The Chinese are wary of Donald Trump’s creative destruction

He is the first US president in decades to challenge China on multiple fronts

Mark Leonard

Donald Trump and Xi Jinping in Beijing. Most Chinese think the US president’s goal is nothing less than remaking the global order © EPA

Donald Trump is leading a double life. In the west, most foreign policy experts see him as reckless, unpredictable and self-defeating. But though many in Asia dislike him as much as the Europeans, they see him as a more substantial figure. I have just spent a week in Beijing talking to officials and intellectuals, many of whom are awed by his skill as a strategist and tactician.

One of the people I met was the former vice-foreign minister He Yafei. He shot to global prominence in 2009 when he delivered a finger-wagging lecture to President Barack Obama at the Copenhagen climate conference before blowing up hopes of a deal. He is somewhat less belligerent where Mr Trump is concerned. He worries that strategic competition has become the new normal and says that “trade wars are just the tip of the iceberg”.

Few Chinese think that Mr Trump’s primary concern is to rebalance the bilateral trade deficit. If it were, they say, he would have aligned with the EU, Japan and Canada against China rather than scooping up America’s allies in his tariff dragnet. They think the US president’s goal is nothing less than remaking the global order.

They think Mr Trump feels he is presiding over the relative decline of his great nation. It is not that the current order does not benefit the US. The problem is that it benefits others more in relative terms. To make things worse the US is investing billions of dollars and a fair amount of blood in supporting the very alliances and international institutions that are constraining America and facilitating China’s rise.

In Chinese eyes, Mr Trump’s response is a form of “creative destruction”. He is systematically destroying the existing institutions — from the World Trade Organization and the North American Free Trade Agreement to Nato and the Iran nuclear deal — as a first step towards renegotiating the world order on terms more favourable to Washington.

Once the order is destroyed, the Chinese elite believes, Mr Trump will move to stage two: renegotiating America’s relationship with other powers. Because the US is still the most powerful country in the world, it will be able to negotiate with other countries from a position of strength if it deals with them one at a time rather than through multilateral institutions that empower the weak at the expense of the strong.

My interlocutors say that Mr Trump is the US first president for more than 40 years to bash China on three fronts simultaneously: trade, military and ideology. They describe him as a master tactician, focusing on one issue at a time, and extracting as many concessions as he can. They speak of the skilful way Mr Trump has treated President Xi Jinping. “Look at how he handled North Korea,” one says. “He got Xi Jinping to agree to UN sanctions [half a dozen] times, creating an economic stranglehold on the country. China almost turned North Korea into a sworn enemy of the country.” But they also see him as a strategist, willing to declare a truce in each area when there are no more concessions to be had, and then start again with a new front.

For the Chinese, even Mr Trump’s sycophantic press conference with Vladimir Putin, the Russian president, in Helsinki had a strategic purpose. They see it as Henry Kissinger in reverse. In 1972, the US nudged China off the Soviet axis in order to put pressure on its real rival, the Soviet Union. Today Mr Trump is reaching out to Russia in order to isolate China.

In the short term, China is talking tough in response to Mr Trump’s trade assault. At the same time they are trying to develop a multiplayer front against him by reaching out to the EU, Japan and South Korea. But many Chinese experts are quietly calling for a rethink of the longer-term strategy. They want to prepare the ground for a new grand bargain with the US based on Chinese retrenchment. Many feel that Mr Xi has over-reached and worry that it was a mistake simultaneously to antagonise the US economically and militarily in the South China Sea.

Instead, they advocate economic concessions and a pullback from the aggressive tactics that have characterised China’s recent foreign policy. They call for a Chinese variant of “splendid isolationism”, relying on growing the domestic market rather than disrupting other countries’ economies by exporting industrial surpluses.

So which is the real Mr Trump? The reckless reactionary destroying critical alliances, or the “stable genius” who is pressuring China? The answer seems to depend on where you ask the question. Things look different from Beijing than from Brussels.

The writer is director of the European Council on Foreign Relations

America’s Grassroots Saviors

Laura Tyson , Lenny Mendonca

BERKELEY – Joan Didion famously observed that, “We tell ourselves stories in order to live.” Unfortunately, if you get your news about the United States from Facebook, Twitter, or cable TV networks, the stories you are being told might convince you that the country is hopelessly divided.

To be sure, the US is plagued by rising economic inequality, regional and rural-urban income disparities, job insecurity, declining social mobility, and political polarization. These issues understandably become the focus of the national news media. And the fact that US President Donald Trump usually starts his day with a fusillade of divisive tweets doesn’t help matters.

But the deeper problem is that, because the business model for local print media has been eviscerated by the loss of advertising revenues to digital media, stories outside the partisan national narrative have disappeared. In 1990, newspapers across the country employed nearly 458,000 people; by March 2016, that number was less than 200,000. The decline is illustrated by the fate of the San Jose Mercury News, which used to be one of the country’s largest-circulation local dailies. Although its home turf, Silicon Valley, has grown in population, income, and economic significance, the number of journalists working for the Mercury News has declined from 400 in the 1990s to around 40 today.

Local news matters because the day-to-day world that most Americans experience is nothing like what rancorous national news coverage makes it out to be. At the same time that Trump and congressional Republicans are failing to address critical issues such as economic insecurity and climate change, state and local governments are taking action. Across the country, Americans – regardless of class or party – are rolling up their sleeves and working to improve their communities. After a long decline, there are signs that social capital is being restored.

When Alexis de Tocqueville visited the US in the 1830s, he observed that, both in public and private, Americans are able to overcome selfish desires, thus enabling both a self-conscious and active political society and a vibrant civil society. Today is no different – at least at the state and local level. But in the absence of robust local journalism, we often don’t hear about these activities, other than from the few reporters and researchers who have been willing to traverse the country to document what is happening.

For example, after spending five years crisscrossing the US in their single-engine propeller plane, James and Deborah Fallows have published Our Towns, a deep and faithful account of local efforts to rebuild the country. The Fallowses draw compelling parallels between today and the end of the Gilded Age, when local experiments to solve community challenges began to flourish. The lesson from that earlier period is that whenever the national mood finally shifts toward economic and democratic reform, local communities around the country will already have developed a blueprint for action.

All stories of local renewal are unique, but the Fallowses show that most follow a similar pattern. A “civic story” centers on “local patriots” who have come together to create “public-private partnerships,” while “ignoring national politics.”

Moreover, local research universities, community colleges, and other educational and social institutions have been stepping up to help communities translate their visions of civic renewal into action. And in many of the communities that the Fallowses cover, there is at least one craft brewery, where community members hold lively but civil discussions. All told, the Fallowses’ travels across the country inspire optimism. “The good parts of American community-consciousness,” they write, “seem, in many places, stronger and better than we anticipated.”

Similarly, Bruce Katz of the Brookings Institution has been researching local rejuvenation efforts for years. In his recent book, co-authored with Jeremy Nowak of Drexel University, he shows how problem solving has been shifting vertically from national to state, county, and municipal governments, as well as horizontally from the public sector to networks of public, private, and civic actors.

Katz thinks such cross-sector collaboration is contributing to a “new localism,” which has been triggered by the same economic and social/cultural forces that gave rise to Trump. In addition to fueling toxic populism, economic insecurities are also fostering more constructive responses from dissatisfied citizens. Though many people have lost faith in the federal government, they still trust local institutions.

It is still early in what Anne-Marie Slaughter calls an “American Revival” or David Brooks, who chairs a new Aspen Institute project on community, calls an “American Renaissance,” yet it is already clear that many Americans are ready for a fresh national narrative. For example, the media entrepreneur Greg Behrman has created the digital-media platform NationSwell to go “from merely telling stories about people doing good things to participating in, and adding to, those efforts.” Other similar efforts include the cross-partisan coalition Patriots and Pragmatists and the National Association of Non-Partisan Reformers, which are laying the groundwork for a bottom-up reform movement across the country.

At the same time, new media models are being developed to fill the vacuum left by the erosion of local journalism. In Texas and California, the nonprofit media outlets Texas Tribune and CalMatters have become go-to sources for state reporting.

Moreover, innovative funding methods are being developed for local media. Berkeleyside, in Berkeley, California, recently raised $1 million from its readers through a direct public offering. Down the coast, in Half Moon Bay, citizens created a public benefit corporation to save the Half Moon Bay Review (for which Lenny Mendonca serves as chairman of the board). And the national non-profit organization Report for America now trains and subsidizes young journalists working for local newspapers around the country.

In a recent Pew Research Center survey, seven in ten Americans reported feeling “exhausted by the news.” This isn’t surprising, given the acrimony dominating national news coverage. As local news has declined, civic engagement and public trust have waned. It is time to reverse these trends by focusing on the inspiring stories of communities that are reinventing themselves and bringing people together for the common good.

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group.

Lenny Mendonca, Chairman of New America, is Senior Partner Emeritus at McKinsey & Company.

Is Gold on the Verge of Breaking Out?

Myra P. Saefong

Is Gold on the Verge of Breaking Out?

This could be the year that gold prices hit a record.

A massive move in gold, driven in part by declines in the U.S. dollar and Treasury bonds, excessive optimism in the stock market, and rising inflation, may help send prices above $1,900 an ounce this year, surpassing the all-time high from 2011. “Gold has been in a stealth bull-market phase for the past few years with little notice from most investors,” says Peter Spina, chief executive of precious-metals information provider “Gold at $2,000 is a long shot, but not an improbable target by any means.”

Barron’s John Kimelman recently flagged the gold rally, offering a number of ways to play it (“Gold’s Recent Rally Could Be Just the Start,” Jan. 6). Among the most popular: exchange-traded funds such as the SPDR Gold Shares (ticker: GLD) and the Van Eck Vectors Gold Miners (GDX).

On Wednesday, February gold settled at $1,339.20 an ounce—the highest futures finish since September 2017. Gold hasn’t ended a session above $1,400 since September 2013. “Gold is on the verge of breaking out of a multiyear base that has formed between [approximately] $1,400 and $1,050,” says Jeb Handwerger, publisher of the Gold Stock Trades newsletter. If it does break above $1,400, “don’t be surprised to see moves like we saw in cryptocurrencies.” Gold, he says, could then “see a doubling in the price from $1,400 to $2,800 in 2018, especially as the Chinese have been rumored to be dumping U.S. bonds and dollars as the greenback hits new three-year lows.”

And gold’s move is much more likely to have staying power than bitcoin. “The difference between moves in bitcoin and gold is that the gold move will be sustainable, as it is driven by supply and demand, whereas bitcoin is all speculative,” he adds (see “Are Investors Selling Gold to Buy Bitcoin?” Dec. 16, 2017).

In a report released earlier this month, the World Gold Council identified themes likely to influence gold’s performance this year, including synchronized global economic growth, especially in China, home to the world’s largest gold market, and “frothy asset prices.” Adds the WGC: “Should global financial markets correct, investors could benefit from having an exposure to gold, as it has historically reduced losses during periods of financial distress.”

Meanwhile, the market expects a spike in Chinese gold demand ahead of the Lunar New Year on Feb. 16. Final demand data for the first quarter won’t be released until April, says Juan Carlos Artigas, director, investment research at the WGC, but he points out that the first three quarters of last year saw an “upward trend in China’s bar and coin demand,” compared with a year earlier.

Gold has shown persistent strength in recent weeks. On Dec. 20, gold futures started their longest winning streak on record, eventually posting gains for 11 trading sessions in a row ending on Jan. 5. “The odds are highly favorable that in the coming week or months, the [$1,350 gold] barrier will fall and the momentum will be unleashed,” says Spina, predicting prices of $1,500 to $1,600 on the upside, with “potential to reach near-prior records.” Gold futures hit a record intraday high above $1,900 in September 2011.

Is Gold on the Verge of Breaking Out?

SOME ANALYSTS, HOWEVER, offered a more moderate outlook. Nitesh Shah, director and commodities strategist at ETF Securities, says his “base case fair value” for gold is “broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates.” He pegged “fair value” at about $1,280 for the year under that scenario.

But his “bull case” would see gold rise to $1,420 by midyear and settle just below $1,400 by year end—assuming only two U.S. interest-rate hikes in 2018, which would imply a more moderate rise in ICE’s U.S. Dollar Index (DXY) and U.S. Treasury yields. Strength in the greenback can dull gold’s attractiveness to holders of other currencies, and rising bond yields can hurt its investment appeal since gold offers no yield.

On the more bearish side, gold prices may fall to $1,110 by year end if the Federal Reserve delivers four rate hikes and assuming the “absence of any geopolitical risk premia or adverse financial market shock,” says Shah.

Meanwhile, Chris Gaffney, president of World Markets at EverBank, says that $2,000 gold is “unlikely” in 2018, but $1,600 is “possible.” Adds Gaffney: “Everything would need to fall into place for gold, but if we get a major black-swan event, or a major correction in the equity markets, we could easily see gold investors flock back into the market, and a 20% gain in price could occur.”

Sprott Gold Report: Gold Slumps on Trade War Fears

By Shree Kargutkar, Portfolio Manager, Sprott Asset Management LP

In late January, the 10% sell-off of the S&P 500 Index was caused by the prospect of a global trade war. Six months later, the U.S. equity markets have recovered but “trade war” headlines dominate the news. On June 1, the Trump administration launched its steel and aluminum tariffs on imports from Canada, Mexico and the European Union. New tariffs on Chinese goods followed and we are now in the midst of a growing global trade war.

Some market participants believe that the United States is insulated from the effects of a global trade war. Others are of the opinion that a full-blown trade war is unlikely, while some still believe that mutually beneficial trade agreements can still be brokered. Market participants have attempted to de-risk their portfolios by moving into the U.S. dollar and U.S. equities, which explains their recent strength. U.S. technology, healthcare and consumer discretionary stocks are now the most crowded trades while emerging market equities, bonds and currencies have been sold off. The move out of emerging markets, in particular, explains some of the recent strength in the U.S. dollar.

Commodities have been another casualty of the global trade war. Except for crude oil, whose strength is related to pressure on supply from Venezuela and Iran, virtually all commodities, including gold have been liquidated. The GLD ETF,1 which we use as a proxy for gold bullion, saw its value drop by 5.68% in Q2 of 2018 (year-to-date GLD has lost 4.04%). Gold equities have stumbled in line with the yellow metal; GDX2 has declined 4.00% year-to-date.


For some time, we have highlighted silver’s value proposition relative to gold. For most of Q2, silver outperformed gold, although some relative gains were surrendered in late June. For the long term, we continue to see silver and silver equities favorably positioned to provide outsized gains relative to gold and gold equities. As of June 30, the gold/silver ratio was a steep 80:1, and we believe it is likely to return to its long-term historical average of 60:1.


One of the most commonly asked questions of late has been: Why isn’t gold doing better? Admittedly, we have also been perplexed. Finance 101 teaches us that the market is an accurate discounting mechanism – unless uncertainty prevents the market from doing so. We see new forks emerge in the U.S. policy towards trade and geopolitics almost daily. The current Trump administration is currently engaged in a trade war with the European Union, Canada, Mexico and China.

Despite all the bluster, the monetary impact of the trade war remains quite small. Currently, $34 billion worth of Chinese goods are being hit with an import tax, for which China has retaliated in kind. Canada countered in early July after $12 billion worth of goods, primarily steel and aluminum, were slammed with a tariff. The U.S. – Canada trade partnership is worth almost $630 billion while the U.S. – China trade relationship is valued at nearly $650 billion. The U.S. currently trades approximately $2.3 trillion worth of goods with the world and the portion of goods affected by import tariffs is estimated to be $92 billion, or a mere 4%.

In the grand scheme of things, tariffs on a small portion of trade have had minimal impact. While Trump has threatened to tax the $500 billion of goods being imported from China and has even threatened local automakers from manufacturing cars in NAFTA countries, many investors remain hopeful that the trade disputes will be settled before an all-out trade war occurs. If the current trade “skirmish” leads to a full-scale trade war, we have the potential to see the emergence of a strong bull market for gold.


The knee-jerk reaction for most market participants, when faced with the prospect of loss, is to seek shelter under the comforting shade of the U.S. dollar. The prospect of a global trade war has prompted investors to flee emerging markets, particularly those most exposed to potential trade war fallout and repatriated capital. This has placed a sizeable bid under the U.S. dollar, in spite of spiraling U.S. budget deficits. U.S. dollar strength has also been fueled by U.S. corporations that began repatriating cash held offshore for years. This repatriated cash appears to have been promptly deployed into share buybacks and not into capital projects as the Trump administration had hoped. It is little wonder that the U.S. dollar has appreciated relative to virtually every major currency, including gold.

Figure 1: The U.S. Dollar YTD Strength (Percent Gains YTD of U.S. Dollar versus 10 Currencies and Gold Bullion). Source: Bloomberg (Jan 1 – July 20, 2018).
Panic buying of the U.S. dollar and liquidation by frustrated holders of gold have led to a situation in which everything that could go wrong for the yellow metal has gone wrong, and sentiment in gold has never been weaker. This is easily evidenced by anemic futures positioning in gold. By contrast, gold equities have held up remarkably well. Gold equities generally lead gold bullion prices. With gold futures positioning near two-year lows, it leads us to believe that while commodity traders have liquidated their speculative positions, long-term oriented investors have encouragingly stood steadfast to gold.

Figure 2: Gold Futures Positioning at Two-Year Lows. The CEI1GNCN Index measures the Bloomberg CFTC CMX Gold Net Non-Commercial Futures Positions. Source: Bloomberg (January 2013 – July 24, 2018).
In the past, U.S. trade wars have often hurt those they were meant to protect: American consumers and producers. The automotive revolution in the 1920s resulted in massive job losses in the horse carriage industry. Grazing land was freed up for agriculture resulting in an agricultural boom. Record quantities of crops were produced. Eager to protect its farmers, U.S. lawmakers passed the Smoot-Hawley Tariff Act in June 1930. More than 3,200 goods were impacted. The pleas of the economists and even pushbacks from President Herbert Hoover did not result in a light-bulb moment for the Republican lawmakers in power. Unsurprisingly, America’s trade partners retaliated with their own tariffs. Three years later, U.S. imports had decreased by 66% while exports had decreased by 61%. Ironically, those most impacted by Smoot-Hawley was the group the Act meant to protect – the farmers.

Here is a more recent example.

Following the election of Trump, Whirlpool lobbied the administration to “even” out the playing field for washers and dryers. LG and Samsung had been dominating this segment in recent years. On January 23, 2018, the Trump administration imposed tariffs as high as 50% on imported washers and dryers. Whirlpool shares hit their 2018 YTD price high on January 26, 2018, closing at $183.20. As of July 30, Whirlpool shares stood at $132.37, down from $168.48 on January 2, representing a decline of more than 20%.

While craving protectionist measures, Whirlpool wasn’t ready for a trade war as rising costs of steel and aluminum led to increased costs. While washer-dryer prices have increased by 20% in the three months leading to June, Whirlpool’s profits are in decline and consumers are now paying more for their washing machines. In the meantime, Korea is not happy either as it is exporting fewer washing machines into the U.S. Trade wars are complex because the consequences of poorly thought out actions can be disastrous.

Figure 3: Whirlpool Corporation (WHR). Source: Yahoo Finance.


Gold, however, may prove to be the ultimate winner given the most recent trade conflicts. Futures positioning in gold is at a trough. GLD options pricing seems to indicate a level of negativity, which has previously coincided with lows in gold. Recently, we have seen the producer price index (PPI) continue to climb as other American producers are seeing rapid cost inflation. The consumer price index (CPI) is now rising faster than wage inflation, which is likely to make the average American feel worse off than they did two years ago.

Figure 4: Inflation is Overtaking Wage Growth. AHE YOY% measures wage growth and represents the U.S. Average Hourly Earnings All Employees Total Private Yearly Percent Change SA. CPI represents the Consumer Price Index, and is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Source: Bloomberg (July 2015 – July 2018).

The expected 2018 $804 billion U.S. budget deficit represents a 17% increase over 2017. Surprisingly, despite a strong U.S. dollar, demand for U.S. Treasuries is near multi-year lows as measured by the bid-to-cover ratio. Perhaps sovereigns such as China and Japan who have traditionally recycled their U.S. profits into U.S. Treasuries are no longer choosing to do so. The lack of demand for U.S. debt at a time when U.S. fixed-income yields are higher than debt yields of other developed economies like Germany, France, Canada and Japan is quite striking. The structural takeaway for us is simple: The recent strength in the U.S. dollar is likely to prove to be short-lived.

Unfortunately, the trends we described above play out significantly slower than the speed of a Trump tweet. Fortunately, this allows investors plenty of time to position their portfolios appropriately. We are confident that the necessary elements are in place to provide the robust underpinnings for a durable bull market for precious metals and precious metal equities.
Shree Kargutkar is a Portfolio Manager at Sprott Asset Management LP, which is the sub-advisor for Sprott Gold and Precious Minerals Fund and Sprott Silver Equities Class.


SPDR Gold Shares (GLD) is an exchange-traded fund and is used as a benchmark to measure gold bullion prices.


VanEck Vectors Gold Miners ETF (GDX) tracks the overall performance of companies involved in the gold mining industry.


Will The Impending U.S. Economic Collapse Usher In Socialism?

by: Avi Gilburt


- The US market still has a few good years left.

- When this rally completes in mid-2020s, we will begin a major bear market.

- The major bear market can usher in further socialistic policies.

This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard
Benjamin Franklin was purported to have said “that which hurts, also instructs.” Yet, society, as a whole, has a very short memory. Thus, lessons learned through the pain of generations gone by often are quickly forgotten.
We have very few people left worldwide who actually lived through the Great Depression.
While I have been told many stories by my grandparents of what it was like to live through the 1930s and 1940s, I clearly do not have first-hand experience. Yet, I would assume that I still have a better understanding of that time period than most of the people reading my words today.
To add to Franklin’s wisdom, George Santayana was quoted as saying that “those who do not learn from history are doomed to repeat it.”
So, if we were to synthesize Franklin’s and Santayana’s wisdom, it would suggest that when society, as a whole, no longer remembers the pain experienced during the times of the Great Depression, it certainly opens the door to repeating it. And, I think we are approaching such a period of time in the coming decade.
As an Elliottician, I understand that financial markets provide us with a representation of the overall mood or psychology of the masses. Moreover, we also understand that markets are fractal in nature. That means they are variably self-similar at different degrees of trend. For those that want a more detailed explanation of what this means, I suggest you read this article written by Robert Prechter, who is today’s foremost expert on this topic: [Article] Science is Validating the Concept of the Wave Principle
But, I would imagine that the simplest way to explain this concept is by saying that while history may not repeat in the exact same fashion, it will certainly rhyme.
What I intend to focus upon in this article is R. N. Elliott’s concept of a 5-wave structure, which provides guidance as to the ebb and flow of our markets, thereby providing insight into the ebb and flow of society as a whole. This also provides insight into what the future may hold.

Most specifically, I want to focus upon waves 2 and 4 within the 5-wave structure, which are the corrective and regressive segments of the 5-wave structure.
Based upon my analysis (along with Elliott’s himself), the market seems to be on a path of completing a multi-generational 3rd wave some time in the mid-2020s. This wave began at the conclusion of wave II in 1932, and has progressed for almost 90 years. But, take note that wave II ushered in the Great Depression.
Currently, 90 years later, we are approaching the completion of wave III of that same wave degree.
That means that the impending wave IV regressive structure, which seems to be scheduled to begin in the mid-2020s, will likely usher in an economic period of the same degree as the Great Depression. Clearly, that will not likely bode well for our economy.

To put this type of predictive analysis into historical perspective, allow me to present you with the following prediction made by Ralph Nelson Elliott in August of 1941:
[1941] should mark the final correction of the 13 year pattern of defeatism. This termination will also mark the beginning of a new Supercylce wave (V), comparable in many respects with the long [advance] from 1857 to 1929. Supercycle (V) is not expected to culminate until about 2012.

For those of you that do not understand this quote, Elliott was predicting the start of a 70-year bull market in the face of World War II raging around him. Quite an amazing prediction, no?
While it seems Elliott may have been off by about a decade, this still stands as the most amazing market prediction in modern history.
Elliott presented us with an understanding of financials markets which is not linear in nature.
This allows us to understand that once this long-term bull market runs its course in the mid-2020s, it will usher in a regressive period which will likely destroy much of the wealth that was accumulated during the preceding bull market.

History has shown that when the economy moves into extremes, so does society. We have seen how the extreme conditions in Europe after the Great Depression led to Nazism and Fascism.
More recently, during the Great Recession and for several years thereafter, we have seen governments worldwide (even those based upon capitalism) willing to adopt socialistic policies during periods of great economic risk.
My personal expectation, based upon many of the charts I analyze and based upon the modern political trend, is that this regressive period will mirror what was experienced by Europe during the Greek debt cycle, but to a much more extreme degree. Therefore, my expectation is that even more extreme socialistic policies will likely be adopted, wherein the government will seem to have no choice other than to take over various segments of private industry. We have seen the initial stages of this potential during the Great Recession, and the economic downturn I expect in the future will be of one degree greater than the Great Recession.
Moreover, I am expecting a rising yield deflation, again, similar to what we experienced during the Greek debt cycle, which is not likely what most expect. But, how often do markets telegraph their next major cycle to the great majority of investors? Rather, markets often provide the masses with what is least expected. But, this is simply my opinion based upon my current readings of the charts I analyze.
Yet, what I also see quite interestingly is that the metals complex seems to be setting up in a similar manner to what Elliott saw in the DOW back in 1941. In fact, my read on the metals complex is that it is about to enter a 50+ year bull market.
Before you present me with a personalized tin-foil hat, those that have read my analysis over the years would know that I am often a very measured and realistic analyst. So, I am not known as the traditional “doomsday” type.
In fact, I have been quite bullish the stock market for years, despite many taking me to task for remaining steadfastly bullish in the face of negative fundamentals such as Brexit, Frexit, Grexit, rise in interest rates, cessation of QE, terrorist attacks, Crimea, Trump, Syrian missile attack, North Korea, record hurricane damage in Houston, Florida, and Puerto Rico, quantitative tightening, trade wars, etc. And, as many were looking for a crash back in 2016, we were pounding the table that the market was setting up to run strongly to 2,600+, with potential to exceed 3,000 before this long-term bull market beginning in 2009 would conclude, no matter who won the election in 2016.

Back in 2011, when I called for the top in the gold market within $6 of the high struck at the time, many thought me to be quite crazy, with some even suggesting that I am throwing away my career as an analyst with such a market call. I also called for a multi-year rally in the DXY back in 2011 when the Fed was throwing many rounds of QE at it, and many simply wrote me off as someone who really does not understand the market. And, when I suggested investors get back into the gold market at the end of 2015, most again wrote me off as they were certain that gold was about to break down hard below $1,000.
So, let me reiterate that I am neither bull nor bear. Rather, I am most interested in viewing our financial markets through an honest and objective lens in order to be able to maintain on the correct side of the market the great majority of the time.
While you may read this article as being in the same vein as all the doomsday predictions that are paraded before you on an almost daily basis, I can assure you that this is not akin to those perspectives. So, unlike those who try to scare you into buying something, my goal is to prepare you for what I honestly believe is “something wicked this way comes.”

The Syrian War Is Over, and America Lost

Bashar al-Assad won. It’s worth thinking about why the United States didn’t.

By Steven A. Cook

 A picture taken on March 1, 2018 shows a member of the Russian military police standing guard between the portraits of Syrian President Bashar al-Assad (R) and Russian President Vladimir Putin (L) hanging outside a guard-post at the Wafideen checkpoint on the outskirts of Damascus neighbouring the rebel-held Eastern Ghouta region. (LOUAI BESHARA/AFP/Getty Images)
A picture taken on March 1, 2018 shows a member of the Russian military police standing guard between the portraits of Syrian President Bashar al-Assad (R) and Russian President Vladimir Putin (L) hanging outside a guard-post at the Wafideen checkpoint on the outskirts of Damascus neighbouring the rebel-held Eastern Ghouta region. (LOUAI BESHARA/AFP/Getty Images) 

Earlier this month, Syrian regime forces hoisted their flag above the southern town of Daraa and celebrated. Although there is more bloodletting to come, the symbolism was hard to miss.

The uprising that began in that town on March 6, 2011, has finally been crushed, and the civil war that has engulfed the country and destabilized parts of the Middle East as well as Europe will be over sooner rather than later. Bashar al-Assad, the man who was supposed to fall in “a matter of time,” has prevailed with the help of Russia, Iran, and Hezbollah over his own people.

Washington is too busy over the furor of the day to reflect on the fact that there are approximately 500,000 fewer Syrians today than there were when a group of boys spray-painted “The people demand the fall of the regime” on buildings in Daraa more than seven years ago. But now that the Syria conflict has been decided, it’s worth thinking about the purpose and place of the United States in the new Middle East. The first order of business is to dispose of the shibboleths that have long been at the core of U.S. foreign policy in the region and have contributed to its confusion and paralysis in Syria and beyond.

There probably isn’t anyone inside the Beltway who hasn’t been told at some point in their career about the dangers of reasoning by analogy. But that doesn’t mean such lessons have been regularly heeded. The Syrian uprising came at a fantastical time in the Middle East when freedom, it seemed, was breaking out everywhere. The demonstration of people power that began in Daraa—coming so soon after the fall of longtime leaders in Tunisia and Egypt—was moving. It also clouded the judgment of diplomats, policymakers, analysts, and journalists, rendering them unable to discern the differences between the region’s Assads and Ben Alis or between the structure of the Syrian regime and that of the Egyptian one.

And because the policy community did not expect the Syrian leader to last very long, it was caught flat-footed when Assad pursued his most obvious and crudely effective strategy: a militarization of the uprising. In time, Syria’s competing militias, jihadis, and regional powers, compounded by Russia’s intervention, made it hard to identify U.S. interests in the conflict. So, Washington condemned the bloodshed, sent aid to refugees, halfheartedly trained “vetted” rebels, and bombed the Islamic State, but it otherwise stayed out of Syria’s civil conflict. Lest anyone believe that this was a policy particular to U.S. President Barack Obama and his aim to get out of, not into Middle Eastern conflicts, his successor’s policy is not substantially different, with the exception that President Donald Trump is explicit about leaving Syria to Moscow after destroying the Islamic State. While the bodies continued to pile up, all Washington could muster was expressions of concern over another problem from hell. Syria is, of course, different from Rwanda, Darfur, and Srebrenica—to suggest otherwise would be reasoning by analogy—but it is another case of killing on an industrial scale that paralyzed Washington. It seems that even those well versed in history cannot avoid repeating it.

Many of the analysts and policymakers who preferred that the United States stay out or minimize its role in Syria came to that position honestly. They looked at the 2003 invasion of Iraq and decried how it destabilized the region, empowered Iran, damaged relations with Washington’s allies, and fueled extremist violence, undermining the U.S. position in the region.

It seems lost on the same group that U.S. inaction in Syria did the same: contributed to regional instability, empowered Iran, spoiled relations with regional friends, and boosted transnational terrorist groups. The decision to stay away may have nonetheless been good politics, but it came at a noticeable cost to Washington’s position in the Middle East.

The waning of U.S. power and influence that Syria has both laid bare and hastened is a development that the policy community has given little thought to, because it was not supposed to happen. By every traditional measure of power, the United States, after all, has no peer. But power is only useful in its application, and Washington has proved either unable or unwilling to shape events in the Middle East as it had in the past—which is to say, it has abdicated its own influence. That may be a positive development. No one wants a repeat of Iraq. In Washington’s place, Moscow has stepped in to offer itself as a better, more competent partner to Middle Eastern countries. There haven’t been many takers yet beyond the Syrians, but there nevertheless seems to be a lot of interest, and the conflict in Syria is the principal reason why.

Contrast the way in which Russian President Vladimir Putin came to the rescue of an ally in crisis—Assad—with the way U.S. allies in the region perceive Obama to have helped push Egyptian President Hosni Mubarak from office after 30 years, much of it spent carrying Washington’s water around in the region. The Egyptians, Saudis, Emiratis, Israelis, and others may not like Assad very much, but Russia’s initial forceful response to prevent the Syrian dictator from falling and then Moscow’s efforts to will Assad to apparent victory have made an impression on them. Syria is now the centerpiece and pivot of Russia’s strategy to reassert itself as a global power, and its renewed influence in the Middle East stretches from Damascus eastward through the Kurdistan Regional Government to Iran and from the Syrian capital south to Egypt before arcing west to Libya.

Israel, Turkey, and the Gulf States still look to Washington for leadership but have also begun seeking help securing their interests at the Kremlin. The Israeli prime minister has become a fixture at Putin’s side; the Turkish president and his Russian counterpart are, along with Iran’s leaders, partners in Syria; King Salman made the first ever visit by a Saudi monarch to Moscow in October 2017; and the Emiratis believe the Russians should be “at the table” for discussions of regional importance. The era when the United States determined the rules of the game in the Middle East and maintained a regional order that made it relatively easier and less expensive to exercise U.S. power lasted 25 years. It is now over.

Finally, the situation in Syria reveals the profound ambivalence of Americans toward the Middle East and the declining importance of what U.S. officials have long considered Washington’s interests there: oil, Israel, and U.S. dominance of the area to ensure the other two. Americans wonder why U.S. military bases dot the Persian Gulf if the United States is poised to become the world’s largest producer of oil. After two inconclusive wars in 17 years, no one can offer Americans a compelling reason why the Assad regime is their problem. Israel remains popular, but over 70 years it has proved that it can handle itself. Obama and Trump ran on platforms of retrenchment, and they won. The immobility over Syria is a function of the policy community’s impulse to just do something and the politics that make that impossible.

Perhaps now that the Assad-Putin-Khamenei side of the Syrian conflict has won, there will be an opportunity for Americans to debate what is important in the Middle East and why. It will not be easy, however. Congress is polarized and paralyzed. The Trump administration approach to the region is determined by the president’s gut. He has continued Obama-era policies of fighting extremist groups, but then he broke with his predecessors and moved the U.S. Embassy in Israel to Jerusalem. Trump breached the Iran nuclear deal, though he has done very little since about Iran other than talk tough. He wants to leave Syria “very soon,” even as his national security advisor vows to stay as long as Iran remains.

Despite and because of this incoherence, now is the time to have a debate about the Middle East. There is a compelling argument to be made that American interests demand an active U.S. role in the region; there is an equally compelling argument that U.S. goals can be secured without the wars, social engineering projects, peace processes, and sit-downs in Geneva. In between is what U.S. policy in the Middle East looks like now: ambivalence and inertia. Under these circumstances, Syria, Russia, and Iran will continue to win.

Steven A. Cook is the Eni Enrico Mattei senior fellow for Middle East and Africa studies at the Council on Foreign Relations. His new book, False Dawn: Protest, Democracy, and Violence in the New Middle East, was published in June.

End of pension fund tax break looms over Treasury market

Bond buying by corporate pension funds may have kept a lid on long-term interest rates

Joe Rennison in New York

US Treasury traders are bracing for the end of a tax break that they say has encouraged companies to funnel billions of dollars into their pension funds and helped keep a lid on long-term interest rates.

Companies have raced to top up their pensions ahead of the expiry of the tax break on September 15, and their pension funds have in turn been significant buyers of long-dated Treasuries.

Demand for long-term Treasuries has kept yields low, even as short-term rates have risen, leading to a flat yield curve and intense debate over what that signals for the economy. The terms of that debate could change depending on what happens to yields if pension fund bond buying subsides next month.

Under tax reforms introduced at the end of last year, the US cut the corporate tax rate from 35 per cent to 21 per cent, but companies have been allowed to deduct pension contributions at the old, higher rate for most of this year. The grace period was designed to encourage companies to deal with pension fund deficits.

“We have seen a lot of accelerated pension fund contribution activity this year. New money has flowed in from contributions and that needs to be invested,” said Matt McDaniel, who leads pension fund consultancy Mercer’s US financial strategy group.

Among companies taking advantage, General Electric has promised to contribute $6bn to its pension over the course of 2018. FedEx made contributions of $2.5bn to its pension plan for its fiscal year 2018, which ran to May 31, up from $2bn for the previous year and $660m for 2016, according to regulatory filings.

“One of the most powerful forces in the market place is this pension buying that is taking place,” said Tom di Galoma, a managing director at Seaport Global Securities.

Pension fund deficits, while still large, have improved in part due to rising bond yields and stock market strength. That has reduced the incentive to buy risky assets in the hope of closing the gap. Instead, many funds prefer to buy long-dated Treasuries whose returns more closely match their liabilities.

The looming tax credit deadline has added a sense of urgency to the activity. Wells Fargo analysts estimate a further $40bn to $60bn of Treasury buying from pensions funds in the coming months.

“If you put more cash into pensions now, then you get this significant tax benefit that goes away in two months,” said Boris Rjavinski, rates strategist at Well Fargo Securities. “The long end of the Treasury curve is definitely feeling this effect of Treasury buying.”

The longest maturity Treasury bond lasting 30 years has seen its yield rise by less than shorter-dated yields this year, flattening the yield curve and raising fears of a slowdown in the economy. Short-dated yields have risen above longer-dated yields before every US recession of the past 50 years.

Once September passes and pension funds have less incentive to buy bonds, some traders and analysts anticipate a rise in yields heading into the back end of the year, steepening the yield curve.

“Every day for months now there has been steady buying of 30-year Treasuries,” said a trader at one large bank. “That goes away after September.”

Others disagree. Pension funds could remain big buyers after the deadline, investing cash allocated to them before September and continuing a rotation out of equities and into bonds, said Mercer’s Mr McDaniel.

“There is a sound argument that long bond rates are unlikely to rise very quickly because there is so much pent up demand from pension funds looking to de-risk,” he added.