble, and its drop doesn’t appear to stem from increasing indebtedness, points out J.P. Morgan Chase economist Michael Feroli. That doesn’t mean it isn’t worrisome. Consumer spending has been almost the only driver of the economy over the past year, but it appears consumers are reaching their limit unless incomes grow faster.

More jobs numbers like Friday’s will help but the declining savings rate shows that jobs growth only goes so far. Without wage growth, U.S. companies may struggle to increase their sales.

The alternative is that employers, responding to a tighter labor market, start paying employees more, giving them the wherewithal to spend more. That would increase labor costs and, with companies struggling to find new ways to increase productivity, likely put further pressure on profit margins.

The worst scenario for profits is that wages go up but people put their raises in the bank until their savings rate returns to levels that prevailed until about a year ago. That might actually count as a welcome long-term development for the economy, but for corporate bottom lines, not so much.

A Pillar of Chinese Growth Starts to Show Cracks

As prices in the all-important interior lose momentum, the market looks close to an inflection point

By Nathaniel Taplin

Chinese Housing prices, change from a month earlier

Summer in the city is tough—especially if you’re a construction worker in China’s furnace-like interior.

In July, as temperatures in China were breaking records, the economy showed distinct signs of slowing following a strong run in the first half. The heat itself may have been a factor. But July housing prices, out Friday, are another sign that momentum is faltering: Prices in the multitude of medium-size cities in China’s vast interior, which account for as much as 70% of the country’s housing market by floor space, rose at a slower pace for the second month in a row. That Is troubling news for all the investment and commodities demand they drive.

A construction site in Dalian, China. July housing prices in China’s medium-sized cities rose at a slower pace for the second month in a row. Photo: china daily/Reuters

The deceleration in growth, from a rise of 0.9% on the month in June to just 0.6% in July, is relatively minor. But consumer-loan growth and tightening mortgage restrictions have already put the lid on rallies in top-tier coastal markets like Beijing and Shanghai. If prices in the interior begin falling outright, or if housing investment weakens again in August, it may be time to start hedging bets on China growth plays. Some vulnerable stocks include mining firms and U.S. construction-equipment maker Caterpillar , which has been testing new highs this year as global growth rebounded.

Vacant, unsold commecial housing(square meters)

Some slowdown in the interior is to be expected. Credit has been gradually tightening in China for months. Steel prices are up, buoyed by mill-capacity cuts. That is fantastic for steel producers but bad for downstream industries like construction, which buy steel. Steel sector growth accelerated in July, while most other sectors decelerated.

The biggest bullish factor for Chinese construction remains intact: Massive housing inventories, which depressed construction growth for years, are still falling. Vacant, unsold housing floor space in China fell 10 million square meters in July to the lowest level since February 2014, according to data released earlier in the month. Vacant floor space is down 20% on the year.

China’s housing market looks close to an inflection point. If August data shows sales and investment weakening again, or the fall in inventories leveling off, sentiment on China is likely to deteriorate rapidly—a chilly end to the dog days of summer.

How to Fix Libor Pains

The time has come to phase in an alternative to the interest-rate benchmark.

By Jerome Powell and J. Christopher Giancarlo

Andrew Bailey, chief executive officer of the Financial Conduct Authority, in London, July 27. Photo: Bloomberg News

There’s a good chance your credit card, floating-rate mortgage, car loan and even the investment funding for the company where you work are all influenced by an arcane interest rate known to market professionals as Libor. Once called the London interbank offered rate, Libor is meant to reflect the interest rate that large banks must pay to borrow short term. The British Bankers’ Association has called it “the world’s most important number.”

Libor has enormous implications for the U.S. It is cited in financial contracts setting $150 trillion of dollar-denominated loans, securitizations and derivatives. But all has not been well with Libor.

Problems first came to light during the 2008 financial crisis, with accumulating reports of attempts by traders to manipulate the rates used to determine Libor. The U.S. Commodity Futures Trading Commission, working with U.K. regulators, investigated and ultimately fined nine institutions a total of $2.8 billion for their roles in the misconduct. Since then, U.S. authorities including the Federal Reserve have been deeply engaged with regulators in the U.K. seeking to strengthen Libor to the furthest extent possible.

Libor is calculated each day based on the quoted rates that a panel of 17 banks submit to ICE Benchmark Administration, an independent subsidiary of the Atlanta-based firm Intercontinental Exchange. The quotes represent the rates at which the banks are able to borrow in short-term money markets. Apart from overnight transactions, however, banks no longer borrow much in those markets.

In essence, banks are contributing a daily judgment about something they no longer do.

On July 27 the man charged with regulating Libor— Andrew Bailey, chief executive of the U.K.’s Financial Conduct Authority—called for an alternative to the current system. He noted that the FCA’s legal authority to compel banks to submit quotes to Libor could not be relied on indefinitely.

The FCA has brokered agreements with banks to continue submitting rates until the end of 2021, at which point a new benchmark is expected to take its place.

We support this approach. It offers a longer period of guaranteed stability than the current two-year period for compelling submissions to critical benchmarks described in European Union regulations. We have also encouraged U.S. banks that submit to Libor to cooperate with the FCA. Of course, Libor could remain viable in some form past 2021, but market participants can’t safely assume that it will. The time has come to move away from it.

Fortunately, we are not starting from scratch. The Fed has convened a group of private-sector participants who regularly broker and clear Libor transactions to form the Alternative Reference Rates Committee. Following an extensive consultation, the ARRC recommended replacing Libor with a rate derived from short-term loans known as repurchase agreements, backed by Treasury securities as collateral. This so-called repo rate is a measure of nearly risk-free borrowing. Using the Treasury repo rate resolves the central problem with Libor, because it will be based on actual market transactions currently reflecting roughly $800 billion in daily activity. That will make it far more robust than Libor.

The ARRC has also developed plans for a gradual transition to the new rate. Those plans are a valuable starting point for the work that now needs to be done.

Given Mr. Bailey’s announcement, the time has come for market participants and regulators to work together on a plan for dealing with existing Libor-based contracts maturing after 2021. This plan must also address how to expand adoption of the broad Treasury repo rate into a wider array of products that rely on a benchmark. It is a big task, but a stable financial system requires a stable reference interest rate. There is time for this transition to be done thoughtfully. Our agencies are prepared to help ensure that it is done cooperatively and smoothly.

Mr. Powell is a member of the Board of Governors of the Federal Reserve System. Mr. Giancarlo is chairman of the U.S. Commodity Futures Trading Commission.

Doug Casey on the End of the Nation-State

There have been a fair number of references to the subject of “phyles” in Casey Research publications over the years. This essay will discuss the topic in detail. Especially how phyles are likely to replace the nation-state, one of mankind’s worst inventions.

Now might be a good time to discuss the subject. We’ll have an almost unremitting stream of bad news, on multiple fronts, for years to come. So it might be good to keep a hopeful prospect in mind.

Let’s start by looking at where we’ve been. I trust you’ll excuse my skating over all of human political history in a few paragraphs, but my object is to provide a framework for where we’re going, rather than an anthropological monograph.

Mankind has, so far, gone through three main stages of political organization since Day One, say 200,000 years ago, when anatomically modern men started appearing. We can call them Tribes, Kingdoms, and Nation-States.

Karl Marx had a lot of things wrong, especially his moral philosophy. But one of the acute observations he made was that the means of production are perhaps the most important determinant of how a society is structured. Based on that, so far in history, only two really important things have happened: the Agricultural Revolution and the Industrial Revolution.

Everything else is just a footnote.

Let’s see how these things relate.

The Agricultural Revolution and the End of Tribes

In prehistoric times, the largest political/economic group was the tribe. In that man is a social creature, it was natural enough to be loyal to the tribe. It made sense. Almost everyone in the tribe was genetically related, and the group was essential for mutual survival in the wilderness.

That made them the totality of people that counted in a person’s life—except for “others” from alien tribes, who were in competition for scarce resources and might want to kill you for good measure.

Tribes tend to be natural meritocracies, with the smartest and the strongest assuming leadership. But they’re also natural democracies, small enough that everyone can have a say on important issues. Tribes are small enough that everybody knows everyone else, and knows what their weak and strong points are. Everyone falls into a niche of marginal advantage, doing what they do best, simply because that’s necessary to survive. Bad actors are ostracized or fail to wake up, in a pool of their own blood, some morning. Tribes are socially constraining but, considering the many faults of human nature, a natural and useful form of organization in a society with primitive technology.

As people built their pool of capital and technology over many generations, however, populations grew. At the end of the last Ice Age, around 12,000 years ago, all over the world, there was a population explosion. People started living in towns and relying on agriculture as opposed to hunting and gathering. Large groups of people living together formed hierarchies, with a king of some description on top of the heap.

Those who adapted to the new agricultural technology and the new political structure accumulated the excess resources necessary for waging extended warfare against tribes still living at a subsistence level. The more evolved societies had the numbers and the weapons to completely triumph over the laggards. If you wanted to stay tribal, you’d better live in the middle of nowhere, someplace devoid of the resources others might want. Otherwise it was a sure thing that a nearby kingdom would enslave you and steal your property.

The Industrial Revolution and the End of Kingdoms

From around 12,000 B.C. to roughly the mid-1600s, the world’s cultures were organized under strong men, ranging from petty lords to kings, pharaohs, or emperors.

It’s odd, to me at least, how much the human animal seems to like the idea of monarchy. It’s mythologized, especially in a medieval context, as a system with noble kings, fair princesses, and brave knights riding out of castles on a hill to right injustices. As my friend Rick Maybury likes to point out, quite accurately, the reality differs quite a bit from the myth. The king is rarely more than a successful thug, a Tony Soprano at best, or perhaps a little Stalin. The princess was an unbathed hag in a chastity belt, the knight a hired killer, and the shining castle on the hill the headquarters of a concentration camp, with plenty of dungeons for the politically incorrect.

With kingdoms, loyalties weren’t so much to the “country”—a nebulous and arbitrary concept—but to the ruler. You were the subject of a king, first and foremost. Your linguistic, ethnic, religious, and other affiliations were secondary. It’s strange how, when people think of the kingdom period of history, they think only in terms of what the ruling classes did and had.

Even though, if you were born then, the chances were 98% you’d be a simple peasant who owned nothing, knew nothing beyond what his betters told him, and sent most of his surplus production to his rulers. But, again, the gradual accumulation of capital and knowledge made the next step possible: the Industrial Revolution.

The Industrial Revolution and the End of the Nation-State

As the means of production changed, with the substitution of machines for muscle, the amount of wealth took a huge leap forward. The average man still might not have had much, but the possibility to do something other than beat the earth with a stick for his whole life opened up, largely as a result of the Renaissance.

Then the game changed totally with the American and French Revolutions. People no longer felt they were owned by some ruler; instead they now gave their loyalty to a new institution, the nation-state. Some innate atavism, probably dating back to before humans branched from the chimpanzees about 3 million years ago, seems to dictate the Naked Ape to give his loyalty to something bigger than himself. Which has delivered us to today’s prevailing norm, the nation-state, a group of people who tend to share language, religion, and ethnicity. The idea of the nation-state is especially effective when it’s organized as a “democracy,” where the average person is given the illusion he has some measure of control over where the leviathan is headed.

On the plus side, by the end of the 18th century, the Industrial Revolution had provided the common man with the personal freedom, as well as the capital and technology, to improve things at a rapidly accelerating pace.

What caused the sea change?

I’ll speculate it was largely due to an intellectual factor, the invention of the printing press; and a physical factor, the widespread use of gunpowder. The printing press destroyed the monopoly the elites had on knowledge; the average man could now see that they were no smarter or “better” than he was. If he was going to fight them (conflict is, after all, what politics is all about), it didn’t have to be just because he was told to, but because he was motivated by an idea. And now, with gunpowder, he was on an equal footing with the ruler’s knights and professional soldiers.

Right now I believe we’re at the cusp of another change, at least as important as the ones that took place around 12,000 years ago and several hundred years ago. Even though things are starting to look truly grim for the individual, with collapsing economic structures and increasingly virulent governments, I suspect help is on the way from historical evolution. Just as the agricultural revolution put an end to tribalism and the industrial revolution killed the kingdom, I think we’re heading for another multipronged revolution that’s going to make the nation-state an anachronism. It won’t happen next month, or next year. But I’ll bet the pattern will start becoming clear within the lifetime of many now reading this.

What pattern am I talking about? Once again, a reference to the evil genius Karl Marx, with his concept of the “withering away of the State.” By the end of this century, I suspect the US and most other nation-states will have, for all practical purposes, ceased to exist.

The Problem with the State—And Your Nation-State

Of course, while I suspect that many of you are sympathetic to that sentiment, you also think the concept is too far out, and that I’m guilty of wishful thinking. People believe the state is necessary and—generally—good. They never even question whether the institution is permanent.

My view is that the institution of the state itself is a bad thing. It’s not a question of getting the right people into the government; the institution itself is hopelessly flawed and necessarily corrupts the people that compose it, as well as the people it rules. This statement invariably shocks people, who believe that government is both a necessary and permanent part of the cosmic firmament.

The problem is that government is based on coercion, and it is, at a minimum, suboptimal to base a social structure on institutionalized coercion. Let me urge you to read the Tannehills’ superb The Market for Liberty, which is available for free, download here.

One of the huge changes brought by the printing press and advanced exponentially by the Internet is that people are able to readily pursue different interests and points of view. As a result, they have less and less in common: living within the same political borders is no longer enough to make them countrymen. That’s a big change from pre-agricultural times when members of the same tribe had quite a bit—almost everything—in common. But this has been increasingly diluted in the times of the kingdom and the nation-state. If you’re honest, you may find you have very little in common with most of your countrymen besides superficialities and trivialities.

Ponder that point for a minute. What do you have in common with your fellow countrymen? A mode of living, (perhaps) a common language, possibly some shared experiences and myths, and a common ruler. But very little of any real meaning or importance. To start with, they’re more likely to be an active danger to you than the citizens of a presumed “enemy” country, say, like Iran. If you earn a good living, certainly if you own a business and have assets, your fellow Americans are the ones who actually present the clear and present danger. The average American (about 50% of them now) pays no income tax. Even if he’s not actually a direct or indirect employee of the government, he’s a net recipient of its largesse, which is to say your wealth, through Social Security and other welfare programs.

Over the years, I’ve found I have much more in common with people of my own social or economic station or occupation in France, Argentina, or Hong Kong, than with an American union worker in Detroit or a resident of the LA barrios . I suspect many of you would agree with that observation. What’s actually important in relationships is shared values, principles, interests, and philosophy.

Geographical proximity, and a common nationality, is meaningless—no more than an accident of birth. I have much more loyalty to a friend in the Congo—although we’re different colors, have different cultures, different native languages, and different life experiences—than I do to the Americans who live down the highway in the trailer park. I see the world the same way my Congolese friend does; he’s an asset to my life. I’m necessarily at odds with many of “my fellow Americans”; they’re an active and growing liability.

Some might read this and find a disturbing lack of loyalty to the state. It sounds seditious. Professional jingoists like Rush Limbaugh, Sean Hannity, Bill O’Reilly, or almost anyone around the Washington Beltway go white with rage when they hear talk like this. The fact is that loyalty to a state, just because you happen to have been born in its bailiwick, is simply stupid.

As far as I can tell, there are only two federal crimes specified in the US Constitution: counterfeiting and treason. That’s a far cry from today’s world, where almost every real and imagined crime has been federalized, underscoring that the whole document is a meaningless dead letter, little more than a historical artifact. Even so, that also confirms that the Constitution was quite imperfect, even in its original form. Counterfeiting is simple fraud. Why should it be singled out especially as a crime?
(Okay, that opens up a whole new can of worms… but not one I’ll go into here.) Treason is usually defined as an attempt to overthrow a government or withdraw loyalty from a sovereign. A rather odd proviso to have when the framers of the Constitution had done just that only a few years before, one would think.

The way I see it, Thomas Paine had it right when he said: “My country is wherever liberty lives.”

But where does liberty live today? Actually, it no longer has a home. It’s become a true refugee since America, which was an excellent idea that grew roots in a country of that name, degenerated into the United States. Which is just another unfortunate nation-state. And it’s on the slippery slope.

So now what? Here’s where Phyles come in.