China, Trump and the North Korean nightmare

Beijing could get drawn into a war on the península

Gideon Rachman

With the threat of another Korean war looming, this week’s US-China summit in Beijing could be the most important in decades.

Most western commentary on North Korea has focused on President Donald Trump’s warnings of “fire and fury” to combat the regime’s nuclear threat. But the Korean crisis also poses a huge risk to China. If a war breaks out, China will literally be on the frontline — potentially exposed to nuclear fallout, refugee flows and dramatic shifts in the regional balance of power.

These acute risks have produced a startling variety of opinions among Chinese experts about the best way forward. There are some who even argue that China and the US should co-operate in joint military operations against North Korea. Others take a completely different line — contending that Washington’s policy is leading to disaster, and that it is time for Beijing to break publicly with the US.

Beijing’s official position avoids either of these dramatic alternatives. Instead, the government of President Xi Jinping is pressing to restart diplomacy through a “freeze for freeze” policy.

The idea is that North Korea would freeze the development of its nuclear weapons, in return for the US freezing military exercises that alarm Pyongyang.

In principle, this sounds like a decent idea. In practice, neither North Korea nor the US seem willing to take the steps needed to make the policy work.

Given this reality, the Chinese are having to consider other more radical alternatives. One senior official argues that by agreeing to US demands for tougher sanctions on North Korea, China has lost its influence in Pyongyang. So, the official argues, China should now attempt to rebuild ties with the Kim Jong Un regime — even if that means antagonising the US administration.

But, among Chinese academics, there are eminent figures who take a radically different position. These hawks argue that a nuclear North Korea is a profound threat not just to South Korea, Japan or the US — but to China itself. In strategic terms, the growing North Korean threat may well persuade both South Korea and Japan to acquire their own nuclear weapons — which would sharply increase tensions within East Asia.

Chinese experts also fret about the dangers of a North Korean nuclear test going wrong, or of an accident at the Yongbyon nuclear facility, near the border. Any such development would pose serious environmental risks to China. “Yongbyon could be our Fukushima,” worries one academic — referring to the 2011 nuclear accident in Japan.

North Korea is now estimated by the Chinese to have 40-60 nuclear weapons. If any were used during a conflict, the risks to China would be enormous.

All of this leads some Chinese experts to consider a radical alternative — perhaps Beijing should co-operate with the US, in a joint military action, aimed at toppling the Kim regime and seizing its nuclear weapons. Such a strategy would allow China to take active steps to defend its own security — rather than helplessly watching a conflict unfold from the sidelines. Offering to ally with the Trump administration might also allow China to secure a new “grand bargain” over postwar arrangements. The Chinese could, for example, look for guarantees that US troops would withdraw from a unified Korea — and might also seek concessions on other regional security issues, such as the status of Taiwan or the South China Sea.

Any joint military operations, however, would be fraught with risk. Above all, there is the fear that North Korea could launch a devastating retaliation — using either nuclear weapons or conventional artillery. To avoid this, one Chinese expert speculates that an attack on the Kim regime could begin by using an electromagnetic pulse weapon (EMP), designed to disable all electronic communication in North Korea — so making it impossible to co-ordinate defences or launch nuclear weapons.

However, while the US and China are both known to have worked on EMP weapons, they have never been used. It would be extremely risky to rely on an untried weapons system to disable the North Korean nuclear threat.

Given all these considerations, an alternative school of thought argues that, if the Trump administration launches a strike on North Korea, the sole Chinese military response should be to advance 50km into North Korea, to protect its border, and to prevent uncontrollable flows of refugees. One nationalist academic argues that a US pre-emptive strike might ultimately benefit China. America’s allies, such as South Korea and Japan, would be appalled and would break their ties with the US, destroying American influence in the Pacific, or so the thinking goes.

But there would also be costs if China tried to watch a conflict from the sidelines. The humanitarian consequences would be horrendous. And even a limited advance into North Korea would risk drawing Chinese troops further into the conflict. But if China sat the fighting out completely, it would risk looking like an impotent bystander as the US fought a war in a country that remains a Chinese ally and neighbour.

In Washington, there is a saying that “North Korea is the land of bad options”. It looks that way from Beijing, too. The problem is that, with North Korea’s nuclear weapons programme advancing fast, doing nothing may not be an option, either.

Has Trump Captured the Fed?


Jay Powell and Donald Trump

NEW YORK – One of the important powers of any US president is to appoint members and heads of the many agencies that are responsible for implementing the country’s laws and regulations and, in many cases, governing the economy. Perhaps no institution is more important in that regard than the Federal Reserve.

In exercising that power, Donald Trump has broken a long-standing pattern, going back almost a half-century, whereby the president reappoints (on a non-partisan basis) the incumbent Fed chair, if he or she has been seen to be doing a good job. Probably no chair has done a better job, in a particularly difficult moment, than Janet Yellen.

Whereas her two immediate predecessors greatly tarnished the Fed’s reputation by looking the other way as massive risk was accumulating – and massive fraud occurring – within the financial sector, Yellen restored the Fed’s reputation. Her calm and balanced hand nurtured broad consensus among a Federal Reserve Board characterized by divergent economic philosophies, and she navigated the economy through a slow recovery in a period when fiscal policy was unnecessarily constrained, as duplicitous Republicans hyped the dangers of deficits.

The Republicans’ shallow commitment to fiscal rectitude is now being exposed as they advocate massive tax cuts for corporations and billionaires that will add one and half trillion dollars to the deficit over the next decade.

To be fair, Trump chose a moderate, when many in his party were pushing for an extremist.

Trump, never shy about conflicts of interest, has an uncanny ability to embrace economic policies, such as the proposed tax cuts, that benefit him personally. He realized that an extremist would raise interest rates – any real-estate developer’s worst nightmare.

Trump broke with precedent in another way: he chose a non-economist. The Fed will face great challenges in the next five years, as it reverts to more normal policies. Higher interest rates could give rise to market turmoil, as asset prices undergo a significant “correction.” And many are expecting a major downturn in the next five years; otherwise, the economy would have experienced an almost unheard-of decade-and-a-half expansion. While the Fed’s tool kit has been greatly expanded in the last decade, the Fed’s low interest rates and huge balance sheet – and the possibly massive increase in debt, should Trump get his tax cuts – would challenge even the best-trained economist.

Most importantly, there has been a bipartisan (and global) effort to depoliticize monetary policy. The Fed, through its control of the money supply, has enormous economic power, and such power can easily be abused for political purposes – say, to generate more jobs in the short run. But lack of confidence in central banks in a world of fiat money (where central banks can create money at will) weakens long-term economic performance, owing partly to fears of inflation.

Even in the absence of direct politicization, the Fed always faces a problem of “cognitive capture” by Wall Street. That’s what happened when Alan Greenspan and Ben Bernanke were in charge. We all know the consequences: the greatest crisis in three quarters of a century, mitigated only by massive government intervention.

Yet, somehow, the Trump administration seems to have forgotten what happened less than a decade ago. How else to explain its efforts to rescind the 2010 Dodd-Frank regulatory reforms, designed to prevent a recurrence? The consensus beyond Wall Street is that Dodd-Frank didn’t go far enough. Excessive risk taking and predatory behavior are still real problems, as we are frequently reminded (for example, by reports about the growing volume of subprime auto loans). In one of the more insidious recent instances of malfeasance, bankers at Wells Fargo simply opened accounts on behalf of customers, unbeknownst to them, so that it could collect additional fees.

None of this bothers Trump, of course, who as a businessman has been no stranger to nefarious practices. Fortunately, it appears that Powell recognizes the importance of well-designed financial regulations.

But politicization of the Fed should be viewed as just another part of Trump’s battle against what his former chief strategist, Steve Bannon, has referred to as the “administrative state.”

That battle, in turn, should be viewed as part of a larger war against the Enlightenment legacy of science, democratic governance, and the rule of law. Upholding that legacy entails employing expertise as needed, and creating, as Edward Stiglitz of Cornell Law School has emphasized, trust in public institutions. A large body of research now supports the idea that societies perform more poorly without such trust.

Every few days, Trump does something to rend the fabric of US society and inflame its already-deep social and partisan divisions. The clear and present danger is that the country is growing so accustomed to Trump’s outrages that they now appear “normal.” For more than seven decades, America has fought – often fitfully, to be sure – to redeem its stated values, taking on bigotry, fascism, and nativism in all their forms. Now, America’s president is a misogynist, racist xenophobe whose policies embody profound contempt for the cause of human rights.

One may approve or disapprove of the Republicans’ tax proposals, efforts to “reform” health care (oblivious to the tens of millions who might lose insurance coverage), and commitment to financial deregulation (ignoring the consequences of the 2008 crisis). But, while the Fed may be safe for now, whatever possible economic benefits this agenda could bring pale in comparison to the magnitude of the political and social risks posed by Trump’s assaults on America’s most cherished institutions and values.

Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former senior vice president and chief economist of the World Bank and chair of the US president’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. His most recent book is The Euro: How a Common Currency Threatens the Future of Europe.

Is This the Top of the Market?

The investing nirvana that has driven markets in recent years is under attack as central banks scale back stimulus

By Ken Brown

    The rally has driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels. Photo: European Pressphoto Agency 

A da Vinci sells for $450 million, one bitcoin is worth $7,700 and 99-year-old Austria issues a 100-year bond at an interest rate of 2.1%. Clearly there is too much money in the world.

That isn’t new, but how long can it last? With central banks scaling back stimulus, investments that appear attractive when interest rates are near, or below, zero suddenly look silly. And silly investments usually lose money, often bringing down less silly assets along with them.

The end may come soon, or the current investing nirvana could go on. Heard on the Street walks through the risks and likely scenarios for markets in the coming months.

Some of the best performers of past three years
Total return

The rallies have driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels.

S&P 500 cyclically adjusted Price/earnings ratio

Investors are more confident than at any time since the tech bust, and high confidence typically means markets don’t perform well in the future.

Wells Fargo/Gallup Investor and Retirement Optimist Index

The biggest and most widely acknowledged risk is in the bond market where central bank stimulus has driven yields to record lows. But as economies have picked up, investors haven’t demanded higher yields to compensate for the risk that rates will rise.

That Time a Norwegian Shipper Held Iran's Oil Hostage

By Nick Giambruno, editor, Crisis Investing

The Iraq-Iran War was one of the bloodiest conflicts of the past 50 years.

It also set the stage for a multibillion-dollar empire…

The war pitted Iran, led by Ayatollah Khomeini, against Saddam Hussein’s Iraq.

The US, Europe, the Arab countries, and the Soviet Union—practically the whole world—supported Iraq.

Remember, this was in the 1980s, back when Saddam was a “good guy.”

Saddam used chemical weapons on the widest scale since World War 1. Oddly, nobody seemed to care at the time. The US government only made a stink about it years later, after Saddam had morphed from a US ally into the Hitler du jour.

The brutal Iraq-Iran War killed over 1 million people. It also rocked global energy markets.

Iraq and Iran were (and still are) two of the biggest oil exporters in the world. Earnings from oil exports were crucial to both. That’s why each side targeted the other’s oil tankers.

Not surprisingly, it became incredibly expensive and inconvenient to ship oil from the Persian Gulf, which was an active warzone.

The US Navy escorted the oil tankers of US allies like Saudi Arabia and Kuwait. But Iran’s oil shipments were completely vulnerable.

Given the extreme risk, oil shippers wanted nothing to do with Iran. But Iran needed to export its oil.

During all this bloody chaos, emerging shipping magnate John Fredriksen sensed an opportunity to build a fortune.

Fredriksen struck a deal with the Iranian government to ship the country’s oil exports when nobody else wanted to. This gave him huge bargaining power, which he used to make enormous profits.

The deal earned Fredriksen a famous nickname… “lifeline to the Ayatollah.”

Naturally, Saddam Hussein repeatedly attacked Fredriksen’s tankers because they were carrying the enemy’s crude. One time, Iraqi fighter jets killed two of his crew members in a missile strike.
But the attacks weren’t Fredriksen’s only problem.

At one point, Iran fell over $10 million behind in payments. So Fredriksen confiscated ships loaded with Iranian oil. He promptly moved them out of Iranian-controlled waters and refused to give them back until the Ayatollah paid up.

Iran sent a warship to “persuade” Fredriksen to return its oil. But a US warship intercepted it before it could reach Fredriksen’s tankers. With little recourse left, Iran came to terms with Fredriksen.
Despite these close calls, Fredriksen made huge profits. It was the beginning of a multibillion-dollar fortune and a shipping empire.

Fredriksen eventually became the richest man in his native Norway and the most influential ship owner in the world.

But John Fredriksen isn’t just a great crisis investor. He’s also an International Man.

Fredriksen is a native of Norway, one of the most heavily taxed countries on Earth. After a dispute with the tax authorities, Fredriksen relinquished his Norwegian citizenship. He became a citizen of tax-friendly Cyprus.

Fredriksen rose to the top of the global shipping industry thanks to his guts, instincts, and, most importantly, his keen sense of timing.

You see, the shipping industry is brutally cyclical. It goes through huge booms and busts.
Getting the timing right is the key to making money in the shipping industry. And Fredriksen understands the cycle better than anyone.

Famed investor Wilbur Ross once said of Fredriksen:

One of the strange things about shipping is, you make your big money based on your entry point in the market and the exit point, and he’s brilliant at both.

In other words, it pays to watch what Fredriksen does.

Recently, he made a huge bet that the shipping industry is about to turn around.

“It Hasn’t Been This Bad Since the Black Death”

We’re eight years into one of the worst bear markets in the history of shipping.

It’s one of the few industries that never really recovered from the 2008 financial crisis. In fact, it’s in worse shape.

One of Fredriksen’s top colleagues recently said, “It hasn’t been this bad since the black death.” He wasn’t exaggerating.

Shippers make money by hauling stuff from point A to point B. It’s standard practice for shippers to lease out their vessels for negotiated periods of time. These arrangements are called charters.

Charters help lock in a fixed amount of revenue for a shipper.

Charter rates are based on the supply of, and demand for, ships. And they’re by far the biggest variable for shipping companies.

Long-term charters give a shipper more revenue certainty.

When a shipper signs a long-term charter, he misses out if rates rise during the charter’s term.

Conversely, if rates go down, an existing charter insulates a shipper from a decline in revenue.

A shipper who relies on shorter-term charters is more exposed to fluctuating charter rates. But that’s a good thing when rates are rising.

Remember, the shipping industry is extremely cyclical. It’s been that way for over a century. It goes through huge booms and busts.

For example, in July 2008, a large oil tanker could earn $170,000 a day. A year later, charter rates had crashed over 90% to just $11,000 per day.

One reason the shipping industry is so volatile is that it’s prone to malinvestment—which is the result of faulty investment decisions.

Central banks encourage malinvestment by suppressing interest rates. Companies invest in plants, equipment, and other capital assets that only appear profitable because borrowing money is cheap. This leads to wasted capital and, eventually, economic loss.

This is how malinvestment plays out in the shipping industry…

When charter rates rise, shippers make more money and want more ships. Artificially low interest rates make it easier to buy them. The problem is building a ship takes at least two years. And the business environment can change drastically in that time.

This is exactly what happened in 2007. At the time, the shipping industry was in a state of euphoria.

Charter rates were high and orders for new vessels shot up. Most were financed with debt.

Then the 2008–2009 financial crisis hit. World trade slowed and shipping demand plunged.

Then things got really ugly.

Shipbuilders started to deliver the vessels that shippers had ordered during the happy days of 2007.

This was the last thing shippers wanted. Now they had an enormous oversupply of vessels. Plus, demand for moving stuff had weakened.

Charter rates plummeted. So did shipping profits. Many shippers went bankrupt.

Only quality companies survived. Today, many of their shares are down more than 90% from their peak.

A Speculator’s Dream

Charter rates are so volatile that you can double your money, or even bag 10-baggers, in short periods of time. As Doug Casey says, you should make volatility your best friend.

You can see what I mean in the chart below. This chart shows the Baltic Dry Index (BDI), which measures the cost to move raw materials like iron, coal, or wheat across the ocean. It’s also a benchmark for charter rates.

Between 1999 and 2008, the industry had an epic boom. During that period, the BDI rocketed more than 14-fold. Shippers made a killing.

Then the financial crisis hit.

Rates went on to crash more than 90% since 2008. Today, the BDI is still near record lows.

The shipping industry has now been in a bear market for eight years and counting. That’s the bad news.

The good news is that the shipping cycle usually lasts about seven years. It takes a long time for supply and demand to balance out.

The current downturn has lasted almost eight years, which is extraordinarily long.

The turning point could be close. In fact, a number of fundamental factors are starting to turn the industry around.

For starters, the shipping glut is shrinking after years of bankruptcies and shippers scrapping vessels.

There are almost no new ships on order.

That means there won’t be any new supply until at least 2020. (Again, it takes approximately two years to build a ship.)

And, as supply shrinks, demand is set to increase.

Part of the increased demand will come from China’s ambitious, multitrillion-dollar New Silk Road project.

The New Silk Road is the largest infrastructure project in human history. It will link Europe’s Atlantic shores with the Pacific shores of Asia. The project includes high-speed rail lines, modern highways, fiber-optic cables, energy pipelines, seaports, and airports.

This behemoth project is moving ahead as planned. China will need to import a lot of commodities to create this infrastructure. That will create demand for shippers.

Not to be outdone, President Trump has announced his own trillion-dollar plan to repair, replace, or build critical infrastructure. And, of course, he’s promised to build a 2,000-mile wall along the US-Mexico border. This is another huge infrastructure project.

I think it’s a good bet that Trump will follow through on at least some of his promises to build new infrastructure. Trump’s “America First” pledge notwithstanding, the US will undoubtedly need to import some materials for this.

The US and China’s multitrillion-dollar infrastructure tsunami will be a big positive for shippers.

When the upturn begins in earnest, there won’t be enough shipping capacity to handle the demand.

That’s when charter rates—and profits for shipping investors—will explode higher.

Not only that, but Fredriksen, who knows the shipping cycle better than anyone on the planet, is betting on an upturn.

Earlier this year, one of his shipping companies scooped up vessels from a distressed seller for pennies on the dollar.

This, along with today’s depressed levels, tells us the industry has likely bottomed. We might even be looking at the best time ever to enter the shipping industry.

Here are a few more reasons why…

• It looks like the bottom has already been carved.

• The Baltic Dry Index is well off its all-time low.

• Several shipping stocks have more than doubled over the past year. A few have tripled.

But don’t worry. You didn’t miss your chance to buy shipping stocks.

Remember, these stocks have been beaten to a pulp. Many are still down more than 90%.

That means they could double and still be 80% off their old highs. Others could soar 1,000% or more in the coming years.

In short, there’s plenty of upside left. Yet most investors are still afraid to touch this industry.

But we’re not worried about what the average investor does. We care what a legendary crisis investor like Fredriksen is doing.

And right now, his actions are telling us that the industry is at the point of maximum pessimism. Of course, as you know, that’s exactly when you want to buy.

Trump, ISIS and the Crisis of Meaning

When politics limits itself to the material, people seek spiritual purpose elsewhere.

By Eliora Katz

A sketch of Sayfullo Saipov, appearing in a Manhattan federal courtroom, Nov. 1. Photo: Jane Rosenberg/Reuters

Three years and many beheadings after Abu Bakr al-Baghdadi declared a caliphate, Americans are rejoicing in its demise. “With the liberation of ISIS’s capital and the vast majority of its territory,” President Trump said in a statement, “the end of the ISIS caliphate is in sight.”

But does the fall of Raqqa really mean the fall of Islamic State? One needs merely a sharp object—or as we saw last week, a rented truck—and a nearby group of “infidels” to be an ISIS soldier.

After the Oct. 31 New York attack, Mr. Trump tweeted: “We must not allow ISIS to return, or enter, our country after defeating them in the Middle East and elsewhere. Enough!” But ISIS’ most important battlefield is not in the Levant; it is online, in hearts and minds. ISIS’ power comes from ideas, not territory.

The threat is from within as well as without. Sayfullo Saipov, the Uber driver who allegedly murdered eight in ISIS’ name, had been living an unremarkable life in the U.S. for seven years.

Thousands of young Muslims have left Europe and the U.S. for Syria and Iraq to answer Mr. Baghdadi’s call. Seduced via social media, young men and women, some of them converts, are also taking up arms in the West, or leaving their homes in Chicago, London and Paris, to live, and perhaps die, for a cause.

The Obama administration argued that young people join ISIS because of poor economic prospects. “We can work with countries around the world to help improve their governance,” State Department spokeswoman Marie Harf said in 2015. “We can help them build their economies so they can have job opportunities for these people.” That’s myopic. Physicians, computer scientists and star high-school students have been radicalized, too. People are motivated by meaning more than money.

While Western states do (or used to) provide good social services, economic opportunity and consumer goods, they are increasingly indifferent to questions of meaning—to principles worth living, and perhaps dying, for. In the U.S. we are proud of our freedom—but freedom to do and care for what? For a small but not negligible number of young people, answering a call to build a caliphate, allegedly based on the dictums of a holy book, will seem a more genuine choice than ambition or consumerism.

Mr. Trump should know this. His campaign was a kind of call for meaning. Whatever the merits of Mr. Trump’s positions, he framed his views on trade, immigration and foreign policy in terms of America’s national identity: “Make America Great Again.” Hillary Clinton emphasized technical solutions. Can anyone remember her slogans, her rallying cries? There was “breaking down barriers” and “fighting for us” and “I’m with her.” None stuck. She ended on “stronger together.” Together with what or whom?

It’s not a new problem. In Germany’s Weimar era, the jurist Carl Schmitt argued that political liberalism, in deriving supreme political value from individual liberty, gave rise to a paradox he called “depoliticization.” For Schmitt, politics boiled down to disputes over fundamental principles. A state that enshrines individual freedom must allow citizens to pursue their private ideas of the good, as the state itself is barred from laying claim on transcendent values.

Liberalism thereby shrinks politics to a series of technical arguments over the most efficient means for achieving material ends.

For an example of depoliticization, consider Mrs. Clinton’s “basket of deplorables” remarks. Half of Mr. Trump’s supporters, she said, “are irredeemable, but thankfully they are not America.” The other half “are people who feel that the government has let them down, the economy has let them down, nobody cares about them, nobody worries about what happens to their lives and their futures, and they’re just desperate for change.” The implication is that the only legitimate basis of political disagreement is over the means of attaining prosperity and material security. The Trump movement perceived that political differences run deeper—that they are civilizational and cultural.

The search for meaning can lead in monstrous directions—as it does for ISIS recruits, and as it did for Carl Schmitt, who would become known as “the crown jurist of the Third Reich.” That danger is all the more reason to regard the matter seriously.

The Trump presidency, the European Union’s crisis and the threat of ISIS all, in very different ways, point to a yearning for a political approach to life’s fundamental questions rather than a merely technocratic one. By all means, celebrate setbacks to the caliphate. But recognize that in the absence of good answers about what we’re fighting for at home, some people will be attracted to very bad ones.
Ms. Katz is a Robert L. Bartley Fellow at the Journal.