Rio de Janeiro’s militias: a parallel power in Bolsonaro’s Brazil

Death of leftwing politician Marielle Franco focused attention on the growth of militias — to the president’s discomfort

Jonathan Wheatley in Rio de Janeiro

                                                                                                                                        © AFP

She was the Alexandria Ocasio-Cortez of Brazilian politics. An articulate and charismatic public speaker, Marielle Franco was a city councillor from the leftwing PSOL party whose campaigning against corruption and police violence had made her a rising star of Rio de Janeiro politics — an unlikely achievement for a black, gay woman from one of the city’s sprawling favelas.

On the evening of March 14 last year, Franco — who was known universally as Marielle — was shot in her car in the centre of Rio, along with her driver Anderson Gomes.

Almost a year later, investigators finally arrested two men suspected of her murder — both of whom were themselves former police officers.

Hours later, as police were searching an apartment in a northern suburb of Rio owned by an associate of one of the suspects, they made a surprising discovery. In a storeroom, in sealed boxes apparently straight from the factory, were the unassembled parts of 117 M16 automatic rifles. It was the biggest haul of illicit weapons ever seized in Brazil.

Rio has long been famous for the drug gangs who have made parts of the city no-go areas for outsiders including the police. Franco’s killing has focused attention on a different and parallel menace — Rio’s milícias, the murderous paramilitary gangs led by serving and former police officers that have emerged over the past two decades as a threat to public security and to the integrity of the state. Investigators believe the two men arrested and who have not been charged were members of the Escritório do Crime — the “Office of Crime” — a militia gang of contract killers.

Brazilian President Jair Bolsonaro believes the police should be given more freedom to shoot back against suspected criminals © AFP

Although the detective leading her murder investigation suggested the alleged killers may have acted out of personal hatred for leftwing politicians, many others disagree and believe Franco was murdered because she had challenged some of the business interests of Rio’s militias.

“Marielle’s murder was a political contract killing, a sophisticated crime ordered by powerful people,” says Marcelo Freixo, a PSOL federal congressman from Rio who led a team of activists of which Franco was part. “We don’t want some nobody to be given the blame. We want to know who ordered it and why.”

The murder of Franco is also raising uncomfortable questions for Jair Bolsonaro, Brazil’s new far-right president. Longstanding figures in Rio politics, Mr Bolsonaro and his sons have a history of associating with people close to known and suspected militia members.

Flavio Bolsonaro, left, with his brother Carlos © AFP

Moreover, the spotlight on the militias clashes with the security plan that Mr Bolsonaro is proposing and the philosophy that helped him get elected. The president believes the police should be given more freedom to shoot back against suspected criminals. “We need to urgently get rid of the ideology that defends criminals and criminalises the police,” he said at his January inauguration. However, the death of Franco suggests that the root of at least some of the violence that scars so many Brazilian cities is the blind eye that the authorities cast over militias that act as an almost parallel state.

“The militias operate in places with a vacuum of power, an omission of the state,” says Simone Sibilio, head of a unit in the Rio state public prosecutor’s office investigating the militias and their involvement in Franco’s murder.

She likens their activities to those of the Italian mafia, particularly in the way they substitute and co-opt elements of the state. “They have public agents and politicians [working on their behalf],” Ms Sibilio says. “So far, we have arrested the coalface workers,” she adds. “We need to arrest the leaders.”

Eduardo Bolsonaro arrives for the showing of a documentary on his father's government in Washington on March 16 © Reuters

Firepower, murder, organised crime and politics: the characteristics that define the militias have become more destabilising since they first emerged towards the end of the last century.

Their origins help explain how rampant lawlessness can flourish in the surroundings of a sophisticated, modern city that only three years ago hosted the Olympics. Rio’s first militia can be traced to groups of migrant construction workers who settled with their families on no man’s land to the west of the city while they were building the apartment blocks and luxury condominiums that formed the upmarket seafront neighbourhood of Barra da Tijuca.

As their community grew, the favela of Rio das Pedras took shape with little intervention or interest from the state. With no formal police presence, security was provided by justiceiros, or vigilante gunmen. The favela expanded in the 1980s and 1990s and, as parts of it acquired the look of a regular city neighbourhood, police officers living there banded together to take over from the vigilantes, expelling, beating and killing drug dealers and other people they considered undesirables. They presented themselves to the local population as a peaceful alternative to the drug gangs.

“That’s where the behaviour of the militiamen began, behind Tijuca in Rio das Pedras,” says Ubiratan Angelo, a former Rio state chief of police. “They used to say, no criminals live here — where the police live there’s no place for bandits. Then they began to dominate local businesses, the market for alternative transport and all the rest.”

Weapons, equipment and money found at the home of an associate of former policeman Ronnie Lessa on March 12 © AFP

At first, militias offered protection to local businesses at a modest price many were willing to pay. From there to extortion was a short step, and soon militias were selling protection against themselves. They expanded into other services: informal public transport, distribution of cooking gas, pirate cable TV, the sale and rental of commercial and residential property, and more.

The most lucrative line of business for the militias has been real estate. Investigators recently found documents at the residents’ association in Rio das Pedras showing that between 5 per cent and 10 per cent of the value of every property deal goes to the local militia. They were also involved in the hugely profitable business of land expropriation or grilagem — the fraudulent assignment of property and land deeds.

This was the issue that Franco had been highlighting at the time of her death. Her work to support local residents and their rights to land and property made her a threat to this type of real estate scam.

Almost from the outset, militias dominated local politics in the areas they controlled. “If you have the power, you can tell people, ‘Look, it’s best that you vote for my candidate’,” says Mr Angelo. “That’s how these guys got big. In the city council, in the state legislature, they pass laws that interfere with the public machinery to benefit their activities.”

During the past 20 years, many new militias have been formed beyond Rio das Pedras. A study last year found they were present in 165 favelas and in 37 other city neighbourhoods in greater Rio, areas of the city that are home to a combined population of more than 2m people. They hand out often gruesome and lethal justice designed to set an example, sometimes for criminal behaviour, sometimes for acts of disobedience such as buying cooking gas from the wrong distributor. Their presence haunts the city: an opinion poll last month found that Rio’s residents were more afraid of the militias than of the city’s often brutally violent drugs gangs.

Fear of rising urban violence was one of the main issues that allowed Mr Bolsonaro to sweep to power from near-obscurity last year. While Brazilians hoped to turn their back on the leftwing Workers’ party (PT), which had overseen a crushing recession in 2015-16 and was involved in a multi-billion-dollar corruption scheme, he also campaigned strongly on a promise to tackle violent crime.

One indication of the failings of security policy in Brazil is the almost complete lack of official crime data. According to the Brazilian Forum for Public Security, Brazil had 63,895 homicides in 2017, by far the biggest national total in the world, and an increase of about 50 per cent in two decades. The homicide rate, at 30.8 per 100,000 people, is five times the global average and 14th worldwide, second only to South Africa among large nations. In two of Brazil’s states it is more than 60, higher than in El Salvador, the world’s most murderous country.

Rio’s militias are far from the only challenge. Rio is also home to the Comando Vermelho (Red Command), a brutally violent gang born in the state’s inhumane prisons whose members run much of the city’s drugs trade. Other prison “factions” compete for power in Brazil’s 27 states. Most prominent nationwide is the PCC of São Paulo, which has evolved into a sophisticated organisation running guns and drugs across Latin America and to Africa, Europe and the US.

Battles between the prison gangs horrified the country two years ago, when warring factions displayed severed heads and buckets full of their opponents’ hearts on social media.

Mr Bolsonaro has vowed to tackle such violence head-on. His campaign promises included arming the population and giving police greater licence to shoot to kill — something they already do with impunity at an estimated rate of 5,000 a year. In office, he has called on Sérgio Moro, the prosecuting judge who led an investigation into corruption under the PT that has put dozens of business people and politicians in jail — including former president Luiz Inácio Lula da Silva. As justice minister, Mr Moro presented a package of “anti-crime” bills to Congress last month, including a measure that would allow judges to dismiss prosecutions for use of excessive force “if it results from excusable fear, surprise or violent emotion”.

Since Mr Bolsonaro took office in January, police violence has increased. In one operation against warring drug dealers in a Rio favela last month, they killed at least 13 people, at least nine of whom residents claim were executed while trying to surrender.

Rodrigo Amorim is a Rio state deputy for the PSL, Mr Bolsonaro’s party, and a political ally of Flávio Bolsonaro, his eldest son. He praises the police action.

“In my view, it was an extremely successful operation,” he says. “Necessarily, you need confrontation. Of course, in confrontation some innocents are killed, but we need to give the state back the territory controlled by the factions.”

Mr Amorim gained national fame during the election campaign when he broke in two a fake street sign bearing Franco’s name that had been put up by her supporters in the centre of Rio. He takes issue with the suggestion that Franco, who campaigned for the rights of Rio’s poor, was also campaigning for the rights of its police officers, 70 of whom were killed last year.

“This human rights crew, they have started to see the bandit, the criminal, as a subject with rights, as some kind of poor creature marginalised by society,” he says.

Daniel Cerqueira, an economist and author of a study of the causes and consequences of crime in Brazil, says the Bolsonaro-Moro plan runs contrary to policies that appear to have worked in parts of the country. He points to dramatic success in fighting crime in some Brazilian states this century, under programmes based on seven common elements: dedicated leadership, co-ordinated action, investigation, disarmament, conflict resolution, targeting crime bosses rather than arresting petty criminals, and funding youth services in favelas and other deprived areas.

“These experiences shine a light and offer some hope that things can get better, without turning to the barbarity that’s going on today,” he says.

That “barbarity”, says Mr Cerqueira, includes a policy of repression and neglect, in which poor areas become lawless territories where the police enter only in violent raids, so that “the communities hate the police and the police hate the communities”. He says these problems will only be exacerbated by the new government’s policies.

Former police officers Ronnie Lessa and Elcio Vieira de Queiroz were arrested for the murder of Marielle Franco

This month’s arrests brought Franco’s murder one step nearer to closure a year after her death. But there are fears that the investigation into her murder may itself have been corrupted by the militias’ reach into the Rio state police.

Last November, after months of resistance from Rio’s authorities, Raul Jungmann, then minister of public security, installed a federal police investigation into the local murder investigation in Rio. It is expected to report next month.

“It is the only chance to find out who ordered her killing,” he says. “We need to pull the thread of this satanic alliance between crime and political corruption that has been shielded up to now.”

Connections of Bolsonaro clan invite scrutiny

Jair Bolsonaro has in the past suggested Rio’s militias be legalised. Last year he told a radio interviewer, “Look, there are people who support the militias . . . In places where the militias are paid, there’s no violence.”

There is no suggestion that Mr Bolsonaro or his sons had any involvement in Marielle Franco’s shooting. But one reason her murder has created problems for the president is the web of connections between the Bolsonaro clan and people involved in or close to the militias.

In 2011 Patricia Acioli, a judge who fought the militias and put several members in jail, was murdered. Flávio Bolsonaro, the president’s eldest son, tweeted that “the absurd and gratuitous way she humiliated police officers” had made her many enemies. Until November, Flávio — then a deputy in the Rio state assembly — employed in his office the wife and mother of Adriano Magalhães da Nobrega, a fugitive from justice accused of leading the Escritório do Crime, the militia hit squad believed to have been involved in the murder of Franco. He dismissed the pair when their employment became public.

“Is a criminal’s mother a criminal? Of course not,” says Marcelo Freixo, a federal deputy and campaigner against the militias. “But it has to be explained. Everything suggests they were there as a favour to the criminal.” He says the two women had no clear function in Flávio’s office.

Flávio has described local media suggestions that he employed the two as a favour to Mr Nobrega as defamatory and said the pair had been nominated for their jobs by Fabrício Queiroz, an adviser, former policeman and longtime family friend. Mr Queiroz is under investigation for involvement in a scheme allegedly skimming publicly-funded salaries from phantom employees in the state assembly, which he denies. When the allegations were made public, he went into temporary hiding in Rio das Pedras, home of Rio’s first militia.

The Economic Consequences of Global Uncertainty

With new sources of uncertainty seemingly proliferating by the day, a broad economic slowdown should come as no surprise. And as long as the rules and institutions governing the global economy remain in doubt, continued underperformance is to be expected.

Michael Spence

BEIJING – The global economy is weakening, in no small measure because of a deep, widespread sense of uncertainty. And a major source of that uncertainty is the ongoing Sino-American “trade war.”

As Lawrence J. Lau of Stanford University has shown, the problem is not that tit-for-tat tariffs have had an especially large impact, except perhaps on particular US and Chinese economic sectors. Rather, the conflict has cast doubt on the future of global economic connectivity, which has led to lower investment and consumption in China and the United States, and among their respective trading partners.

Moreover, the Chinese state has expanded its role in the economy. State-owned enterprises are back in favor among young jobseekers and in the eyes of the largely state-owned banking sector, even though many SOEs really should be restructured rather than kept afloat. At the same time, many private-sector firms are finding credit scarce and very expensive, and bankruptcies appear to be on the rise. Periodic policy interventions to reverse these longstanding public-private asymmetries have proved insufficient.

As for the US, the economy is coming down from a pro-cyclical fiscal stimulus that was bound to leave a mild hangover. And until very recently, the US Federal Reserve has been tightening monetary policy, with the effects of higher interest rates probably delayed by the Trump administration’s December 2017 tax cuts.

Meanwhile, according to a recent Council on Foreign Relations report, jobs in manufacturing, construction, and mining have become relatively scarce, while unfilled openings in a range of higher-productivity service industries are increasing. More generally, productivity growth has been trending downward, undercutting long-term growth. A McKinsey Global Institute report notes that this trend is partly due to lags in the implementation of new digital technologies. Another factor is the growing skills mismatch, which has also contributed to labor immobility between traditional blue-collar jobs and services.

Political developments are adding to the uncertainty. In the US, no one knows if the 2020 presidential election will result in a second term for Donald Trump or a new Democratic administration governing from either the center or the far left. The range of possible policy scenarios – from antitrust actions against major digital platforms to universal health-care schemes and major changes in the tax system– is more expansive than it has been in decades.

The situation in Europe is not very different. With nationalism and populism (of the left and right) on the rise, anti-establishment parties have either gained ground or taken power in many countries. In light of these developments, the European Union seems increasingly unlikely to undertake sorely needed structural reforms. The only two leaders who could push through such measures, German Chancellor Angela Merkel and French President Emmanuel Macron, have been weakened politically. Merkel has announced that this term will be her last, and Macron has had to contend with widespread (and in many cases violent) protests since November.

Come May, all eyes will be on the European Parliament elections, which could result in a radical reshuffling of personnel at the European Council and Commission. And complicating matters further, the United Kingdom has fallen down the rabbit hole of Brexit, adding to the climate of uncertainty.

On the economic front, Germany’s troubles – owing to its sizeable industrial sector and significant exposure to developments in China – have had spillover effects across Europe. Italy remains in a two-decade period of subdued growth, with youth unemployment at an intolerably high 32%. Worse, the Italian government has taken a confrontational approach to the EU over fiscal rules, but lacks a convincing plan to achieve long-term growth. With Italian sovereign debt having ticked back up toward 140% of GDP, there is reason to worry that a spike in yields for government bonds – as happened in 2010-2012 – could provoke a fiscal crisis.

Should that happen, it is unclear how the European Central Bank would respond. In any case, the absence of strong growth will add to the fragility of the Italian banking sector, as nonperforming loans tend to rise with growth headwinds. That, in turn, will result in tighter credit and damage to still-healthy sectors of the Italian economy.

More broadly, Europe is lagging behind other powers in terms of innovation and the adoption of new digital technologies. But digital technologies themselves are also contributing to global uncertainty. The extent to which digital platforms can influence political processes is unclear; but there is ample evidence to suggest that they have amplified social fault lines and made democratic elections easier to exploit. Beneath those fault lines are powerful economic trends, not least the labor-market and income polarization that is observable across the developed economies.

The global economy is undergoing a major transition, owing to the rise of emerging economies, especially in Asia, and the digital transformation of business models and global supply chains. Services constitute a growing share of global trade, and the search is on for new sources of comparative advantage. The location of final markets and the configuration of supply chains are in flux, or being upended entirely. And while it is obvious that global-governance structures and rules need an overhaul, existing international institutions lack the power to push through such changes on their own, and the governments of the world’s leading economic powers do not seem up to the task.

Taken together, these diverse economic and political trends may or may not lead to another global crisis or sudden stop. Either way, they will sustain a prolonged period of radical uncertainty. Under such conditions, caution may seem like the best policy for companies, investors, consumers, and even governments. But caution carries its own costs: companies and countries that fail to invest enough in, for example, new digital technologies may well fall by the wayside. And as long as the rules and institutions governing the global economy remain in doubt, continued underperformance is to be expected.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Advisory Board Co-Chair of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

Wall Street hits fresh peak as earnings fears recede

Inflows into equity ETFs pick up but active fund managers miss out

Chris Flood

Sentiment towards equities received a boost from an unexpected shift in monetary policy by the Federal Reserve (Johannes Eisele/AFP)

A strong rally for the US stock market this year has propelled Wall Street to a fresh all-time high, a rebound that has surprised many investors after a savage sell-off in the closing months of 2018.

Fear of an all-out trade war between Washington and Beijing and worry over the effect of rising interest rates on US economic growth helped drag the US equity market to a 20-month low on Christmas Eve. Wall Street’s decade-long recovery following the global financial crisis appeared to have reached exhaustion.

Instead the S&P 500 has surged 24.8 per cent higher since December 24, confounding the doubters.

David Kelly, chief global strategist at JPMorgan Asset Management, says the rebound reflects growing confidence that the US economy will not sink into a recession in the near term.

“We are at a late stage in the business cycle but there is no expiration date on the recovery. The main cyclical sectors — housing, autos, capital goods and inventories — remain well behaved, which reduces the risk of a recession,” he says.

Sentiment towards equities received a boost from an unexpected shift in monetary policy in March when the Federal Reserve indicated that it would refrain from raising US interest rates for the rest of the year.

But the surprise shift in monetary policy by the Fed has also led to an inversion in the US yield curve, a historical warning sign that the economy could move into recession.

Mr Kelly is unmoved by this, describing the inverted yield curve as “a broken barometer” as a result of the reduction in US bond yields due to quantitative easing — the massive bond-buying programmes introduced by central banks in response to the financial crisis.

“It still makes sense for investors to have a modest overweight position in US equities,” he says.

Jeremy Podger, a global equity portfolio manager at Fidelity International in London, describes yield curve inversion as a “red herring”.

“The US economy still has positive momentum,” he says.

Investors also appear unperturbed by the warning from the yield curve. Inflows into US equity ETFs have picked up following the Fed’s signal on interest rates.

Matthew Bartolini, head of Americas research at State Street Global Advisors, points out that SPY, the world’s largest ETF, which tracks the S&P 500, has attracted inflows of more than $3.9bn since the start of April after registering outflows of $4.1bn over the first quarter of the year.

Traditional active fund managers have missed out. Active US equity funds had close to $28bn in outflows in the first quarter while passive US equity tracker funds gathered nearly $34bn in inflows, according to Morningstar, the data provider.

Corporate earnings will play a critical role in determining whether the stock market will make further progress or retreat.

Earnings for the S&P 500 are on track to shrink by about 3.3 per cent in the first quarter compared with the same period, a slightly better outcome than predicted by the consensus forecast among analysts.

Mr Podger says first-quarter earnings have been “encouraging”, particularly as the latest updates follow a strong showing in 2018 when generous tax cuts helped to swell corporate profits. He currently holds a modest underweight position in US equities but sees value in technology and the oil stocks where this year’s rise in oil prices has not been fully reflected in company valuations.

Morgan Stanley is more cautious. It is predicting the US will undergo an earnings recession with two consecutive quarters of negative or flat earnings growth for the first time since 2016.

“There will need to be real evidence of a turn in earnings growth for US stocks to advance much from here. The real question is what the second half of the year looks like,” says Michael Wilson, an equity strategist in New York.

The consensus forecast among Wall Street analysts is for calendar-year earnings growth for the S&P 500 to slow to 3.6 per cent this year before recovering to 11.5 per cent in 2020, according to FactSet, the data provider.

Equity valuations have also risen as a result of the stock market rally. The S&P 500 is trading on a multiple of 16.4 times 12-month forward earnings, above the long-term average of 15.3 times.

Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch, says the S&P valuation looks “slightly stretched” based on earnings forecasts but inexpensive on cash flow measures and also relative to bonds.

BlackRock, the world’s largest asset manager, has been reminding its clients that equities historically have performed well in late-cycle periods while also cautioning against extrapolating the US stock market’s recent strong performance through to the end of 2019.

Larry Fink, the head of BlackRock, said this month that “a lot” of investors’ money remained on the sidelines.

“There’s too much global pessimism. I think you’ll see investors put money back into equities,” said Mr Fink.

We Give Up! Part 6: Federal Reserve “Resigned” To Blowing Bubbles

by John Rubino

After raising interest rates and getting slapped around by the markets last year, the Fed now appears to accept that future monetary policy can only be easy, even at the cost of ever larger and more destabilizing financial bubbles. On one hand this is a truly epochal change. On the other hand it’s just a recognition of the new normal in which central banks have already lost control.

From Bloomberg:

Fed Seems Resigned to Bubble Risk in Effort to Extend Expansion 
Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going.
That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting. 
“A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’’ according to the minutes, published April 10. 
Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble. 
A willingness by the Fed to court such perils by holding rates down should be good for the economy for a while. After all, the aim of such a policy would be to sustain growth at a healthy enough clip to meet the Fed’s twin goals of maximum employment and 2 percent inflation. 
But that monetary stance could store up trouble down the road should the financial threats materialize. 
“Easy financial conditions today are good news for downside risks in the short-term but they’re bad news in the medium term,” senior International Monetary Fund official Tobias Adrian told a Boston Fed conference last year. 
In economists’ parlance, here’s the Fed’s dilemma: R-star — the neutral interest rate that stabilizes the economy when it’s meeting the Fed’s goals — may be so low that it also prompts super-risky behavior by investors. 
Behind the fall in R-star: an aging population and slower productivity growth that has boosted savings and depressed investment. 
In an article last August, Bloomberg coined the term “Fast-star’’ for the interest rate that’s consistent with ensuring “FinAncial STability.’’ A rate too far below that level leads to excesses in the financial system. A setting much above it stifles risk-taking and obliterates the “animal spirits” that drive economic growth. 
The trouble is that Fast-star may be higher than R-star, as suggested by the minutes. 
neutral interest rate financial bubbles
The Fed has put policy on hold this year after lifting short-term rates to 2.25 percent to 2.5 percent in December, within the range it considers neutral for the economy. The dovish shift helped ignite a huge rally in the stock market, with the S&P 500 Index up 16 percent in 2019.
stock prices financial bubbles

But it failed to satisfy President Donald Trump, who’s vociferously complained that the Fed’s rate increases have held back the economy and the stock market and who’s urged the central bank to open up the monetary spigots to boost both.
A couple of policy makers at last month’s FOMC meeting said that any financial stability risks arising from low rates could be addressed by counter-cyclical macro-prudential policy tools and other regulatory and supervisory measures, according to the minutes. 
The problem is that the U.S. has a limited set of such tools, as Fed Vice Chairman for Supervision Randal Quarles acknowledged in a March 29 speech in New York. 
At times last year Fed policy makers sounded open to using higher interest rates to lean against potentially over-exuberant financial markets, said Jonathan Wright, a professor at Johns Hopkins University and a former Fed economist. 
Case in point: New York Fed President John Williams said in October that the central bank’s rate increases would help reduce risk-taking in financial markets, though he added that was not their principal purpose. 
Backed Off 
Such talk has since faded. “There doesn’t seem to be the same idea of having tighter monetary policy so as to lessen the risk of asset bubbles developing,” Wright said.

So that’s it. Low interest rates and generally easy money for as far as the eye can see, while asset bubbles expand and then burst according to their own dynamics.
The way you can tell this is true is by looking at stock prices, which are back at levels that last year compelled the Fed to start tightening, and wage inflation, which is running nearly a full percentage point beyond the Fed’s current 2% inflation target. Either (and certainly both) of these trends might have lead previous Feds to tighten aggressively. That this one is still talking about easing proves that it has given up on the whole inflation-fighting thing.
Which means we’ve arrived at yet another milestone on the path to global currency collapse, one that will leave future historians shaking their heads in disbelief.

What the Yield Curve Says About the 2020 Presidential Election

By Ben Levisohn

When the yield curve “inverted” last Friday, markets suffered a brief moment of panic before remembering that a recession usually takes 12 to 18 months to show up after such a move. As it happens, that time frame would put the economic swoon just before the 2020 presidential election—which would presumably help the Democrats.

Presumably, but not necessarily. A recession isn’t preordained, of course. Long-term Treasury yields would need to stay lower than short-term ones for longer than just a few days for the signal to be meaningful, and right now the yield curve looks quite “weird,” as my colleague Alexandra Scaggs noted. Trying to pick which way the Dow Jones Industrial Average, S&P 500,and other stock market indexes will go is difficult enough without trying to time the what-ifs of recessions and elections.

Still, it is worth wondering what the yield curve could be saying, and there is no better way than to look to history as a guide. Deutsche Bank strategist Alan Ruskin has done just that. In a note released Tuesday, he looked at past yield-curve inversions and what they meant for incumbent candidates or parties.

Two examples stand out: Ronald Reagan’s win in 1980 and Barack Obama’s victory in 2008. In both cases, the yield curve had inverted meaningfully, and the economy had slipped into deep recessions by the time of the election. In both cases, the incumbent party lost. “On both occurrences we know, that at the time of the election, the economy was in unusually poor shape, almost certainly encouraging the Reagan 1980 and Obama 2008 wins,” Ruskin writes.

The rest of the time, the results have been mixed. A flat curve hasn’t benefited either the incumbent party or the challenger, and a steep yield curve didn’t help the Democrats in 2016, George H.W. Bush in 1992, or Gerald Ford in 1976. “Each of them had a special story,” Ruskin explains.

As a result, the yield curve, though it does have some predictive abilities, should not be taken as the be-all and end-all for the 2020 election. “The yield curve is only one indicator, albeit one that is particularly interesting because of its possible long lead time,” Ruskin writes. “Currently, the curve’s message is rather simple and suggests that come the 2020 election, the electorate may well be demanding new economic ideas in the face of a slowing economy, that in turn may produce more ‘out of the box’ thinking than in traditional campaigns.“

In other words, it’s an indicator that shouldn’t be ignored. 

The Global Impact of a US Recession

It appears more and more likely that a recession is coming, and it will have geopolitical consequences.

By George Friedman


Last week, there was a great deal of talk about an impending U.S. recession. On Wednesday, U.S. Federal Reserve Chairman Jerome Powell indicated the Fed would not increase interest rates this year amid signs of a modest economic slowdown. On Friday, three-month yields on U.S. treasuries briefly rose higher than those of 10-year treasuries – the first such inversion of the yield curve (a historically reliable predictor of a recession when inverted for an extended period) since 2007. And stock markets around the world have responded accordingly.

This is one time when I agree with the speculation. In our 2019 Forecast, we indicated that the United States was due for a recession. Since before World War II, no period of economic growth has lasted longer than 10 years. With the last recession having ended in 2009, we’re now reaching that benchmark. But another important indicator is the labor market. Economics teaches that wealth is generated through land, labor and capital. The U.S. unemployment rate is around 4 percent, about as close to full employment as possible, and that means the labor component of growth is being tapped out. To attract workers, companies will have to pay more for labor, and that will result in declining profit margins or rising prices for consumers. As a result, lower-cost competitors, particularly those outside the United States, will take a larger market share.

This is one of the ways that economies regulate themselves to limit inefficiencies that arise during periods of economic expansion. Economic growth encourages inefficient businesses to absorb resources that would be better deployed in more profitable companies. If this continues, the allocation of resources becomes increasingly irrational. When this irrationality is protected by state intervention to avoid short-term political problems, the economy deteriorates. There are many examples of countries that have used short-term means to postpone recessions, only to wind up in a long-term, insoluble economic malaise. Thus, the business cycle – in which a period of economic growth inevitably leads to recession – is painful but essential.

The question is, how long will the economic irrationality continue to build until the economy moves into recession? In the United States, the limit for economic expansion has been 10 years, so it would be surprising if we did not have a recession fairly soon. It should also be remembered that, since a recession is defined as two consecutive quarters of economic contraction and since numbers on gross domestic product come out about two months after the end of a quarter, we will be in recession for about eight months before it’s officially announced. But it should be fairly obvious that the country is in recession even without an official confirmation. The most painful recessions are accompanied by massive financial crises, like the one experienced in 2008, but most are primarily cyclical in nature.

What I’ve outlined here may be obvious to some, but it’s important to bear in mind the logic and necessity of recessions, which are frequently blamed on political decisions. And that is a necessary point of departure to discuss the geopolitical ramifications of an American recession. The principles that drive recessions in the U.S. are no different than those in other countries. But the consequences for the international system are far more significant.

The United States accounts for nearly one-quarter of the world’s GDP. It is the largest importer of goods and services in the world – consuming about 14 percent of total exports. It’s also the largest export destination for China, India and Germany and second-largest for Japan. These four major economies are heavily dependent on exports – nearly half of Germany’s GDP comes from exports, for example – so a global decline in demand has the potential to affect their financial systems, employment rates and even internal political dynamics.



The United States, by comparison, is fairly insulated from the global economy. Only about 13 percent of its GDP comes from exports, nearly half of which go to Canada and Mexico. The three countries form a stable trading bloc, the occasional histrionics notwithstanding. The relatively low dependency on exports limits the United States’ exposure to foreign business cycles. But countries that are heavily dependent on exports are vulnerable to fluctuations in global demand, especially from the world’s largest economy. And because a U.S. recession would decrease consumer demand for goods, it could also – depending on its severity – have a significant effect on the business cycles in other countries. The greater the dependence on exports, the more destabilizing the effect of an American recession.

Some of the most vulnerable economies are already facing serious challenges that would be compounded by a decline in exports. China, for example, is already in an economic downturn. In Germany, there have been some signs of a slowdown in manufacturing and the economic implications of Britain’s exit from the European Union are still uncertain.

The economic and political effects of the last global recession still linger more than a decade later. Many countries are still recovering, though the United States’ economy has proved more robust than those of nations like China, Russia or Germany. These countries are, oddly enough, more vulnerable to an American recession than even the United States. That’s partly because an American recession not only affects direct exporters to the U.S. but also the price of goods and services, especially industrial minerals like oil. Given that it seems the next recession will be relatively mild, as there is no attendant financial crisis in sight, the impact may be limited.

The point about vulnerability challenges the doctrine of interdependence. Countries that are more intertwined in the global economy are more vulnerable to events in other countries; those that are less intertwined can, within limits, control their own fates. This became clear in 2008, and the next recession will simply drive the point home. The political lesson that should have been learned was that the greater the dependence on exports, the greater the vulnerability to the consumer. This point should have been obvious already but was forgotten after many years of general prosperity. It will become even more apparent, however, after each successive recession. The problem for countries like Germany and China is that it would be exceedingly hard to reduce their dependence on global markets, and that will have political consequences.

In the meantime, the U.S. business cycle will run on its own clock, and not on others’. It is the argument for strategic economic prudence, which is odd to say since the U.S. is regarded as economically imprudent, particularly by its own citizens.