Pyramids of Crisis

By John Mauldin

 TFTF Image

In an increasingly divided world, we all share one great desire: self-preservation. Not just humans, either. The survival instinct exists in almost every living thing. Humans simply have greater ability to do something about it.

In fact, we have been doing something about it for many thousands of years. An inverted pyramid of geniuses and giants, modern medicine, nutrition, sanitation, and assorted other innovations has extended our lifespans and helped more of us live to ripe old ages. That’s wonderful… but it’s also a problem many of us still don’t fully understand.

I have mixed feelings myself. At 69, I truly believe I’ll live well past 100 and stay as healthy and independent as I am now. But sometimes I wonder. For instance, in the past few weeks I had a growing adverse reaction to a new (to me) medicine. It made me tired and slowly lowered my blood pressure to a dangerous level. I didn’t recognize it and just thought the years and miles were finally beginning to take their toll. Finally, in consultation with my doctor, we figured out what was going wrong, changed course and the major symptoms improved quickly. But for about a month, I felt much older, almost invalid at times. It was kind of like the Hemingway line, “How do you go bankrupt?” The answer: “Slowly, and then all at once.”

Of course, I’ve helped my elderly parents and others but this poignant experience gave me new awareness of my own age. It also increased my determination not to go gently into that good night. And, to today’s topic, it helped draw my attention to aging and demographics as they relate to my series on debt.

Aside from death, aging brings financial and cultural problems. We are simply not prepared for a world in which old people outnumber the young. But it may be coming, thanks to life extension at the upper end and falling fertility rates below.
National pension systems—what we call Social Security in the US but similar elsewhere—are not designed for that combination. They presume a high ratio of working young to retired old citizens. That is no longer happening and is increasingly hard to ignore.

Today I want to review these issues, and then tell you about a new initiative to help you live well and even prosper in this new, longer-lived world.

This Is Nuts

A dwindling minority of us has long warned that demographic changes are making Social Security unsustainable. Here’s a chart I shared earlier this year in The Pension Train Has No Seat Belts.

Source: Peter G. Peterson Foundation

The chart doesn’t show the full progression. In 1940 the Social Security system had 159.4 workers per beneficiary then went off the rails quickly. By 1945 the ratio was down to 41.9 and a decade later was in single digits. A variety of measures, from higher tax rates to (slightly) raising the retirement age, have flattened the trajectory but it is still slipping lower.

We usually think this is a result of the Baby Boom generation turning 65, and that’s a big part of it. But rising life expectancy is equally and maybe more important. People now live longer, which lowers the ratio and means they collect more years of benefits than previous generations.

Let’s stop here and think about this “retirement” concept. It is, in the history of man, relatively new. For millennia, the idea that a physically able person of “non-royal” blood would simply stop working and enter a life of leisure was unthinkable. You worked as long as you could, declined quickly and then died. Very simple and, more to the point, financially sustainable most of the time.

Note also, in much of the world “retirement” is still a dream. Even the elderly are expected to contribute something to the community, as long as they are able. What we have in the developed countries is still not the norm globally.

It was not coincidence that the modern concept of retirement developed alongside the Industrial Revolution. Technology made food production far less labor-intensive, reducing the need for less-productive older people to contribute. Societies around the world decided to let the oldest members take some final time off before their end. A good and humane practice, I think, one I think we should continue as long as we have the elderly.

However, it has limits. I don’t know of anyone who, when the retirement systems were created, thought it made sense for average people to spend the last 30% or 35% of their lives in retirement, at the broader society’s expense. They would’ve expressed that concept in words along the lines of, “That’s nuts!” And yet we are trying to do it. No surprise, the seams of our retirement dream are beginning to unravel.

From Pyramid to Rectangle

The problem is not simply that there are so many Baby Boomers. It is that we have so many Baby Boomers and they’re living longer than previous generations did. Not in every single case, obviously, but the aggregate difference is dramatic.

We can illustrate this with “population pyramid” charts, which show age distribution in graphic form. Here’s the US in 1950. That widest bar at the bottom is the beginning of the Baby Boom, including me.

Add up the male and female sides of the top four bars and we see 8.4% of the population was over 65, and 1.2% was aged 80 or above. Now, let’s roll forward 50 years to the year 2000.

Notice a few things here. First, the pyramid’s base is narrower because there are relatively fewer children. That bulge in the 35-54 brackets is the Baby Boom. But for our purposes, look especially at the top. The 65+ share of the population went from 8.4% in 1950 to 12.3% in 2000. The 80+ category—all in one bar 50 years earlier—now gets split into five bars and is 3.2% of the population, almost tripling since 1950.

But wait, that’s not all. Here’s the same chart projected forward to 2050.

If this estimate is right, then in 2050 some 22.3% of the US population will be over 65 and 8.3% will be over 80. Both would be huge increases since 2000… but I think the chart is probably wrong, and not in a helpful way, at least in terms of paying for unfunded liabilities.

You see, the current mortality tables don’t include the age-extending technologies I believe are coming in the next decade. Lots of folks aren’t going to die on schedule and, absent a major fertility increase to grow the younger population, those top rows will widen further. The pyramids are becoming more like rectangles.

That means by 2050 the working-age population will be less than half the total, and yet have to support its children and elders? I don’t think so. Something will break first.

The most likely (and most benign) candidate is a redefinition of “working age” at the upper end. There’s nothing magical about retiring at 65 or 67. Those were legislative choices, rooted in times when few people lived that long and most of those who did were physically incapable of going much longer. That is rarely the case now. I’m knocking on 70 and still work as full-time as I ever did, and I’m surrounded by friends my age and older who are just as active or more active than I am.

What should have happened, years ago, was an increase in the Social Security eligibility age to 70 or beyond, to reflect rising life expectancy and better health. People would have known to expect it and been able to plan accordingly. That didn’t happen so now we have to scramble for solutions.

Though it’s not all that popular, I wouldn’t oppose means testing (no Social Security income over X income level) as part of a “solution.” Whatever we do is going to disappoint many folks. The only question is whom.

Redefining Retirement

This certainty that major changes are coming, but uncertainty about what they will be, greatly complicates retirement planning. Preparing for it would be far simpler if you could know in advance when you will get sick and die. That means you must either

  • Save too much and possibly check out with a surplus, or  

  • Outlive your savings, then fall back on Social Security and the kindness of family for your final years.

The first option is obviously better, but is it feasible? For most people, no, even at today’s life expectancies. A surprising number of people die with negative assets, i.e. debt, having never repaid money borrowed earlier in life.

Longer lifespans make this harder. Say you finish your education and start making money at age 25. If you retire at 65 your career was 40 years, during which you probably had to buy a house, help children with college, maybe repay your own student loans and otherwise live a normal and hopefully comfortable life. You use whatever is left for retirement savings.

Now, is it mathematically possible to save enough in those 40 years to fund another 30 or 40 years of retirement? Probably not. Sure, you might build a business or invent a new technology, but the average working person can only save so much of their income, and basic retirement living costs will consume most of it in less than 30 years. Then what? Traditional “retirement” will grow increasingly out of reach, available only to the very highest-earning tier of the population.

At the other end, outliving your savings will be as easy as ever but the likelihood that Social Security will be there for you, in anything like its current form, is diminishing rapidly. Extended lifespans further complicate the problem.

This is what my British friends call a “sticky wicket.” The good news is we will soon be living longer. The bad news is we will soon be living longer. Since the technology is coming regardless, we need ways to reconcile the costs and benefits. It is not at all clear how we will do so. My editor and long-time friend/associate Patrick Watson and I have been discussing this for years. He expects some kind of Soylent Green solution. My sunny nature makes me more optimistic; I think we’ll find better answers that reduce the costs and spread the benefits widely.

Demographic Problems and Opportunities

It is easy to look at the gap between revenues and entitlement spending by the middle of this decade and see problems. Too many people above 65 and too few people paying taxes.

At Mauldin Economics, we think a lot about those problems, but we also look at some of the opportunities. The growing number of us of in our 70s and 80s will mean more healthcare spending, more need for revolutionary new healthcare products and services, and major opportunities to find and fund solutions to those problems.

My associate Patrick Cox covers the extraordinary biotechnologies under development, and he has introduced me to some of the most fascinating scientists in the sector. I talked with two medical researchers today. Both are optimistic about not just increasing our lifespans but prolonging our health spans. Others think we can someday reverse the aging process. I think it is highly likely a major medical journal will use the words “age reversal” within the next few years.

It’s hard to describe how fast this technology is progressing in not just the fight against aging, but against all diseases. I believe cancer will be defeated in the next decade. By the mid-2020s there will be therapies to at least slow down the aging process, and some could be called the “fountain of middle age.”

Those obviously have the potential to be great investment opportunities. But hundreds of lesser-known diseases and problems are going to get cures, too. I have been reviewing a new Parkinson’s disease therapy, not yet public, that shows great potential. I could go on for hours...

However it happens, we are entering a period unlike anything humanity has ever seen. Along with my publishing team, we have been dreaming about a new division that focuses not only on biotech and healthcare investments but also on how to put the best research to work in your life, helping you live longer to enjoy your investments and the things they can buy.

To that end, we’re launching a new division called Health & Wealth Research. Led by  Patrick Cox and Senior Healthcare Analyst Chris Wood, it will be a central source for information on healthy living, life extension technology, and related investment opportunities.

Dr. Mike Roizen from the Cleveland Clinic will be a major contributor with both tips on keeping your body healthy and information drawn from the depth of his research experience. I think he told me he has over 200 published papers on a wide variety of topics, not to mention 30 million books sold.

The Health & Wealth Research website is almost ready. Watch for an email from me with more information soon.

If you just can’t wait, you can sign up for our new weekly letter (free) by going here. It’s called A Rich Life and will be written by Chris Wood (really a top-notch analyst—I’m thrilled we have him) with contributions from Dr. Roizen and Patrick Cox.

Sign up today and you’ll receive the inaugural issue on December 3.

Puerto Rico, Cleveland, and Boca Raton

Shane and I will be leaving for Puerto Rico at the end of next week then we’ll fly to Cleveland to go through the Executive Wellness Program at the Cleveland Clinic with the head of the program, the above-mentioned Dr. Mike Roizen.

Taking care of yourself is more than just working out and eating the right foods. It is also making sure you get regular medical care and checkups. Everyone should have a thorough full-body checkup at least every two years, along with regular blood tests (and, as I just learned, check your blood pressure regularly). I can hear my mother saying, “Prevention is 90% of the cure” (and I think Shane says this as well).

I will be traveling to Boca Raton in late January for the Tiger 21 conference, so if you’re going, let me know so we can be sure to meet.

My friend and partner, Steve Blumenthal of CMG, was here this week for planning sessions, meetings, and interviews as we laid out a fairly aggressive travel schedule for next year. Stay tuned, I may be coming to a ZIP code near you.

As I wrote those opening thoughts on the human drive for survival, it occurred to me that more than a few people worry about artificially intelligent machines “waking up” to threaten our survival. Until we see machines worrying about their own survival, I think they will really be just very useful tools and not actually self-aware. We can worry about being replaced when they start worrying about the future upgrade replacing them.

Until then? I have other things on my mind. Whether some computer with artificial intelligence can pass a “Turing Test” and simulate human behavior is trivial compared to even a virus’s survival instinct. Call it the Mauldin Test for true intelligence.

And I think with that comment, it is time to hit the send button. This appears to be one of the shortest letters I have written in some time. And to make sure it stays that way, I will wish you a good week and pleasant journeys.

Your ready for that age reversal breakthrough any day now analyst,

John Mauldin
Chairman, Mauldin Economics

As This Bubble Deflates, All Assets Will Be Affected: The One Polity, Two Economies World

by: Roger Salus


- Western countries are demarcating into two distinct economies, consisting of higher- and lower-tiered earners.

- With the shrinking of the once-strong middle class, the political intelligentsia loses credibility and legitimacy in the eyes of increasing numbers of voters.

- As unconventional parties and candidates gather popularity, our elites grow increasingly defensive, enraged, and unable to constructively deal with events occurring beyond their bubble.

- As the bubble surrounding mainstream politics deflates, economies will be affected, along with assets ranging from currencies to stock markets to precious metals. Nothing is exempt. Be warned.
As promised, dear readers, your humble author concludes his look at the "two economies" phenomenon by discussing the inevitable political consequences that are already unfolding. The growing class divide within developed economies has been happening since at least the 1960s, but it was the Great Financial Crisis (GFC) of 2008 that shook the political status quo to its core. Whether that will be good or bad remains to be seen, and open to interpretation. What's not in doubt is that our political class is mortally wounded, and there will be consequences for asset values, whether stocks, precious metals, or even currencies.
Until now, the political elites of developed nations have been either ignorant of, or in outright denial about growing class divisions. In my previous three articles (see here, here, and here), I discussed how outdated economic indicators, like GDP, inflation, and unemployment have disguised the slow stratification of society into two classes due to disappearing job opportunities, punitive living costs, and decreasing social mobility.
Since 2008, the chasm between grass-roots voters and mainstream political elites has grown wider. The result has been the rise of unconventional political parties and candidates in the West and worldwide. This will inevitably affect our investments and asset values.
Brexit, for example, demonstrated how political earthquakes can affect national currencies and precious metals. The Trump White House attests to the fact that previously sacrosanct notions, like freer trade, are no longer sacrosanct. The latest Italian standoff proves that unconventional governments now have the popular backing to challenge the political establishment.

If these developments are not factored into your asset allocations, perhaps it's time they were.
What, We Worry?
We of the developed world are in the midst of epochal political changes. That so few of us realize it is testament only to the extent that our political class is in denial of the fact, and that includes the mainstream media.
The evidence is too extensive to dismiss.
In the US, in the midst of the 2008 economic crisis, voters angrily rejected mainstream politicians, like Hilary Clinton and John McCain, and elected a relative unknown in Barrack Obama. This was not a temporary blip. Come 2016 voters were still rejecting mainstream politicians, like Hilary Clinton and Ted Cruz, in favour of the highly unconventional Donald Trump.
It is critical we don't misunderstand the significance of these events. The mainstream media, for its part, has consistently misinterpreted it. President Obama's election was not, as we were told, a warm embrace of the Democratic Party and a "turn to the left". It was clearly a rejection of the status quo, period. Developments since then have further confirmed this.
Consider that Mr. Obama was elected in the midst of a financial crisis and an unpopular war. In 2008, there was a surge of voter turnout, the highest seen in decades (see here).
By 2012, however, enthusiasm for the President waned as he came to be seen as much more mainstream than many supporters had wished. Voter turnout in 2012 reverted back to pre-2008 numbers (see here). The president easily managed re-election but did so against a most archetypal mainstream Republican challenger, Mitt Romney.
If you're still clinging to the media narrative, then fast forward to 2016. A most unconventional candidate, Donald Trump, shocked the Republican establishment by seizing the party's nomination amidst a storm of inner-party acrimony (see here). Meanwhile, Hilary Clinton, the anointed next president, unexpectedly faced a grassroots revolt that nearly placed Bernie Sanders, himself a most unconventional candidate, on the party's ticket instead. Clinton eventually received the nomination but did so under a cloud of controversy (see here).
Ultimately, the unconventional Donald Trump won the election, despite the deafening jeers of the political establishment. Recent reports even show significant numbers of Obama voters preferring Trump to Clinton in 2016 (see here).
Most recently, the recent US mid-terms saw the unlikely nomination, and then election, of professed 'Democratic Socialist', Alexandra Ocasio Cortez, who unseated the establishment Democratic congressman, Joseph Crowley (see here). The move towards the unconventional continues on, and in every case, the political class is "shocked" by the results.
This shift is not merely a US phenomenon, either.
Since the GFC, so-called "fringe" parties have been gaining momentum year-after-year in Europe. The rising popularity of nationalist and right-wing parties, like the Dutch Freedom Party, True Finns, Swiss People's Party, and the Danish People's Party was first dismissed, and then jeered, by a political establishment watching its own monopoly on power evaporate.
Just as importantly, left-wing "fringe" parties have also seen new-found success since 2008.
From the Greens to Podemos, the rising popularity of leftist parties is undeniable. In Greece, the far-left SYRIZA, led by the academic Marxist, Alexis Tsipras, actually assumed power.
Even boring, conventional Germany is seeing its political establishment turned on its head. Ten years separated from the GFC, unconventional parties perform as never before. From the right-wing AfD to the leftist Greens, fringe parties are not merely pecking away at mainstream German parties, they're now threatening to topple them (see here and here).
Meanwhile, in Italy, a most unlikely coalition between Five Star and the Northern League has taken power and is challenging Brussels on everything from fiscal policy to immigration.
Of course, possibly the most shocking development was the UK's Brexit referendum in which Britons voted to leave the EU. Needless to say, the establishment was "shocked" when the Brexit votes were tallied.

More localized separatist movements have also grown in various jurisdictions, like Scotland and Catalonia. Indeed, Italy's Northern League initially cut its teeth as a party by advocating for regional Independence.
If you've been watching network news you're likely aware of the aforementioned developments, but you may be completely unaware that what we're seeing is the incremental overturning of a political establishment that has existed for half a century, an establishment that includes, of course, network news.
How We Got Here
So, what gives?
How is it that the political scene is so prone to upheaval amidst what is supposedly one of the longest economic expansions in history? After all, GDP growth is positive, unemployment is at "record lows", and inflation is non-existent. This isn't the way it's supposed to happen.
In my three previous article (see here, here, and here), I demonstrated that many measures used to gauge the health of the economy - namely GDP, inflation, and unemployment - are either outdated or hopelessly inaccurate. The incremental stratification of nations into two distinct economies is simply not built into the models.
GDP numbers post-2008 have been mostly positive. However, in many developed countries, like the US, UK, Canada, and Australia, they mask many nations' over-reliance on consumer spending to produce those positive numbers. Worse, they mask the fact that the meager post-crisis GDP growth is mostly attributable to spending by the lowest-tiered earners, thanks largely to unsustainable consumer debt, decreased savings, or plundered savings.
The inflation rate, which central bankers continuously insist is "too low", is deceptive as well. Attempts to accurately account for "hedonic adjustments" or "substitution", while perhaps well-intended, have had the effect of confusing price increases with living standards and with living costs.
These are not the same things, yet "inflation" is frequently paraded as a measure of them all.
In a two economies world, the net result has been that for high earners wage-increases have kept up rather well with living standards and living costs, but bottom-tiered earners are being crushed. All the hedonic adjustments in the world can't disguise the fact that 50 years ago a sole bread-winner could support a family and still hope to retire. Today, for much of the population, two bread-winners are needed if families are to merely keep up with advancing technologies and living costs, and even then, ever fewer can realistically hope to retire.
Unemployment numbers, too, are misused by our political class, whether by politicians, bureaucrats, or the media. The typical model of "employment" that existed in the 1950s and 1960s no longer exists, yet it is still expected to continue functioning in economic models exactly as it did then, by using the famous/infamous Philips Curve, for example.
Employment once referred to permanent full-time work, a livable wage, and a retirement plan.
For the unskilled, it represented a path to the middle-class for those possessing some combination of work ethic, loyalty, and prudence. It no longer does. In a two economies world, the old standard of employment is gone, likely forever, for not only low-skilled workers but increasingly for the skilled as well.
Our political class has been rhetorically aware of the hollowing out of the middle class but has been impotent to address the issue beyond the realm of, well, rhetoric. The media, in particular, is in outright denial. Whether for reasons of laziness, incompetence, or worse, our media routinely trumpets GDP, inflation, and unemployment without looking closer at the big picture.
Indeed, I've also shown (see here) that, as an inseparable part of the political establishment, the media often cynically touts these numbers selectively, either trumpeting or ignoring them, depending on which party it suits.
Don't Get Too Comfortable
So, it is. Given the decades-long deterioration of economic conditions for ever-larger swaths of the economy, one would expect the intelligentsia to be prepared for, and able to deal with, challenges from the fringes of the political spectrum. But clearly, events like Brexit and Trump take them by surprise, again and again, and again and again, the political establishment responds only with rage. Presumably, if the political class had any solutions of its own, it would have instituted them by now. It doesn't and hasn't. And hence, a political battle has begun in earnest.
To be clear, this article is not an endorsement of any party, mainstream, or otherwise. Rather, our financial well-being depends on recognizing and accepting the macro trend now sweeping the developed world. No one is asking us whether we like it.

Simply put, expect more of the upheavals like we have seen since 2008.
Perhaps the most stunning of these post-2008 upheavals was the UK's vote for Brexit, essentially rejecting membership in the EU. The aftermath in the markets was nothing short of spectacular. The following day the UK pound dropped 8%, its biggest one-day drop since the collapse of Bretton Woods (see here), but more importantly, the pound has not come close to recovering from its lows two and one half years later. From The Federal Reserve.
US/UK Exchange Rate 2016 - Present
Moreover, the London FTSE stock exchange lost 3% by the end of the first day, though it had been down as much as 7% at the start of trading. Perhaps surprisingly, most European markets dropped even harder, with the German DAX losing almost 7% and Paris losing 8% (see here). The price of gold, meanwhile, surged 5% in a single day.
Since then, of course, normalcy has mostly returned to the stock markets, though the pound still remains markedly lower (see above). The longer-term effects of a potential Brexit, meanwhile, are proving to be more difficult to quantify (see here and here).
On the West side of the Atlantic, the election of Donald Trump in November 2016 created other interesting reactions. As results came in, there was initial shock (again, "shock"), as Dow futures fell up to 750 points. Meanwhile, global markets also dropped sharply. However, those moves,
particularly in US markets, quickly whipsawed, erasing those losses before finishing higher.
Policy-wise, Mr. Trump appears to be somewhat serious about pre-election threats to challenge the trade paradigm in place for roughly 30 years. Granted, with regard to NAFTA, some have reasonably labeled the president's changes as largely "cosmetic" (see here), but his standoff with China is proving to be anything but. The reverberations of this move have only begun, and only time will tell how it ends.

Meanwhile, the situation in Italy demands particular attention. It's becoming clear that the new coalition believes it has the popular support to defy the European political establishment from fiscal policy to immigration.
Not even the dramatic deterioration in Italian government bond spreads has caused the coalition to blink. Since May 2018, when the current Italian coalition was announced, bond spreads vis-a-vis the German Bund have not recovered:
This is the crux of it. It's not just that unconventional parties and candidates are getting elected, it's that they are more willing to take the unconventional actions voters elect them to take. As a visibly impotent political class spits ever more contempt upon elected governments (and, by implication, those who elect them), whether left or right, it only appears to lose further credibility and legitimacy (see here and here) and accelerates its own decline.
As I mentioned previously, the current political upheavals we are seeing are occurring in the midst of one of the longest economic expansions in history. A recession is statistically overdue, and that may be when the real fireworks start.
Takeaways For Investors
There are three major takeaways that investors should be aware of:
1) Thus far, globally, stock markets have largely shaken off the more significant electoral shocks. For example, a sharp drop in Asian markets made headlines after Trump's November 2016 US election.
However, the whipsaw action back to the upside was just as dramatic, and can be seen nicely in the following Nikkei chart, for example:
Nikkei 255, Q4 2016
Source: Macrotrends
2) The few assets that have been affected longer-term are confined to the specific countries where the electoral shock occurred. Weakness in the pound sterling, for example, has largely been the principal consequence of the Brexit vote. Globally, stock markets have largely recovered since the UK referendum, even those in the UK and Continental Europe.
Similarly, the main consequence of the new Italian coalition has been the aforementioned widening of Italian government bond spreads, though the potential for wider contagion is at least conceivable.
3) Safe-haven flight has also tended to be fleeting, with the dollar often (though not always) filling that role as a preferred asset. In the immediate aftermath of first, the Brexit vote, and more recently, the Italian coalition announcement, the euro experienced sudden drops of 3.16% and 2%, respectively, against the US dollar before eventually normalizing (see here).
The election of Donald Trump initially had the opposite effect, however, as the expectation of higher US deficits initially weakened the US dollar. However, that trend, too, reversed once new Fed Chairman Powell demonstrated continued commitment to normalizing US monetary policy.
Precious metals, of course, represent another perceived safe haven. And in just the first two weeks following the Brexit vote, gold increased 7.6%, reaching US $1370/oz on July 6th. Since then, however, gold moved back down and has not repeated that post-Brexit high since. This adds further weight to the conclusion that political shocks have thus far been shrugged off by markets, save for short-term reactions.
London Gold Fixing Price 2016 - Present


Thus far, there have been several major political earthquakes in developed countries, and countless minor tremors. Market effects, however, have been largely temporary or localized to specific countries.
The larger trend, however, is clear: the unraveling of the Western political establishment is underway.
However, it is also a gradual unraveling, and not cause for immediate panic. That said, we can't assume that markets will indefinitely shrug-off political shocks.
By way of currencies, I believe the euro is most vulnerable.
The current spat with Italy's coalition is only the tip of the iceberg. Hungary, the Czech Republic, and Poland are approaching outright revolt against Brussels on immigration. Catalonians in September 2017 voted for independence and were violently crushed by the Spanish government. Meanwhile, French President Macron, the darling of the political establishment, now sports approval ratings of 21%, and his party currently trails Marine Le Pen's in popularity (see here). This, as voter turnout for EU parliamentary elections has declined in every single vote over four decades (see here).
It's unclear that Europe's political elites can realistically rely on either financial threats (shades of Greece, 2015) or baton-wielding riot troops (shades of Catalonia 2017) to hold an increasingly unpopular status quo together.
Catalonia, Sept. 2017, Source: PRESSTV
As we saw in the wake of Brexit, currencies can undergo major moves when voters don't behave as their "betters" expect. The euro is a more widely held currency than the pound, so expect the reverberations to be even more extreme should the eurozone experience a major disruption, such as a country leaving.

Stock markets have also shown fits of volatility. From the whipsaw action following Donald Trump's election to the steep drops post-Brexit, moves can be big and happen fast. It's also true, however, most of these moves have stabilized with time. Traders may wish to try to profit from such moves, while long-term investors may wish to merely ignore them. However, the current rising rate environment presents a brand new variable, and thus stocks look increasingly risky from your humble author's perspective.
As for precious metals, it seems they will always retain some safe-haven appeal. As we saw post-Brexit, gold's status as a safe haven is still alive in the minds of millions. It has recently shown weakness as the Federal Reserve continues its rate-tightening policy, but short-term it at least appears to have found a bottom. Such levels might present buying opportunities for gold bugs.
Frustratingly, while we can clearly see that the Western political establishment is in its death-throes, we cannot clearly see what direction(s) voters will take near-term. Of course, if we knew which unconventional direction any given country might take we could take preparatory measures. But we don't know.
What we do know is this: Warnings of financial turmoil from our elites will not frighten voters away from the unconventional any longer. This, too, is a function of our "two economies". With 10% of Americans, for example, owning 91% of stocks and mutual funds (see below) it would be unwise to expect restraint from those who increasingly believe they have little to lose.
We can no longer deny that greater numbers no longer see the political class as elected representatives, public servants, or even fellow countrymen. Both elites and the modern state apparatus are perceived by more and more as serving career technocrats, financially endowed lobbyists, political correctness high priests, or varied special interests. Citizens who do not fall within any of these categories - i.e. who exist outside the bubble - have become marginalized and despised, and they know it.

The Western intelligentsia seems unable to fathom what is happening from within its bubble. Internally its rigid academic "correctness" on all matters remains unquestioned. Continued use of the aforementioned dubious economic measures has only contributed to this disconnect.
Thus, challenges to the status quo are routinely attacked as evil outside forces, but such attacks resonate less and less with each passing year.
There will be further consequences, both politically and financially. Thus I conclude my four-part look at our "two economies" world. You can examine the other three parts, should you so desire, in any particular order (see here, here, and here).

Is the worst over?

Emerging markets’ currencies have staged a comeback

But threats to growth remain.


AFTER DUSK men from Lea Lea, a village in Papua New Guinea, wade into the Coral Sea to spear fish sleeping near the seabed. Their torches twinkle in the darkness. But they are easy to miss against the riot of illumination from a $19bn liquefied natural gas plant. Built by ExxonMobil, it stores natural gas from the country’s highlands, which is piped to tankers at the end of a jetty over a kilometre in length.

When the plant was opened in April 2014, the oil price was well over $100 and gas was similarly valuable. Energy prices have since plummeted, but Papua New Guinea’s currency, the kina, has been allowed to fall only gradually. Its strength has hurt the country’s other exports, including coffee, tourism and fish. And because foreign exchange is underpriced, the central bank has been forced to limit its availability. A decline in Papua New Guinea’s currency would, then, be a relief for many.

That sets the country apart from many developing countries, including several represented at the Asia-Pacific Economic Co-operation (APEC) summit in Port Moresby, the country’s capital, last week. Their currencies have already fallen quite enough this year, thank you.

Russia’s rouble has declined by over 20% from its highest point of the year to its lowest. Other APEC currencies have also suffered, including Chile’s (which declined by over 15% from its peak to its trough), Mexico’s (over 13%), and Indonesia’s (over 12%).

At the gathering Malaysia’s prime minister, Mahathir Mohamad, recalled the speech he gave at the same summit 20 years ago. Back then, amid Asia’s financial crisis and Russia’s default, emerging markets were “thrown into utter disarray by currency speculators [who] were laughing all the way to the bank”, he said. But this year speculators have not had things all their own way.

Few of the big emerging markets still offer foreign-exchange traders anything resembling a one-way bet. The “extreme currency misalignments” that prevailed at the start of the year have now been largely corrected, according to the Institute of International Finance (IIF), a think-tank. Better-aligned currencies have also begun to work their magic on trade imbalances. Turkey’s exports were 22% higher this September than last. Its current-account balance could turn to surplus by the end of 2018, according to the IIF. In Argentina, meanwhile, falling imports helped the country post a trade surplus in September.

Indeed, many of the emerging-market currencies that suffered most in the summer have staged partial rebounds—enjoying a snigger, if not quite a laugh, at speculators’ expense. Turkey’s lira bottomed out in August and has since gained over 25%. The currencies of Argentina, Brazil, Russia and South Africa hit bottom the following month and have climbed substantially since. Those of India and Indonesia fell less sharply and bottomed out less quickly. But even they have eked out gains against the dollar in recent weeks (see chart).

Floating currencies can change direction as quickly as the fish in the Coral Sea. Other macroeconomic forces turn more slowly. In Turkey and Argentina, inflation and growth are still heading in an unwelcome direction. Prices rose by more than 45% in Argentina in the year to October, and by 25% in Turkey. Reining inflation in will require a painful slowdown in activity. And that is what is under way. Industrial production in Argentina fell by 11.5% in September, compared with a year earlier. Car sales in both countries are collapsing.

Elsewhere, however, inflation remains remarkably contained. In both India and Indonesia it is below 4%, and in Brazil below 5%. Cheaper oil should help reduce price pressure even further. That will weaken one rationale for hiking interest rates and thus reduce one obvious threat to growth. Taken as a group, emerging markets grew faster in 2017 and 2018 than in the two prior years, according to Capital Economics, a consultancy. The sell-off has slowed that recovery but not yet reversed it. And despite the trade war being waged by America’s president, Donald Trump, exports have been surprisingly strong.

This strength may reflect buyers of Chinese goods racing to place orders before American tariffs rise. Many emerging markets worry that if the trade war escalates, China will let its currency weaken in response, with unknown consequences for investor sentiment. The yuan may be the only major emerging-market currency that has not reached its low for the year. Testy exchanges between the two superpowers during the APEC events in Papua New Guinea will have done little to calm nerves.

For the host country’s entrepreneurs, the trade war must seem an extraordinary indulgence.

They face two adversaries, poverty and geography, that are more devastating than protectionism to trade. Long distances and patchy infrastructure mean that the cost of shipping local handicraft to the outside world can double the price. Crystal Kewe, a 20-year-old self-taught computer programmer in Port Moresby, won APEC’s backing to launch an e-commerce site for bilum, traditional string bags in which Papuans carry infants, food and much family pride. But the cost of shipping keeps export markets out of reach for now. She aims instead to sell to tourists and other visitors, who pay to ship themselves to the product.

The bags are laden with symbolism, according to Sharlene Kylie Gawi, owner of Bilum Culture, a local bilum business. Each loop is like a member of society. Some bear a lot of weight, others less. Some threads add colour; plainer ones allow the patterns to stand out. But each loop is connected to the others. Thus described, the bags could also represent emerging markets. Argentina and Turkey have stood out this year, yet remained bound to other markets through threads of sentiment. But it is China, as ever, that carries the most weight.

How Kim Has Played Trump

Since the historic summit between US President Donald Trump and North Korean leader Kim Jong-un in Singapore in June, the North Koreans have reaped significant benefits without having to make any real concessions. In his desperation to clinch a major diplomatic victory, Trump has allowed Kim to get the better of him.

Kent Harrington , John Walcott

trump kim jong un

ATLANTA – North Korean leader Kim Jong-un is eager to hold a second summit with US President Donald Trump. Since their first meeting in Singapore in June, Kim has consistently outmaneuvered his counterpart. Trump may still fancy himself a world-class dealmaker, but the truth is that Kim – like Russian President Vladimir Putin – has got Trump’s number.

Kim’s bonhomie (real or feigned) and promises of denuclearization have muted Trump’s threats, brought the South Korean government closer to his side, and eroded international sanctions against his regime. Kim has accomplished all of this without diminishing his regime’s nuclear capacity, and he appears to have continued ballistic-missile development at 16 hidden sites. Having gone from nuclear-armed pariah to presidential negotiating partner, it is little wonder that Kim would want a second summit to consolidate his newfound international legitimacy and position in the global limelight.

Kim has already outdone his forebears. His father and grandfather both tried and failed to create a high-level channel to the US government. The relationship that Kim has forged with Trump is thus an historic and personal success. After six reclusive years in power, the 35-year-old scion of North Korea’s dynastic regime has made a remarkable debut on the world stage, both managing an erratic, ego-driven president and setting the terms of the negotiations.

By contrast, the Trump administration has little to show for its efforts. Since the Singapore summit, US officials have reportedly been pushing the Kim regime to lay out a path to denuclearization. But the North Koreans have refused to turn over even the most basic facts about their arsenal. This stonewalling suggests that Kim has read Trump well. As Trump himself contends, “I am the only one that matters.”

Trump’s narcissism, hunger for the spotlight, and desperation to match former President Barack Obama’s Nobel Peace Prize are all that Kim needs to know about the man. The only question is how far Trump will go to secure something that he can hawk as an unprecedented deal with North Korea. By agreeing to another summit while slow-rolling preliminary talks, Kim is reconnoitering Trump’s bottom line.

Recall that, as its up-front price for serious denuclearization talks, the North initially pushed for diplomatic steps, such as a treaty to end to the Korean War. In Singapore, Trump promised to do just that, surprising American allies and US officials alike. Then, in talks last month with US Secretary of State Mike Pompeo, Kim upped the ante by also calling for an end to the international sanctions against his regime. No doubt, Kim is hoping that Trump’s impulsiveness will lead him to fold. This month, Kim’s foreign ministry issued a public threat that North Korea could restart its weapons program if the US does not soften its position on sanctions.

As Pompeo pursues further talks in Pyongyang this month, Kim will surely hold his ground. Since declaring in June that North Korea is “no longer a nuclear threat”, Trump has backpedaled on virtually all of his demands, dropped his draconian deadlines, and failed even to hint that Kim’s foot-dragging is a cause for concern. In October, Pompeo made no headway toward defining even the basic vocabulary of a future agreement. According to officials who are familiar with the talks, on at least two occasions, the North Koreans asked him if he wanted to step out and call his boss. As matters stand, the Kim regime and the US have yet to agree on the definition of terms such as “denuclearization,” “verifiable,” and “irreversible.”

To be sure, playing Trump and reneging on promised steps toward denuclearization has its risks. In May, Trump temporarily canceled the Singapore meeting in response to North Korean statements, and he did the same with talks between Pompeo and the North Koreans in August. There is no guarantee that he will not repeat that gambit.

And yet, even if he does, Kim’s own penchant for drama – from firing missiles over Japan to carrying out frequent purges at home – suggests that he knows how to command the stage and bring Trump to the table. Moreover, his ego-stroking personal letters to Trump show that he has a good fix on the president’s psyche. So far, he has proved to be highly effective at keeping the bromance alive, and the forthcoming summit on track.

Regardless of when the second summit occurs, the North Korean regime will continue to reap dividends at America’s expense in the meantime. Trump’s cancellation of two major US-South Korean joint military exercises already has commanders from both countries worried about their military readiness. And international support for economic sanctions – particularly on the part of China and Russia – has been steadily eroding since even before the Singapore summit.

With a fourth 2018 summit between Kim and South Korean President Moon Jae-in now in the works, it is clear that Moon’s political future is tied to rapprochement. During his October trip to Europe, Moon lobbied hard for the easing of sanctions, reflecting his government’s desire to engage, not embargo, the North.

It is time for the self-described master of the “art of the deal” to admit that he doesn’t have one. Trump prefers hype to the hard work of hammering out arms-control agreements, so controlling his craving for the spotlight will not be easy. Nonetheless, when it comes to Kim, a bit of 54-year-old wisdom from Barry Goldwater, another outsider-turned-Republican Party icon, still applies: “The only summit meeting that can succeed is the one that doesn’t take place.”

Kent Harrington, a former senior CIA analyst, served as National Intelligence Officer for East Asia, Chief of Station in Asia, and the CIA’s Director of Public Affairs.

John Walcott has covered foreign policy and national security for Newsweek, The Wall Street Journal, and other publications, and is an adjunct professor in the School of Foreign Service at Georgetown University.

Why We’re Ungovernable, Part 16: France On Fire

by John Rubino

Back in 2017, when some countries were handing power to populists promising variations of “drain the swamp,” France went for continuity with Emmanuel Macron, a young, moderate-sounding technocrat from the world of finance who promised to modernize the country without threatening the elites, the welfare state or the bureaucracy.

Fast forward a couple of years and Paris is in flames, literally. From Reuters this morning:
Riot police on Saturday were overwhelmed as protesters ran amok in Paris’s wealthiest neighborhoods, torching dozens of cars, looting boutiques and smashing up luxury private homes and cafes in the worst disturbances the capital has seen since 1968. 
Police said they had arrested more than 400 people in Paris on Saturday and that 133 were injured. Some 10,000 tear gas canisters and stun grenades were fired as well as water canon as security forces fought for control.

Now Macron is considering a “state of emergency” declaration that gives the police a freer hand. So it’s possible that the real carnage is still to come.

What happened? In general terms, pretty much the same thing that happens in every society where debt is soaring and the government/banking complex is becoming all-powerful: A small group of elites start siphoning unacceptable amounts of wealth from everyone else, and the peasants eventually grab their pitchforks and make their stand.

The resulting unrest takes different forms in different places. In France, where the state is historically dominant and entitlements are cradle-to-grave, angry mobs will happily take to the streets if the playing field appears to be tilting even a little further in favor of the elite.

The ostensible problems this time around have to do with an increase in diesel fuel taxes and some (to American eyes extremely modest) labor law reforms.

But the deeper reason for Macron’s apparent failure is that once a country (or for that matter a world) has borrowed more than it can ever hope to pay off, it no longer matters who is in charge. Whatever they do will run up against the brick wall of insolvency and the people who voted for current leaders will either hit the streets as in France or shift their allegiance to populists who promise to tear the system out by its roots (as in the US, Brazil, Poland, Italy).

This will also fail, and so on, until the inevitable financial crisis brings the borrow/spend/print game to an end.

France government debt
In the meantime, here’s more from the Reuters article:
Before heading into Sunday’s meeting, Macron met under heavy security with police and firefighters near the Champs Elysees boulevard. Some bystanders cheered, others jeered and called on him to resign.So too did Jean-Luc Melenchon, head of hard-left party La France Insoumise (France Unbowed) and far-right leader Marine Le Pen, who both demanded the government unwind its fuel tax hikes. They called for parliament to be dissolved and snap elections held. 
Such an outcome is unlikely, however. Macron has 3 1/2 years left of his five-year mandate and a strong majority in parliament, albeit with signs of simmering unease on the backbenches over his response to the protests. 
TV footage showed the interior of the Arc ransacked, a statue of Marianne, symbol of the French republic, smashed, and graffiti scrawled on the exterior ranging from anti-capitalist slogans to social demands and calls for Macron’s resignation. On nearby streets, some Parisians worried of a repeat of the violence next weekend. The yellow vests have already called another demonstration in Paris. 
“The violence is increasing at an exponential rate,” said Claude, a resident in the affluent 16th district. “The state is losing control, it is scary. They cannot let this happen. Maybe the army should intervene.”
Let’s end with an excerpt from a long, scary article in the most recent Atlantic Magazine titled A Warning From Europe: The Worst Is Yet to Come
From Orwell to Koestler, the European writers of the 20th century were obsessed with the idea of the Big Lie. The vast ideological constructs that were Communism and fascism, the posters demanding fealty to the Party or the Leader, the Brownshirts and Blackshirts marching in formation, the torch-lit parades, the terror police — these Big Lies were so absurd and inhuman, they required prolonged violence to impose and the threat of violence to maintain. They required forced education, total control of all culture, the politicization of journalism, sports, literature, and the arts. 
By contrast, the polarizing political movements of 21st-century Europe demand much less of their adherents. They don’t require belief in a full-blown ideology, and thus they don’t require violence or terror police. They don’t force people to believe that black is white, war is peace, and state farms have achieved 1,000 percent of their planned production. Most of them don’t deploy propaganda that conflicts with everyday reality. And yet all of them depend, if not on a Big Lie, then on what the historian Timothy Snyder once told me should be called the Medium-Size Lie, or perhaps a clutch of Medium-Size Lies. To put it differently, all of them encourage their followers to engage, at least part of the time, with an alternative reality. Sometimes that alternative reality has developed organically; more often, it’s been carefully formulated, with the help of modern marketing techniques, audience segmentation, and social-media campaigns. 
Americans are of course familiar with the ways a lie can increase polarization and inflame xenophobia: Donald Trump entered American politics on the back of birtherism, the false premise that President Barack Obama was not born in America — a conspiracy theory whose power was seriously underestimated at the time, and that paved the way for other lies, from “Mexican rapists” to “Pizzagate.” But in Poland, and in Hungary too, we now have examples of what happens when a Medium-Size Lie — a conspiracy theory — is propagated first by a political party as the central plank of its election campaign, and then by a ruling party, with the full force of a modern, centralized state apparatus behind it.