Doug Nolan

After posting an inter-week high of 25,800 on Tuesday, the DJIA then dropped 1,583 points (6.1%) at the week’s Friday morning low (24,218) - before closing the session at 24,538 (down 3.0% for the week). The VIX traded as low as 15.29 Tuesday. It then closed Wednesday at 19.85, jumped as high as 25.30 on Thursday and then rose to 26.22 in wild Friday trading, before reversing sharply to close the week out at 19.59.

Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors had a 3.3% swing, gaining 1.8% on the day.

Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was spiking. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.

There are cracks - cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?

This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs. Fed Chairman Powell was clearly no clone of Drs. Yellen and Bernanke. The Bank of Japan couldn’t stick with experimental monetary inflation forever. U.S. tax cuts won’t transform either a flawed financial structure or maladjusted economy.

Speculative blow-offs and “Terminal Phase Excess” are fundamental to Bubble analysis. It’s important to appreciate these culminations of excess are manifestations of Monetary Disorder. 
Invariably, prolonged bouts of asset inflation and Bubble Dynamics were fueled by some underlying monetary disturbance. Monetary policies remained excessively loose, with rates held too low for too long, often out of fear of lurking fragilities. Over time, markets will disregard underlying vulnerabilities – or even be willing to conceive of them bullishly. After all, structural deficiencies ensure uninterrupted easy “money” and ever higher asset prices. Speculative leverage accumulates at compounding rates.

As the cycle extends and timid central banks dilly-dally, the gap widens dramatically between bullish perceptions and mounting systemic deficiencies – between inflating expectations and deteriorating fundamental prospects. This chasm, however, is well-masked by the remarkable inflation of perceived financial wealth, along with, let us not forget, the associated boosts in “money,” Credit and market liquidity.

What’s more, loose financial conditions and rapidly inflating asset markets stimulate economic activity, reinforcing misperceptions as to the underlying soundness of the boom. This Wealth Illusion becomes powerfully self-reinforcing throughout both the Financial and Real Economy Spheres. It is one of the great wonders of economic history – how everyone turns so blindly optimistic right before the bottom falls out.

Tremendous structural damage can be wrought during the “Terminal Phase.” Financial flows go haywire, the reign of speculation dominates, markets turn whimsical, resources are terribly misallocated and systemic risk expands exponentially. Meanwhile, over-liquefied markets see sentiment turn wildly bullish. Misperceptions are rife, as rapidly mounting risks go completely unrecognized. When the spell is inevitably broken and markets reverse sharply lower, suddenly comes the recognition that things are not as previously perceived. So much changes so abruptly, as greed swings to fear.

Over the years, CBB analysis has focused on three epic and interrelated experiments: 1) Unfettered market-based finance. 2) A de-industrialized financial/services/consumption-based U.S. economic structure. 3) Activist central bank monetary inflation and market manipulation.

These runaway experiments have combined to inundate the world with “money” (dollar balances), inflating historic asset Bubbles at home and abroad. Unhinged U.S. finance cultivated unhinged finance globally. A Friday headline from ZeroHedge: “Pat Buchanan Blasts ‘The Fatal Delusions of Western Man - We fed the Tiger, and Created a Monster...’” China is unequalled in terms of feeding off unfettered dollar-based finance while championing economic power, national wealth, military might and global ambitions. And not until Bubbles burst will we have a clearer understanding as to how much wealth has been redistributed and how much has been pilfered and destroyed – and to what regrettably great consequence.

Myriad global Bubbles have been fundamental to unprecedented wealth redistribution, inequalities and economic stagnation - potent fuel for populism and anti-globalization movements (Italian election Sunday). The backdrop has nurtured the rise of the strongman politician, dictator and despot. In a deeply divided world, seemingly the only common understanding is that central bankers and policymakers won’t tolerate market dislocation, recession or crisis.

March 2 – Bloomberg (Joe Deaux, Andrew Mayeda, Toluse Olorunnipa, and Jeff Black): “President Donald Trump pushed back against a wave of criticism against steel tariffs, telling the world that not only are trade wars good, they are easy to win. Trump is facing anger from manufacturers and trade partners in China and Europe after announcing tariffs of 25% on imported steel and 10% on aluminum for ‘a long period of time.’ The formal order is expected to be signed next week. ‘When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,’ Trump said in an early morning tweet on Friday.”

March 2 – Axios (Mike Allen and Jonathan Swan): “President Trump has long mused about doing what he wants, when he wants, how he wants. He wanted tariffs on steel and aluminum — big ones — now. He wanted to negotiate with Congress — in public, on his court, surprise and shock, all for the cameras. He wanted to ditch any P.C. pretenses and consider Singapore-style death for all drug dealers. He wanted to play by his rules alone. Why it matters: His staff at times managed to talk him off the ledge. No more. Tired of the restraints, tired of his staff, Trump is reveling in ticking off just about every person who serves him.”

Trump’s Tariffs should come as little surprise. Perhaps markets are finally beginning to come to terms with the disequilibrium and turmoil of the Trump presidency. Rumors have it that Wall Street darling Gary Cohen, having lost on tariffs, could be on his way out. It’s alarming to see the spectacle of the President referring to the Attorney General as “DISGRACEFUL,” and Mr. Sessions pushing back with “I will continue to discharge my duties with integrity and honor…”

Top aid and close confidante Hope Hicks abruptly resigned this week, with National Security advisor H.R. McMaster’s job said to be in jeopardy. Trump family members are under intense scrutiny, while chief of staff John Kelly has been under attack. After assailing the NRA and contemplating gun control, what might our President do next? Turn on the stock market? But hasn’t he used surging equities to define the incredible merits of his leadership? Commentators Friday on Bloomberg TV used “unleashed” and “rogue.” Not so easy to disregard the Washington spectacle with the markets unsettled.

Fed Chairman Powell’s testimony should have provided little surprise. He impressed as a traditional central banker. It’s been awhile, and it sure was refreshing. Powell highlighted recent economic momentum and, as a disciplined central banker should at this point, demonstrated a resolve to move toward normalizing monetary policy. Our top central banker wasn’t going to belabor the nuances of academic discussions on employment demographics or r-star. No talk of the economy’s higher “speed limit” or a “global savings glut.”

The new Chairman is not in awe and, at least to commence his term, seems disinclined to pander to the markets. With greed waning, the change in tone was difficult for an uncomfortable Wall Street to ignore. Markets have grown too accustomed to central bank chiefs with an academic view of “efficient” markets – scholars wedded to doctrine that it’s the role of central banks to bolster and backstop securities markets. Powell knows better. As the old saying goes, “he knows where the bodies are buried.” Wall Street fancies the naïve. FT: “‘Powell Put’ Assumption Challenged as Fed Chief Shows Hand.”

I believe Powell recognizes the perils associated with backstopping a speculative marketplace. That doesn’t mean he won’t be compelled to do it. At some point, he’ll have little choice. But it likely means he will not act in haste. The Powell Fed will be much more cautious in delivering market assurances. He was skeptical of QE in the past, and I’ll assume he knows he was right. 
He will resort to additional QE slowly and cautiously. Importantly, I believe the new Chairman will want to pull the Fed back to traditional central banking. His preference would be to conclude the monetary experiment – end the follies of “whatever it takes.”

February 27 – Bloomberg (Jeanna Smialek): “Call them the star wars. Debate is heating up over whether the Federal Reserve’s neutral interest rate -- commonly called r-star -- is about to head higher, and America’s monetary policy outlook hinges on who has it right. In one corner, San Francisco Fed President John Williams and his co-authors think long-term factors are holding down the interest rate that neither stokes nor slows growth, so the Fed will have to stop lifting rates this cycle at a historically low endpoint. In the other, Goldman Sachs chief economist Jan Hatzius thinks the recent decline owes to cyclical factors and could reverse meaningfully, allowing the Fed to lift rates higher next year. The intellectual showdown is relevant as Jerome Powell heads to Capitol Hill Tuesday for his first testimony as Fed Chair, and as central bank-watchers look eagerly for hints about how the new chief expects r-star to evolve.”

An incredible amount of intellectual effort is expended on “r-star,” the Philipps Curve, NAIRU (non-accelerating inflation rate of unemployment), and the like. “R-star” – the neutral rate - is a myth. There is no single aggregate price level – there is no equilibrium interest rate. Importantly, the three epic experiments completely altered price dynamics throughout finance and the real economy. Inflation is no longer too much money chasing too few goods. Too much “money” – in this age of momentous technological advancement, globalization and changes in the nature of economic output – no longer manifests primarily in problematic consumer price inflation.

There are instead powerful inflationary biases in securities and asset markets. Too much “money” - and activist central bank support – chasing limited quantities of securities (and upscale homes, commercial real estate, art, collectibles, etc.) The academics need to discard “r-star.” Determining monetary policy based on some convoluted notion of aggregate consumer price indices (or economic equilibrium) in the current backdrop will ensure destabilizing loose finance for securities and asset markets.

In Powell’s testimony, there was mention of the long-accepted view that central banks should not be in the business of Credit allocation. Yet contemporary central bankers have gone so far as to conspicuously favor the securities markets. This is fundamental as to why financial stability risks now reign supreme. Central bankers should take a broad view of monetary stability and begin extricating themselves from the business of incentivizing financial flows and speculation into the markets. I know others disagree, but I believe the majority of central bankers would prefer to return back to traditional monetary management. After almost a decade, they’ve grown weary of the experiment; rationalizing the experiment; justifying the experiment.

March 2 – Bloomberg (Toru Fujioka): “The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy. The yen surged, gaining as much as 0.5% to 105.71 per dollar, while yields on Japanese sovereign debt climbed across the curve. The Nikkei 225 Index closed 2.5% lower and the Topix Index fell 1.8%.”

Cold War II

Richard N. Haass

NEW YORK – The Cold War lasted four decades, in many ways both beginning and ending in Berlin. The good news is that it stayed cold – largely because nuclear weapons introduced a discipline missing from previous great-power rivalries – and that the United States, together with its European and Asian allies, emerged victorious, owing to sustained political, economic, and military effort that a top-heavy Soviet Union ultimately could not match.

A quarter-century after the end of the Cold War, we unexpectedly find ourselves in a second one. It is both different and familiar. Russia is no longer a superpower, but rather a country of some 145 million people with an economy dependent on the price of oil and gas and no political ideology to offer the world. Even so, it remains one of two major nuclear-weapons states, has a permanent seat on the UN Security Council, and is willing to use its military, energy, and cyber capabilities to support friends and weaken neighbors and adversaries.

This state of affairs was anything but inevitable. The end of the Cold War was expected to usher in a new era of friendly Russian ties with the United States and Europe. It was widely thought that post-communist Russia would focus on economic and political development. And relations got off to a good start when Russia, rather than standing by its long-time client Iraq, cooperated with the US in reversing Saddam Hussein’s invasion of Kuwait.

The goodwill did not last. Just why will be a matter of debate among historians for decades to come. Some observers will blame successive US presidents, pointing to a lack of economic support extended to a struggling Russia, and even more to NATO enlargement, which, by treating Russia as a potential adversary, increased the odds it would become one.

It is true that the US could and should have been more generous as Russia made its painful transition to a market economy in the 1990s. Nor is it clear that NATO enlargement was preferable to other security arrangements for Europe that would have included Russia. That said, the lion’s share of the responsibility for the emergence of a second Cold War is Russia’s, and above all Vladimir Putin’s. Like many of his predecessors, Putin viewed the US-dominated world order as a threat to his rule and to what he regarded as his country’s rightful place in the world.

Russia in recent years has used armed force to seize, occupy, and annex Crimea, in the process violating the fundamental principle of international law that borders may not be changed by armed force. Putin continues to use military or covert means to destabilize Eastern Ukraine, Georgia, and parts of the Balkans. And Russia employed military force in particularly brutal ways in Syria to prop up Bashar al-Assad’s appalling regime.

Putin’s Russia also went to great lengths, in the words of US Special Counsel Robert Mueller, to carry out “fraud and deceit for the purpose of interfering with the US political and electoral processes, including the presidential election of 2016.” Heads of US intelligence agencies have made clear that they expect further such efforts between now and the midterm congressional elections in November.

As Russia has become a revisionist country, with few if any qualms about overturning the status quo by whatever means it judges necessary, shoring up Europe’s defense and providing lethal arms to Ukraine is a sensible response. But what more should the US do, beyond reducing the vulnerability of voting machines and requiring technology firms to take steps to prevent foreign governments from trying to influence US politics?

First, Americans must recognize that defense is not enough. Congress is right to call for additional sanctions, and Donald Trump is wrong to refuse to implement sanctions that Congress has already passed.

The US government also needs to find its voice and criticize a Russian regime that arrests its opponents and reportedly murders journalists. If Trump, for whatever reason, continues to coddle Russia, then Congress, the media, foundations, and academics should publicly detail the corruption that characterizes Putin’s rule. Circulating such information might increase internal opposition to Putin, persuade him to hold off on further interference in US and European politics, and, over time, buttress more responsible forces within Russia.

At the same time, the objective should not be to end what little remains of the US-Russian relationship, which is already in worse shape than it was for much of the first Cold War. Diplomatic cooperation should be sought whenever it is possible and in America’s interest. Russia may well be willing to stop interfering in Eastern Ukraine in exchange for a degree of sanctions relief, if it could be assured that ethnic Russians there would not face reprisals. Likewise, the Kremlin has no interest in a military escalation in Syria that would increase the relatively modest cost of its intervention there.

At the same time, Russian support is needed to tighten sanctions against North Korea. And maintaining arms-control arrangements and avoiding a new nuclear arms race would be in the interest of both countries.

There is thus a case for regular diplomatic meetings, cultural and academic exchanges, and visits to Russia by congressional delegations – not as a favor, but as a means to make clear that many Americans are open to a more normal relationship with Russia if it acts with greater restraint. The US and its partners have a large stake in greater Russian restraint while Putin remains in power – and in a Russia characterized by other than Putinism after he is gone.

Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush's special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. He is the author of A World in Disarray: American Foreign Policy and the Crisis of the Old Order.

Russia’s dirty tricks

How Putin meddles in Western democracies

And why the West’s response is inadequate

IN THE late 1980s, as Mikhail Gorbachev launched perestroika, Russia made peace with the West. It was possible to believe that each would give up trying to subvert the other with lies and cold-war conspiracy theories. With the indictment of 13 Russians on February 16th by the American special counsel, Robert Mueller, it is clear just how fragile that belief was.

Mr Mueller alleges that in 2014 Russia launched a conspiracy against America’s democracy, and he believes he has the evidence to withstand Russian denials and a court’s scrutiny. Perhaps because Vladimir Putin, Russia’s president, thought the CIA was fomenting an uprising in Ukraine, the Internet Research Agency, backed by an oligarch with links to the Kremlin, set up a trolling team, payments systems and false identities. Its aim was to widen divisions in America and, latterly, to tilt the vote in 2016 from Hillary Clinton to Donald Trump.

Europe has been targeted, too. Although the details are sketchier, and this is not the focus of the Mueller probe, Russia is thought to have financed extremist politicians, hacked computer systems, organised marches and spread lies. Again, its aim seems to have been to deepen divides.

It is futile to speculate how much Russia’s efforts succeeded in altering the outcomes of votes and poisoning politics. The answer is unknowable. But the conspiracies are wrong in themselves and their extent raises worries about the vulnerabilities of Western democracies. If the West is going to protect itself against Russia and other attackers, it needs to treat Mr Mueller’s indictments as a rallying cry.


They hold three uncomfortable lessons. One is that social media are a more potent tool than the 1960s techniques of planting stories and bribing journalists. It does not cost much to use Facebook to spot sympathisers, ferret out potential converts and perfect the catchiest taglines.

With ingenuity, you can fool the system into favouring your tweets and posts. If you hack the computers of Democratic bigwigs, as the Russians did, you have a network of bots ready to dish the dirt.

With a modest budget, of a little over $1m a month, and working mostly from the safety of St Petersburg, the Russians managed botnets and false profiles, earning millions of retweets and likes. Other, better-funded, groups exploit similar techniques. Nobody yet knows how the outrage they generate changes politics, but it is a fair guess that it deepens partisanship and limits the scope for compromise.

Hence the second lesson, that the Russia campaign did not create divisions in America so much as hold up a warped mirror to them. It played up race, urging black voters to see Mrs Clinton as an enemy and stay at home on polling day. It sought to inflame white resentment, even as it called on progressives to vote for Jill Stein, of the Green Party. After Mr Trump’s victory, which it had worked to bring about, it organised an anti-Trump rally in Manhattan. Right after the Parkland school shooting, Russian bots began to pile into the debate about gun control (see article). Europeans are to a lesser degree divided, too, especially in Brexit Britain. The divisions that run so deep within Western democracies leave them open to intruders.

The most important lesson is that the Western response has been woefully weak. In the cold war, America fought Russian misinformation with diplomats and spies. By contrast, Mr Mueller acted because two presidents fell short. Barack Obama agonised over evidence of Russian interference but held back before eventually imposing sanctions, perhaps because he assumed Mr Trump would lose and that for him to speak out would only feed suspicions that, as a Democrat, he was manipulating the contest. That was a grave misjudgment.

Mr Trump’s failing is of a different order. Despite having access to intelligence from the day he was elected, he has treated the Russian scandal purely in terms of his own legitimacy. He should have spoken out against Mr Putin and protected America against Russian hostility.

Instead, abetted by a number of congressional Republicans, he has devoted himself to discrediting the agencies investigating the conspiracy and hinted at firing Mr Mueller or his minders in the Justice Department, just as he fired James Comey as head of the FBI. Mr Mueller is not done. Among other things, he still has to say whether the conspiracy extended to the Trump campaign. Were Mr Trump to sack him now, it would amount to a confession.

How to win the woke citizens vote

For democracy to thrive, Western leaders need to find a way to regain the confidence of voters.

This starts with transparency. Europe needs more formal investigations with the authority of Mr Mueller’s. Although they risk revealing intelligence sources and methods and may even please Russia—because proof of its success sows mistrust—they also lay the ground for action. Party-funding laws need to identify who has given money to whom. And social media should be open to scrutiny, so that anyone can identify who is paying for ads and so that researchers can more easily root out subterfuge.

Then comes resilience, which starts at the top. Angela Merkel successfully warned Mr Putin that there would be consequences if he interfered in German elections. In France Emmanuel Macron frustrated Russian hackers by planting fake e-mails among real ones, which discredited later leaks when they were shown to contain false information. Finland teaches media literacy and the national press works together to purge fake news and correct misinformation.

Resilience comes more easily to Germany, France and Finland, where trust is higher than in America. That is why retaliation and deterrence also matter—not, as in the cold war, through dirty tricks, but by linking American co-operation over, say, diplomatic missions, to Russia’s conduct and, if need be, by sanctions. Republican leaders in Congress are failing their country: at the least they should hold emergency hearings to protect America from subversion in the mid-term elections. Just now, with Mr Trump obsessively blaming the FBI and Democrats, it looks as if America does not believe democracy is worth fighting for.

The US vs. China: A Study in Opposites

by Jeff Thomas

In the first photo, taken in 1972, US President Richard Nixon made what was then considered a bold move, visiting Mao Zedong in Communist China. Literally, as well as figuratively, Chairman Mao is on the left and Mr. Nixon is on the right.

In the second photo, taken over forty years later, we have US President Barack Obama making a similar visit to China. This time, again literally as well as figuratively, Mr. Obama is on the left and Chinese President Xi Jinping is on the right.

Over the ensuing four decades, both countries have been changing dramatically. The US has become increasingly socialistic, more focused on Big Government and more of a totalitarian state. In 1972, it was the world’s foremost creditor nation; it is now the world’s foremost debtor nation. By contrast, China, since the death of Chairman Mao, has opened up considerably, with billions of people becoming upwardly mobile, in response to China becoming increasingly capitalistic.

To be sure, both countries retain some of their historical features, but increasingly, the US is acting like a country in decline, whilst China is acting like a country on the rise. 
As a result of successful capitalism, the US became the world’s foremost power after World War II. Then, in the 1960s, the US began apologising for the spoils that came with that capitalism. It became increasingly popular for Americans (largely at the urging of the media and the political structure) to be ashamed of capitalistic achievements and to head in a more socialistic direction.

Republican politicians have needed to soften their views on capitalism in order to appear to be “good people.” (“Good people” has essentially come to mean “those who are prepared to take from the rich and give to the poor.”) They are now Republicans in name only. The US still has two major parties, but one is a moderately liberal party and the other is a vehemently liberal party.

China has gone in the opposite direction, becoming increasingly capitalistic. The results have been dramatic. Many Chinese now have all the trappings that Americans do. In addition, their government is expanding more each year into capitalism.

Again, these developments have followed along the lines of “Declining Empire” vs. “Burgeoning Empire.” Increasingly, the US approach to the world has become one of demanding that other countries subjugate themselves to the US, as though they are subsidiaries of the empire. The US has demanded that trade in many essentials (particularly energy) be settled in the US dollar.

As this relationship has been crumbling in recent years, the US has responded by threatening other countries, creating sanctions against them, and even invading them. In doing so, the US has earned the reputation as the schoolyard bully of the world—the country that the world loves to hate. They still have to play ball with the US, but the resentment is growing globally.

(It should be noted here that, if and when a schoolyard bully does fall from his position, he is stomped on, not only by his challenger, but also by those who resented and hated him but had previously deferred to him and pretended to befriend him. Similarly, when empires fall from grace, “staunch allies” frequently switch sides rather quickly.)

In contrast to the US, the Chinese have, in recent decades, displayed the sort of capitalism that is indicative of a burgeoning global player. They are, in effect, saying, “We’re open for business and we’re here to deal. We have some creative ideas to offer that we think you’ll welcome.” They’re not twisting arms behind backs. They’re offering creative opportunities for other countries.

In addition, they’re not aiming for immediate gratification. Their aim is for long-term benefits, just as US goals once were. Today, the Chinese are buying up properties on every continent, setting up businesses, and making sure that the locals benefit from their investments.

In addition, they’re creating deals with governments that those governments could not create on their own. They seek out a country like Venezuela that is on the ropes economically and offer to buy heavily into Venezuela’s primary asset—oil—to the tune of tens of billions of dollars. The deal is not intended to provide a major return for China in the short term, but it does place China in the economic catbird seat in Venezuela over the long haul.

Around the globe, state-backed Chinese developers are offering creative deals to other countries’ political leaders. For example, if a small nation needs, say, a new port and the port costs $50 million (an amount that the country does not have), the Chinese offer to build the port for, say, $30 million, a bid that no other developer can meet. The Chinese developer takes a loss on the construction, but a part of the deal is that he gets a significant portion of the income of the port for, say, 50 or 75 years.

Chinese developers are now executing such deals in nearly every country in the world. What they lose in profits upon completion is made up for in long-term income. As a bonus, China not only owns property worldwide, it is a shareholder in the economies of countries worldwide.

This rapidly expanding global Chinese capitalism is receiving little notice in the US media, but that, most certainly, will change. As the US reaches its own economic tipping point—market crashes, currency collapse, etc.—and finds that it can no longer pay even the interest on its debt, it will also discover that it cannot pay out the benefits promised to the 50% of its population who pay no income tax but are recipients of governmental largesse. The US government will then find itself desperately trying to keep this portion of the population at bay, as payouts to recipients decrease. As a result, governmental capital projects will fail to receive funding. Someone will need to step in and offer “creative bidding.” Enter the Chinese.

Once the US is on more of a Third-World economic footing, it will have little choice but to accept the kinds of deals that the Chinese have recently offered in Jamaica, Egypt, Nicaragua, etc.

The result will be Chinese ownership not only of considerable US real estate and corporations within the US, but ownership of US infrastructure.

Today, the vestiges of Communism undoubtedly remain in China, but the move is decidedly away from Communism, toward capitalism. Conversely, the US seems to be hell-bent on replacing US capitalism with a socialist totalitarian state. Since more than 50% of Americans are now on the dole in some form, it seems highly unlikely that the US will suddenly reverse that direction, since the majority of Americans will vote for continued (and increased) government hand-outs.

Both Chairman Mao and President Nixon are now pushing up daisies, and their present-day replacements are reverse images of them. The future belongs to those who are productive.

As investment guru Jim Rogers has stated, the future belonged to the British in the 19th century and the Americans in the 20th century. The Chinese will own the 21st century. Accordingly, Mr. Rogers made Singapore his home.

We are passing through the early stages of a period of dramatic change. The economic and political world is in the process of turning upside down. Those who come out the other side of this change with their skin on will be those who have diversified both their wealth (however large or small) and, indeed, themselves, so that they are positioned to thrive in the future, rather than to remain where they are and be a part of the decline.

What Will Keep the Chinese Consumer Strong?

Chinese shoppers are splurging again. What will keep them going?

By Jacky Wong

Chinese shoppers are splurging again. The question is: What will keep them going?

China’s consumer confidence has reached a high since Nielsen started compiling the index in 2005. Luxury goods, in particular, are back in vogue. Exports of Swiss watches to China and Hong Kong have jumped 30% from a year ago in January, after growing 10% last year. Luxury car sales increased 18% in 2017, according to Euromonitor. Prices of moutai, a high-end liquor common at Chinese business dinners, have almost doubled since the beginning of 2016. High rollers in the gambling hub Macau have placed 27% more bets in 2017 than a year ago. China’s box office for the seven-day Lunar New Year holiday this year has surged more than 60% year over year, according to online ticketing platform Maoyan.

Moutai is moving again. Prices of the high-end liquor common at Chinese business dinners have almost doubled since the beginning of 2016. Photo: Qilai Shen/Bloomberg News

Beijing’s nationwide anticorruption drive, which drove luxury spending to a halt just three years ago, has faded. That coincided with a rebound in property prices, Chinese consumers’ main source of wealth. According to Deutsche Bank, the housing boom has added 86 trillion yuan ($13.5 trillion) to the total value of residential properties in the past two years. And unlike previous cycles, the gains aren’t concentrated in the biggest cities such as Shanghai and Beijing but have spread to smaller cities. People in these so-called tier-two and tier-three cities have made more money from their houses on paper last year than from their wages, according to Deutsche.

That brings risks. While the government is unlikely to let the property market crash, it needs to let steam out of the market, given the worryingly high level of debt linked to the real-estate sector, both among developers and, increasingly, home buyers. Another risk: Higher rates in the U.S. could spark outflows from China’s economy again, necessitating a renewed clampdown on moving money across borders.

Who among the luxury-industrial complex is most vulnerable? Casino operators in Macau, especially those that rely on high-spending VIPs such as Wynn Macau. Any efforts by Beijing to clamp down on money outflows to the gambling hub, which sits outside the mainland’s capital controls, could deal a blow to those operators.

Investors may do better to stick with companies that cater to China’s rising middle class, instead of the ultrarich—such as Brilliance China, an auto maker that sells BMW cars in the country, or South Korea’s Amorepacific, which owns cosmetics brands that are popular in China.

The health of the Chinese consumer is strong. That is a good thing. But a complicated one.