The Ignore Them, Then Panic Dynamic

Doug Nolan

After years of increasingly close cooperation and collaboration, the relationship has turned strained. Both sides are digging in their heels. Credibility is on the line. If one side doesn’t back down, things could really turn problematic. The Fed is asserting that it’s not about to lower the targeted Fed funds rate. Markets are strident: You will cut, and you will cut soon. Bonds are instructing the world to prepare for the Long March.

Market probability for a rate cut by the December 11th FOMC meeting jumped to 80% this week, up from last week’s 75% and the previous week’s 59%.

May 22 – Reuters (Howard Schneider and Jason Lange): “U.S. Federal Reserve officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place ‘for some time,’ a further sign policymakers see little need to change rates in either direction. ‘Members observed that a patient approach...would likely remain appropriate for some time,’ with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5%, the Fed… reported in the minutes of the central bank’s April 30-May 1 meeting. Recent weak inflation was viewed by ‘many likely to be transitory,’ while risks to financial markets and the global economy had appeared to ease - a judgment rendered before the Trump administration imposed higher tariffs on Chinese goods and took other steps that intensified trade tensions.”

Analysts have been quick to point out that additional tariffs along with the breakdown in trade negotiations unfolded post the latest FOMC meeting. True, yet several Fed officials have recently reiterated the message of no urgency to lower rates. This week Atlanta Federal Reserve President Raphael Bostic said he doesn’t see the Fed reducing rates. In a Thursday Bloomberg interview, Federal Reserve Bank of Cleveland President Lorretta Mester went so far as to state that reducing rates (to boost inflation) would be “bad policy.” This followed New York Fed President John Williams’ Wednesday comment: “I don’t see any strong argument today, based on what we have seen in the data or other information, to move interest rates one way or the other.” On Thursday, Dallas Fed President Robert Kaplan stated he was “agnostic at this point about whether the next move is up or down.”

Agnostic the markets are not. Ten-year Treasury yields dropped another seven bps this week to the lows (2.32%) since December 15th, 2017. Two-year yields declined four bps to 2.17%, the low going back to February 2018. Sinking market yields are anything but a U.S. phenomenon. German 10-year bund yields declined another basis point to negative 0.11%, trading this week at low yields going all the way back to the summer of 2016. Swiss yields fell four bps this week to negative 0.45% (low since October 2016). Japanese JGB yields fell two bps to negative 0.07%.

Curiously, yields dropped 15 bps in Italy (2.55%), nine bps in Portugal (0.97%) and six bps in Spain (0.82%). Yields this week were down to 0.04% in Denmark, 0.07% in the Netherlands, 0.11% in Finland, 0.17% in Sweden, 0.19% in Austria, 0.37% in Belgium, 0.38% in Slovakia, 0.45% in Latvia and 0.54% in Slovenia. We have become numb to an incredible market spectacle.

Global “risk off” gathered some momentum this week. The Shanghai Composite declined 1.0%, trading back to around February lows. China’s growth/tech ChiNext index sank 2.4% to the lowest level since February 22nd. Hong Kong’s Hang Seng China Financials index dropped 1.5% to the low going back to January 21st. China’s renminbi mustered a 0.26% gain versus the dollar, a notably unimpressive recovery considering its recent walloping.

“Risk off” was pervasive throughout European equities. Germany’s DAX index fell 1.9%, with France’s CAC40 down 2.2%. Led by a 6.6% drubbing in Italian bank shares, Italy’s MIB index sank 3.5%. Europe’s STOXX 600 Bank index fell 3.0%.

The S&P500 declined 1.2%, with the tech-heavy Nasdaq100 down 2.7%. The Semiconductors were hammered 6.4%. The Dow Transports fell 3.4%.

The unfolding “risk off” backdrop became too much for some key commodities markets. WTI crude was hammered 6.6% this week (biggest decline of the year), trading to a two-month low. Copper declined 1.7%, approaching January lows. Aluminum fell 2.0%, Zinc 1.5%, and Tin 1.0%. The Bloomberg Commodities Index traded Thursday at the lows since “U-turn” January 4th.

May 22 – Reuters (Michael Martina and David Lawder): “China must prepare for difficult times as the international situation is increasingly complex, President Xi Jinping said in comments carried by state media…, as the U.S.-China trade war took a mounting toll on tech giant Huawei… During a three-day trip this week to the southern province of Jiangxi, a cradle of China’s Communist revolution, Xi urged people to learn the lessons of the hardships of the past. ‘Today, on the new Long March, we must overcome various major risks and challenges from home and abroad,’ state news agency Xinhua paraphrased Xi as saying, referring to the 1934-36 trek of Communist Party members fleeing a civil war to a remote rural base, from where they re-grouped and eventually took power in 1949.”

May 19 – Bloomberg (Karen Leigh): “President Donald Trump said he was ‘very happy’ with the trade war and that China wouldn’t become the world’s top superpower under his watch. ‘We’re taking in billions of dollars,’ Trump told Fox News Channel’s Steve Hilton when asked about the end game on the trade war. ‘China is obviously not doing well like us.’ Trump’s comments signal he’s in no rush to get back to negotiating with Beijing… The president also told Hilton he believed China wants to replace America as the world’s leading superpower, and it’s ‘not going to happen with me.’ ‘I think that’s their intention… Why wouldn’t it be? I mean they’re very ambitious people, they’re very smart.’”

If it is negotiation posturing, it’s a rather convincing effort from both sides. Hopes for de-escalation from rapidly deteriorating Chinese/U.S. relations were tempered to start the week. “China is in ‘no rush’ to restart trade talks,” read the headline. President Trump’s comments regarding China not attaining superpower status under his watch played right into Beijing’s narrative.

May 20 – Bloomberg (Ian King, Mark Bergen, and Ben Brody): “The impact of the Trump administration’s threats to choke Huawei Technologies Co. reverberated across the global supply chain on Monday, hitting some of the biggest component-makers. Chipmakers including Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. have told their employees they will not supply Huawei until further notice, according to people familiar with their actions. Alphabet Inc.’s Google cut off the supply of hardware and some software services to the Chinese mobile phone equipment giant, another person familiar said, asking not to be identified discussing private matters. The Trump administration on Friday blacklisted Huawei -- which it accuses of aiding Beijing in espionage -- and threatened to cut it off from the U.S. software and semiconductors it needs to make its products.”

With technology stocks in the crosshairs, equities were under heavy selling pressure in Monday trading (S&P500 down 2.4%, with the Dow sinking 617 points). In an effort to contain market and supply chain fallout, the administration after Monday’s close moved to grant tech firms a three-month license (with stipulations) to do business with Huawei. Tuesday’s rally suffered a short half-life.

By Tuesday evening, concerns were mounting after reports the Trump administration was considering adding Chinese surveillance firms to the blacklisted companies to be cut off from U.S. technology suppliers. It was the opposite of de-escalation.

Ten-year Treasury yields fell four bps Wednesday and another six on Thursday (to 2.32%). The Shanghai Composite dropped 1.4% in Thursday trading. In U.S. markets, the VIX popped to 18, as a whiff of vulnerability emerged in U.S. corporate credit. Junk bond spreads increased to near the widest – and investment-grade CDS prices near the highest - level since late-March. U.S. bank stocks dropped 1.8% in Thursday trading, as bank CDS prices widened moderately. For the week, investment-grade corporate bond funds suffered their first outflow ($756 million) in 17 weeks.

May 24 – Bloomberg (Brian Smith): “Like a punch-drunk boxer saved by the bell, the Memorial Day weekend couldn’t have come at a better time for the high-grade credit market. Credit spreads have blown out to the widest levels since March, the new issue market screeched to a halt mid-week… Total high-grade new issue volume (including EM) totaled just shy of $17 billion, well below projections of $20b-$25b, as at least three potential borrowers were said to have punted until next week… Three of this week’s new issue tranches failed to price at the tight end of the guidance range, a rare occurrence and clear signal of investor pushback… Nearly 75% of this week’s deals are trading wide to their new issue pricing levels.”

A Wall Street Journal article (James Mackintosh) headline resonated: “Investors Slowly Wake Up to Fears of a New Cold War - The U.S.-China Trade Conflict Might be a Repeat of a Pattern All-Too Common in Markets When it Comes to Geopolitical Risks: Ignore Them, Then Panic.”

It’s worth generally examining The “Ignore Them, Then Panic” Dynamic. At this point, perpetual monetary stimulus has become deeply imbedded within inflated securities prices across asset classes around the globe. One can disagree on potential catalysts and circumstances, but the most extreme global bond pricing dynamics clearly incorporate prospective rate cuts and additional QE. Meanwhile, risk markets are bolstered by collapsing market yields along with the perception of multiple market backstops (Fed/global central banks, Chinese stimulus, Trump/2020 elections, corporate buybacks, etc.).

Early on in the global government finance Bubble, I advanced the concept of the “Moneyness of Risk Assets.” This was an evolution from the mortgage finance Bubble period’s “Moneyness of Credit” market distortion. The aggressive use of rate policy and central bank balance sheets/Credit to promote stock and bond price inflation nurtured the (central bank backstop-induced) perception of risk assets as safe and liquid stores of value (i.e. money-like). Over time, this had momentous effects throughout the markets, certainly including the booming ETF and derivatives complexes.

When it comes to various risks, over years it became increasingly easy to simply “Ignore Them.” Central banks have repeatedly stepped up to backstop vulnerable risk markets. At the same time, the central bank “put” has ensured readily available inexpensive market insurance (i.e. put options). Why not write flood insurance when the authorities control the weather? And with market protection so cheap, is it not rational to partake in rewarding risk-taking activities? Moreover, with QE having become the principal instrument in the central banking toolkit, prices for Treasury, Bund, JGB and other “safe haven” bonds are essentially guaranteed to rise in the event of heightened systemic risk. Superior to even cheap derivative protection, can’t lose holdings of safe haven bonds offer protection while also inflating in value.

As I’m fond of discussing, crises typically erupt in the money markets. It is when the perception of safety and liquidity is suddenly questioned that all hell breaks loose. And never before have risk markets so harbored the misperception of money-like attributes. This explains the “Then Panic” Dynamic.

I have argued that contemporary finance functions poorly in reverse. The market-based global financial apparatus seemingly performs wondrously so long as securities prices rise, the cost of market protection remains cheap and risk embracement holds sway. And it is almost as if the system has evolved to operate quite splendidly under moderate degrees of apprehension. Such a backdrop provides the Buy the Dip Crowd easy opportunities, while lavishing effortless profits upon the writers/sellers of market protection. To be sure, a hospitable marketplace of mild pullbacks and robust rallies further emboldens the prevailing view that markets always go up (so ignore risk!).

As we witnessed in December, things can start to unwind rather quickly when markets begin questioning the timeliness and scope of the central bank backstop. When the faithful dip buyers reverse course and turn urgent sellers, there’s an immediate market liquidity issue. Worse yet, when the protection sellers (i.e. put writers) suddenly fear they might end up on the hook for substantial market losses, it’s “Then Panic.” They must either buy protection for themselves or start shorting securities to offset their exposure to escalating losses. Any time writers of derivative protection are forced into aggressive selling, markets quickly face a major liquidity problem.

I have argued that the bursting of China’s historic Bubble presents a catalyst for the piercing of the global Bubble. And I posited as recently as last week that the breakdown in U.S. trade negotiations risks pushing China over the edge. I also suggested that acute Chinese fragility likely explains the extraordinary drop in global safe haven bond yields. While this is reasonable analysis, it is surely too simplistic.

Crisis unfolding in China has become a high probability catalyst for bursting the global Bubble. Yet it is structurally-impaired global financial and economic systems that explain virtual panic buying of safe haven bonds in the face of resilient risk markets. For decades now, risk markets have climbed the proverbial “wall of worry” – seemingly scaling new heights after overcoming one potential crisis after another (i.e. deep U.S. recession, European crisis, geopolitical flashpoints, Brexit, multiple China scares, “flash crashes,” the winding down of QE, etc.). It’s rational for risk markets to welcome risk as an opportunity to capitalize on additional central bank and Beijing stimulus measures.

Safe haven bond markets view the backdrop altogether differently. Current market structure is unsustainable. Treasuries, bunds, JGBs, etc. are zeroed in on the risk markets’ proclivity for Ignore Them, Then Panic. The safe havens are now preparing for the Panic Phase, with the presumption that dysfunctional speculative dynamics and deep structural maladjustment ensure the next bout of “risk off” (de-risking/deleveraging) deteriorates into illiquidity and market dislocation.

The assumption is that central bankers will have no alternative than to cut rates and aggressively resort to even greater marketplace liquidity injections (QE). Considering the scope of speculative leverage permeating global markets, along with structural dependency to unending liquidity abundance, I don’t disagree with the safe haven perspective.

Highly speculative risk markets, heartened by extremely low yields and prospects for monetary stimulus, confront a major timing issue. They envisage the Fed and global central banks moving quickly and forcefully to reverse “risk off” before it gains momentum – emboldened by the January U-turn and the belief that the Fed learned from its December blunder.

The Fed, however, is signaling it sees no justification for an itchy trigger finger. There is a contingent within the FOMC surely not overjoyed by the speculative melee incited by their January “pivot”. Believing the markets and economy are fundamentally sound, the Fed back in December was caught unprepared for the intensity of market instability. Many on the FOMC likely view the markets’ rapid recovery as confirming their confidence in underlying system soundness and resiliency. I’ll also assume that Chairman Powell and some committee members are uncomfortable with the view of a “Fed put” not far below current market prices.

The huge 2019 risk market rally has only exacerbated underlying market and economic fragilities. Safe haven bonds concur with this view, while the collapse in global market yields works to support the speculative Bubble raging in the risk markets. Corporate Credit, in particular, has been underpinned by sinking sovereign bond yields. It has made it especially easy to Ignore Them – myriad risks including collapsed trade talks, rising U.S./China tensions, a fragile Chinese Bubble, waning global growth, vulnerable EM, susceptible European finance and economies, and the rapidly deteriorating geopolitical backdrop.

Healthy markets would adjust and correct to reflect heightened uncertainties and deteriorating prospects. Speculative markets instead promote excess and the ongoing accumulation of imbalances, maladjustment and impairment. There’s no operable release valve. Pressure builds and builds – risks accumulate in all the wrong places - Then Panic.

The flaw in contemporary finance – especially within market psychology over recent years – is to believe central bankers have nullified market, economic and Credit cycles. They have certainly averted a number of market crises over recent years, in the process significantly extending cycles. Along the way risk market participants grew greatly overconfident in the capacity of central bankers to permanently forestall crisis. Moreover, they have turned completely blind to the historic crisis festering just below the surface of their delusional view of a “Permanently High Plateau” of global peace and prosperity.

Huawei’s Yearslong Rise Is Littered With Accusations of Theft and Dubious Ethics

Chinese giant says it respects intellectual property rights, but competitors and some of its own former employees allege company goes to great lengths to steal trade secrets

By Chuin-Wei Yap and Dan Strumpf in Hong Kong with Dustin Volz, Kate O’Keeffe and Aruna Viswanatha in Washington

                                                                                                             Peter Oumanski

On a summer evening in 2004, as the Supercomm tech conference in Chicago wound down, a middle-aged Chinese visitor began wending his way through the nearly abandoned booths, popping open million-dollar networking equipment to photograph the circuit boards inside, according to people who were there.

A security guard stopped him and confiscated memory sticks with the photos, a notebook with diagrams and data belonging to AT&T Corp., and a list of six companies including Fujitsu Network Communications Inc. and Nortel Networks Corp.

The man identified himself to conference staff as Zhu Yibin, an engineer. The word on his lanyard read “Weihua”—an accidental scramble, he said, of his employer’s name: Huawei Technologies Co. The next day, says Peter Heywood, a co-founder of telecoms research firm Light Reading, the engineer appeared rumpled and bewildered, saying it was his first time in the U.S. and he wasn’t familiar with Supercomm rules forbidding photography.

“Quite the opposite of James Bond,” remembers Mr. Heywood, who interviewed him as part of Light Reading’s coverage of the conference. “He didn’t come across as somebody who was scheming to do something wrong. But perhaps he was clever enough to put on that persona.”

Huawei has since grown from a little-known interloper into China’s global tech champion, the world’s biggest maker of telecoms gear, a leader in next-generation 5G networks, and a significant source of friction between the world’s biggest powers. The company, which employs 188,000 people in more than 170 countries, sells smartphones—more than Apple Inc. —provides cloud services, makes microchips and runs undersea cables that ferry global internet traffic.

Workers on the production line at Huawei Technologies Co.’s Dongguan, China, campus. Photo: Kevin Frayer/Getty Images 

Along the way, Huawei has been dogged by allegations that its gains came on the back of copying and theft. A review of 10 cases in U.S. federal courts, and dozens of interviews with U.S. officials, former employees, competitors, and collaborators suggest Huawei had a corporate culture that blurred the boundary between competitive achievement and ethically dubious methods of pursuing it.

Huawei’s accusers describe a wide-ranging, brazen, and opportunistic appetite: the targets of the alleged thefts range from longtime tech peers, including Cisco Technology Inc., and T-Mobile US Inc.,to a musician in Seattle barely making minimum wage in his day job. In one case, a relative of Huawei’s founder Ren Zhengfei who worked at Motorola Inc. is alleged to have brought secret details of the U.S. company’s technology to a meeting in Beijing. Another suit alleges complicity by Huawei deputy chairman Eric Xu in secrets theft.

Now Washington is amping up pressure on Huawei, citing risks to national security it says have metastasized as the Chinese firm leapfrogged competitors around the world. Last week, the Trump administration unveiled measures that threaten to cut Huawei off from critical American suppliers and ban it from doing business in the U.S.

Driving the crackdown is the Trump administration’s belief that Huawei, like all Chinese companies, has no choice but to abide by orders from Beijing––and that its standing as the No. 1 global telecoms player makes it a powerful tool for China’s ruling Communist Party, which U.S. officials believe has grown increasingly authoritarian in recent years.

Alarm bells included the discovery around 2012 of secure rooms impenetrable to electronic eavesdropping built in Huawei’s U.S. offices, akin to facilities in intelligence stations around the world, American security officials say.

Huawei has said it doesn’t spy for any government, and U.S. authorities haven’t presented any evidence of Huawei conducting cyberespionage. China’s Foreign Ministry has denied Chinese law requires Huawei to spy.

Huawei said in an emailed statement that it is committed to complying with laws in global markets and has a track record of innovation. Huawei owns the world’s largest collection of patents essential to the 5G standard.

“We respect the integrity of intellectual property rights—for our own business, as well as peer, partner and competitor companies,” it said.

Until recent months, officials acknowledge, the U.S. took only piecemeal and disparate efforts to confront Huawei. Nor did American companies, eager to keep doing business with China, push officials to act.

The delay allowed Huawei to make strides in its technology and global reach. Once-mighty rivals such as Cisco and Motorola now are a fraction of Huawei’s size. Huawei has settled several civil cases without admitting fault, and is contesting others. The diversity of the allegations span Huawei’s business, from the science behind 5G signals to the music in Huawei’s smartphones, from the text in user manuals to technology that supports artificial-intelligence applications.

“They spent all their resources stealing technology,” said Robert Read, a former contract engineer from 2002 to 2003 in Huawei’s Sweden office. “You’d steal a motherboard and bring it back and they’d reverse-engineer it.”

Huawei says it had a research budget of $15.2 billion last year, trailing only Google, Inc.,and Samsung Electronics Co., according to S&P Global Market Intelligence data. It doubled R&D staff to about 80,000 in the decade to 2018.

Businesses from South Africa to Switzerland want Huawei to help them set up 5G networks. Customers rave about its quality and responsiveness.

“We have found their equipment to be the most reliable,” said Joseph Franell, chief executive of Eastern Oregon Telecom. “We haven’t had a single equipment failure from Huawei. That’s an astounding record.”

Huawei equipment undergoes a trial in London amid rising security fears in the U.S. Photo: Simon Dawson/Bloomberg News 

Huawei offers prices that are 20%-30% less expensive than its competitors, and lavishes unprecedented attention on small customers, Mr. Franell says. Huawei’s revenue last year rose 20% to more than $100 billion, compared with the year earlier.

Huawei’s culture was molded in military style by Mr. Ren, a former army engineer who in 1987 started selling telecom switches out of an apartment in Shenzhen, near Hong Kong. Mr. Ren built Huawei up through the 1990s with state contracts in rural China. Then-President Jiang Zemin visited one of its new offices in 1994, lauding its work while the concrete was still damp.

The world was 2G then, when text messages were state-of-the-art and mobile phones couldn’t fit in most pockets. As China rose on cheap knock-offs and huge state investment, customers say Huawei’s equipment then was a poor man’s version of Western technology.

In its early years abroad, Huawei kept a low profile. In the U.S., Huawei went at first by FutureWei as it opened offices in 2001 in Plano, Texas, and 2002 in Santa Clara, Calif. It still uses the name for its R&D business in the U.S. In Stockholm, then atop a European ascendancy in network technology, Huawei picked a location across the street from EricssonAB, but named itself Atelier for four years.

“They didn’t want to put out the sign on the building saying: Here is Huawei,” said Jan Ekström, senior adviser to Huawei’s Swedish office from 2004 to 2017.

Staff were briefed to recruit rival talent but struggled initially, former employees say. Huawei turned to scrutinizing the network hardware of rivals. In its Stockholm office, Atelier researchers stashed foreign-made equipment in an electronically secured basement, Mr. Read said. Some were shipped to China to be dissected by engineers, he said.

The secretive chamber had counterparts elsewhere in Huawei’s empire. Tucked in its offices in Texas and elsewhere, Huawei had built spy-proof secure rooms that were off-limits to American employees, according to current and former U.S. officials.

Counterintelligence officials believed the discovery indicated Huawei was handling information more like a state intelligence service, with regimented tiers of secrecy, while relying on a protected communications channel with Beijing.

Asked about the rooms, Huawei said they were installed to prevent spying against the company, not enable spying on others.

Theft and industrial espionage are relatively common in the global tech industry, and Huawei isn’t the sole company to face accusations of stealing foreign intellectual property. What set Huawei apart, its accusers say, was the flagrancy of its plagiarism.

Eighteen months before the Supercomm imbroglio erupted, Cisco accused Huawei in January 2003 of copying its software and manuals—the first time Huawei had to fight a major international allegation of its theft.

“They have made verbatim copies of whole portions of Cisco’s user manuals,” Cisco said in its lawsuit. Cisco manuals accompany its routers, and its software is visible during the router’s operation; both are easily copied, Cisco said.

The copying was so extensive that Huawei inadvertently copied bugs in Cisco’s software, according to the lawsuit.

“Huawei couldn’t release its routers for shipment until it fixed a substantial number of the common Cisco bugs contained in the Huawei routers” for fear of giving away the plagiarism, said former Huawei human resources manager Chad Reynolds in a court filing. Cisco declined to comment.

Cisco General Counsel Mark Chandler flew to Shenzhen to confront Mr. Ren with evidence of Huawei’s theft, which included typos from Cisco’s manuals that also appeared in Huawei’s, according to a person briefed on the matter.

Ren Zhengfei, Huawei’s founder and president, is facing rising pressure from Washington. Photo: Xinhua/Zuma Press 

Mr. Ren listened impassively and gave a one-word response: “Coincidence.” A Cisco spokesman said: “As a trusted company, we do not disclose information about private business meetings.”

Huawei settled Cisco’s lawsuit in July 2004, after admitting it had copied some of Cisco’s router software. A month later, Huawei told Light Reading it had fired Mr. Zhu, its man at Supercomm. He couldn’t be reached for comment.

Eager for results, Mr. Ren visited Atelier in Stockholm’s Kista tech district several times in its early years, former staff say. Atelier’s core team of five Chinese were a lonely bunch at first, easily noticeable in the neighborhood as they trudged daily to lunch at a local Chinese joint now called Restaurant 88, according to Ulrik Imberg, who worked nearby.

Whenever Ericsson announced layoffs, Mr. Read says Huawei’s executives handed him “a bundle of Swedish krona,” the local currency, and dispatched him to a bar near the Kista metro station to buy rounds for laid-off tech talent. Huawei set up a research station in Lund in 2010—a few months after Sony Ericsson Mobile Communications AB announced it would lay off 450 employees in the southern Swedish city, Mr. Ekström said.

Huawei’s hiring spree benefited from the dotcom crash at the turn of the century, which left Huawei largely unscathed. “A lot of this talent was thrown to the wind because everyone else was savaged. It was nothing magical. Just timing,” said William Plummer, former head of government relations at Huawei’s Washington, D.C., office, in an interview earlier this year.

As 3G supplanted 2G—heralding the era of smartphones—Huawei made huge strides. Its global market share rose three times to 18% in the five years to 2010, according to tech consultancy Dell’Oro Group. From 2000 to 2011, revenue rose to around $30 billion from $2 billion.

Huawei’s heady expansion was in microcosm the allure of China’s massive market—irresistible to many companies around the world, including American tech majors who enabled its rise. Qualcomm about a fifth of Huawei’s smartphone chips. Intel Corp.and Microsoft Corp.are also big suppliers. International Business Machines Inc.became an important consultant for Huawei starting in the late 1990s, helping to teach it Western business practices and expand overseas.

While U.S. firms doing business with Chinese companies were concerned about tech theft, the potential riches persuaded many to forgo making official complaints about commercial secrets theft, even though many privately sought help from U.S. officials, said David Hickton, former U.S. Attorney for the Western District of Pennsylvania.

“That problem had been going on for a long time,” said Mr. Hickton, who worked on a 2017 indictment of three hackers from a Chinese company known as Boyusec that advertised Huawei as a client. The hackers were convicted in absentia. “The companies didn’t want to make waves with China.”

Fear of making waves also led senior management at Sunnyvale, Calif.-based optical networking firm Infinera pull back from a plan to file a trade case seeking U.S. tariffs to penalize Huawei, says Jeff Ferry, a former executive at the firm. Mr. Ferry says he had compiled evidence a decade ago showing that subsidies from the Chinese state allowed Huawei to underbid competitors by 30% or more. Though Obama administration officials encouraged Infinera to pursue the case, the company’s top brass said doing so could prompt the Chinese government to lock it Infinera out of its market, Mr. Ferry said. An Infinera representative declined to comment.

One company that did come forward was Chicago-based Motorola—and its accusations enveloped Huawei founder Mr. Ren. After two decades of investing in China, Motorola in July 2010 accused Huawei in a lawsuit of stealing Motorola’s technology for the SC300, a compact base station that connects devices in a wireless network, that could be mounted in enclosed buildings and rural areas.

Seven years earlier, a relative of Huawei’s founder who was then working in Motorola, Pan Shaowei, flew with two colleagues to Beijing. The mission, Motorola said, was for Mr. Pan to secretly show Huawei the SC300’s specifications.

Huawei told an Illinois federal court that Mr. Pan briefed Mr. Ren, unsolicited, on his team’s product development, customer response, and plans to leave Motorola. It denied that Mr. Pan and his team were developing products for Huawei. Mr. Pan didn’t respond to a request for comment.

Email fragments recovered from Mr. Pan’s laptop and included in Motorola’s complaint show Mr. Pan wrote to Mr. Ren after the meeting, “Attached please find those document [sic] about SC300 specification you asked.” Huawei later made a similarly small device, weighing half the SC300, which it marketed to rural communities in developing markets.

U.S. authorities arrested one of Mr. Pan’s alleged co-conspirators, Jin Hanjuan, in February 2007, after stopping Ms. Jin at Chicago O’Hare International Airport with more than 1,000 documents, including Motorola trade secrets, in her bag, and a one-way ticket to Beijing. The FBI questioned Mr. Ren in July that year, though it couldn’t be determined if they discussed the alleged thefts. The Justice Department declined to make available the FBI findings. The U.S. convicted Ms. Jin in 2012 on charges of stealing trade secrets.

Hanjuan Jin, center, was convicted in 2012 of stealing trade secrets from Motorola. Photo: M. Spencer Green/Associated Press

By then, Motorola had dropped its lawsuit, as China’s commerce ministry prolonged its antitrust probe of Motorola’s $1.2 billion sale of its network equipment business to Nokia Siemens Networks Ltd. Analysts viewed it as retaliation through the ministry, which had a say in the matter because Motorola did business in China.

“China took retribution against a number of companies, using antitrust, anti-money laundering, state secrets, a number of things, that sent shock waves through the community,” said Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, a congressional watchdog on national security.

Chinese regulators approved the sale of Motorola’s network arm in April 2011—one week after Motorola publicly agreed to make peace with Huawei. Motorola and the ministry didn’t respond to requests for comment.

Motorola, which once ruled the planet in mobile phone technology, was surpassed as Huawei won key contracts, including launching the world’s first 4G network, in Oslo in 2009.

By the time Huawei began 5G research in 2009, its engineers had learned which ideas they had to own. 5G boasts download speeds 10 times as fast as 4G, and promises to enhance technology including video conferencing and autonomous driving. It will vastly increase the connections between devices, control public service infrastructure, and potentially give the network’s suppliers far greater capacity—what defense officials call “attack surfaces”—to penetrate or compromise a country’s defenses.

It is the generation in which Huawei is emerging as dominant.

Still, allegations of theft persisted. When David Barker, the chief technology officer of Quintel Technology Ltd., an Anglo-American developer of network antennas, attended a meeting with the Canadian network operator Telus Corp. in 2015, the Telus representatives told him about a new technology Huawei offered called “user specific tilt.”

Mr. Barker had never heard of “user specific tilt,” which could multiply the number of signals from an antenna and tilt them to provide greater accuracy in communicating with mobile phones.

Mr. Barker had, however, heard of a conceptually identical technology, ”per user tilt." He coined it seven years earlier, according to a Quintel lawsuit alleging misappropriation of trade secrets by Huawei. Quintel said it had shared the technology with Huawei in September 2009 after Huawei proposed a business partnership.

The partnership never came through. Huawei filed papers to secure a patent for the concept a month after their first meeting, using a document still emblazoned with Quintel’s name and the words “commercial in confidence.”

After a three-year court fight, Quintel acquiesced to a legal settlement last year. Brent Irvine, Quintel’s former engineering director, said the deal included “a durable non-disclosure agreement.” Other Quintel executives declined to respond to requests for comment.

Scientists including Emil Björnson, an engineering professor at Sweden’s Linköping University, say Mr. Barker’s signal-tilting epiphany—now Huawei’s—represents a building block of technology that forms signals in 5G networks.

“Today these are in the networks,” Mr Björnson said. “They may not call it ’user-specific tilt,’ but that is it in its most elementary form.”

At around that time, as Huawei began to surpass most Western tech rivals, its momentum began, slowly, to spur a more coordinated U.S. response. In early 2010, American officials prevailed on AT&T to drop a deal to award a 4G contract to Huawei, according to people familiar with the matter. Washington began advising foreign allies to steer clear of the Shenzhen giant, sending officials to Guam, Japan and elsewhere to try to talk them out of doing business with Huawei.

A Congressional report in 2012 labeled Huawei a national security threat—but it wasn’t enough to stop Huawei, which strongly denied the report’s findings.

As of April 2019, Huawei tops the global rankings in nearly every category of 5G development, from its “contributions”—a technical term meaning standards proposals—to the number of standards meetings around the world that company representatives attend, says data-analysis firm IPlytics.

As Huawei grew parts of its businesses outside telecom equipment, such as smartphones and data storage, allegations of theft followed.

Executives at U.S. telecom hardware maker Tekelec Inc. told Obama administration officials that a Brazilian customer had been approached by Huawei with an unusual offer: get free Huawei equipment in exchange for turning over Tekelec gear. People familiar with the offer believe Huawei intended to reverse-engineer the Tekelec products. Oracle Corp., which purchased Tekelec in 2013, declined to comment.

Rui Oliveira, a 45-year-old Portuguese multimedia producer, told the Journal he flew to Huawei’s Plano offices in May 2014 to meet Huawei executives, who were interested in his patents for a camera attachment to smartphones.

In a conference room, surrounded by a dozen empty chairs, Mr. Oliveira recalls, two Huawei executives listened as he shared data on his product which he hoped to license manufacturing to Huawei. He recommended pricing it at $99.95.

“We’ll talk later,” he says Huawei told him.

Three years later, a friend in Portugal asked him why Huawei was selling “his camera.”

“Huawei? That’s impossible! What?” he remembers saying.

Then he saw pictures: down to its beveled edges and rounded corners, the Huawei product was virtually indistinguishable from Mr. Oliveira’s patent. Huawei’s retail price? $99.99.

“I felt robbed,” Mr. Oliveira said.

When he tried to discuss the matter with Huawei, Mr. Oliveira said its executives put up delaying tactics. He threatened a lawsuit.

Huawei instead sued Mr. Oliveira in March, asking a Texas court to issue a non-infringement ruling and complaining that Mr. Oliveira had publicized his story to try to gain leverage against Huawei. In court papers the company recapitulated Mr. Oliveira’s assertions but said it didn’t infringe on his patents. The litigation remains unresolved.

Taking on Huawei is onerous for those without big corporate backing.

Paul Cheever, a bespectacled preschool teacher who records music as The Cheebacabra, said his life has become overrun with paperwork and costs since he sued Huawei in California last year for taking his song “A Casual Encounter” and pre-loading it on Huawei smartphones and tablets for free distribution to its customers.

Mr. Cheever said in his court filing that he discovered the alleged theft after noticing user comments on YouTube that associated Huawei devices with his song.

Huawei in a filing said Mr. Cheever’s copyright took effect only in August 2018, after Huawei had begun using his music.

Mr. Cheever now spends his days making Play-Doh with his students and his nights editing legal briefs at home, with his two cats for company.

“It’s a weird feeling having this company take my song and give it away to 100 million people on the devices without my permission,” he says.

Huawei is China’s most valuable technology brand, and sells more telecommunications equipment than any other company in the world. Photo: Kevin Frayer/Getty Images

Current and former Huawei employees say the company places intense pressure on delivering results. Mr. Ren posts exhortations on an internal company portal that likens Huawei’s global mission to a military campaign.

In 2016, he told state media that Huawei’s expansion strategy was to expend more than $15 billion a year and more than 100,000 workers in a “saturated attack” on competitors’ weaknesses.

"Our carrier network business group will be fighting a ferocious war in the next 10 years,” Mr. Ren said in a speech to a Huawei conference in April, according to a transcript. “We must be psychologically prepared.”

Via conference calls and emails peppered with “kindly reminders,” Huawei’s China engineers repeatedly prod overseas staff to get foreign data, including confidential information, according to a U.S. indictment and interviews with former Huawei staff. Huawei declined to comment.

In the U.S., Huawei engineer Xiong Xinfu had endured a nine-month fusillade of demands from Huawei’s China-based engineers for information on how to replicate a robot called Tappy developed by T-Mobile to mimic an ultra-fast human finger and test a smartphone’s responsiveness. In May 2013, Mr. Xiong eventually stole part of Tappy at Huawei’s behest, U.S. prosecutors say.

‘Tappy,’ T-Mobile's smartphone-testing robot. Photo: Uncredited

After T-Mobile complained to Huawei, Huawei said Mr. Xiong and a colleague “acted on their own” and fired them. T-Mobile sued Huawei in September 2014 on charges of stealing trade secrets. T-Mobile was awarded $4.8 million in a jury trial.

In January, U.S. prosecutors repeated T-Mobile’s accusations in an indictment of Huawei in a federal court in Seattle. Huawei denies the charges.

“A civil resolution doesn’t necessarily resolve whether and how serious a federal crime was committed, or whether justice was served,” the U.S. Justice Department said in a statement.

In October last year, Yiren “Ronnie” Huang, a longtime Silicon Valley engineer and co-founder of San Jose’s CNEX Labs Inc., accused Huawei in a lawsuit of stealing his firm’s solid-state disk storage technology, used for managing data generated by artificial intelligence. CNEX said at a hearing in April that Huawei deputy chairman Eric Xu issued a directive that led to a Huawei engineer in June 2016 posing as a customer to steal CNEX secrets; Huawei denied wrongdoing. The suit is ongoing.

In December 2017, Huawei had accused Mr. Huang, a former Huawei employee, and CNEX of stealing similar secrets from Huawei—allegations they both deny.

For all the wealth and power Huawei amassed, employees must watch the competition—or face the consequences.

Jesse Hong, a software architect at Huawei’s California unit, said in a lawsuit that his bosses ordered him in November 2017 to use fake company names to register himself for an industry conference organized by Facebook Inc.The social-media giant had invited other companies to a Telecom Infra Project meeting, a collaboration on network design, but excluded Huawei. The suit was confidentially settled in April.

Mr. Hong said he refused to carry out the directive, leading his supervisor to unleash a stream of abuse and a threat: “If you don’t agree on this, then you quit right now.”

After Mr. Hong declined, Huawei fired him. The company says it acted in good faith.

—Patricia Kowsmann contributed to this article.

Negative Interest Rates Spread To Mortgage Bonds 

There are trillions of dollars of bonds in the world with negative yields – a fact with which future historians will find baffling.

Until now those negative yields have been limited to the safest types of bonds issued by governments and major corporations. But this week a new category of negative-yielding paper joined the party: mortgage-backed bonds.

Bankers Stunned as Negative Rates Sweep Across Danish Mortgages
( – At the biggest mortgage bank in the world’s largest covered-bond market, a banker took a few steps away from his desk this week to make sure his eyes weren’t deceiving him. 
As mortgage-bond refinancing auctions came to a close in Denmark, it was clear that homeowners in the country were about to get negative interest rates on their loans for all maturities through to five years, representing multiple all-time lows for borrowing costs. 
“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry. 
For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%. 
The record-low mortgage rates, which don’t take into account the fees that homeowners pay their banks, are the latest reflection of the global shift in the monetary environment as central banks delay plans to remove stimulus amid concerns about economic growth. 
Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years. That’s considerably less than the U.S. government.

The spread of negative yields to mortgage-backed bonds is both inevitable and ominous.

Inevitable because the current amount of negative-yielding debt has not ignited the kind of rip-roaring boom that overindebted countries think they need, which, since interest rates are just about their only remaining stimulus tool, requires them to find other kinds of debt to push into negative territory.

Ominous because, as the world discovered in the 2000s, mortgages are a cyclical instrument, doing well in good times and defaulting spectacularly in bad. Giving bonds based on this kind of paper a negative yield appears to guarantee massive losses in the next housing bust.

Meanwhile, this is year ten of an expansion — which means the next recession is coming fairly soon.

During recessions, the US Fed, for instance, tends to cut short-term rates by about 5 percentage points to counter the slowdown in growth.

With Europe and much of the rest of the world already awash in negative-yielding debt

negative-yield debt mortgage-backed bonds

… this imminent slide in interest rates will turn the rest of the global financial system Danish, giving us bank accounts and bond funds that charge rather than pay, and very possibly mortgages that pay rather than charge.

Anyone who claims to know how this turns out is delusional.


by Egon von Greyerz      

How can a small clique of gold owners holding less than 0.5% of world financial assets be right?

They are clearly a minuscule minority of obstinate goldbugs and contrarians who are living in the past. Or do these people see something that the majority of investors don’t?

More than 99.5% of world financial assets are invested in other things but gold. That makes gold one of the least desired asset classes on the planet. Most professional as well as private investors would never consider gold as part of their portfolio.


Yes, gold has always been money but it is different today. Gold doesn’t work as money. There is not enough of it and it is very impractical to hold and even worse to pay with. You can’t, in a convenient way, transfer it without going through the financial system.

Clearly, fiat money, with electronic transfers or crypto money must be the way forward. And the great advantage with such money is that you can create unlimited amounts of it with just a touch of a button. Who needs gold in this new modern world?

The above are all the typical arguments of the anti-gold mob. The Keynesian crowd with their cheer leader Krugman and the MMT (Modern Money Theory) followers are totally convinced that unlimited money printing and deficit spending is the only way forward. And since this has worked for the US for the last 60 years, it must clearly work forever. So why can’t the US continue to run chronic budget deficits, just as it has since 1960?


The latest high profile proponent of socialism and chronic deficit spending is of course AOC (no, not a fine wine) but Alexandria Ocasio-Cortez. As the US economy collapses in the early 2020s, she will be the perfect candidate for the 2024 US election. As hard times hit the US, she will promise the earth by having a solution for everyone and especially the poor. It will be unlimited social security, free medicare, guaranteed pensions, housing benefits and any other freebees that will win votes. At the same time, the rich will naturally be hit very hard with punitive taxes which will please the masses.

Also, AOC is the perfect saviour, a young, modern, non-white female president with a solution for everything. She will be just right in time for when the US elects its first socialist president and the perfect antidote to Trump. In his second term, if he is reelected, the ageing Trump will be blamed for all the problems that have emerged by that point such as economic misery, poverty, hunger, a breakdown of government services including social services. This will lead to social unrest and crime which will all be blamed on Trump. And AOC being the opposite to Trump in everything will totally convince the Americans that she has the answer to all the problems.

Like all socialists, AOC doesn’t understand that socialism works until you run out of other people’s money. The US debt, when she takes over, could be around $40 trillion, as it follows the historical pattern of doubling every 8 years. But that won’t worry her. She will spend $10s of trillions or more on nationalising or permanently subsidising a number of companies that are going under. She will also increase dramatically the spending on social security, medicare and pensions.


When AOC takes power she could already have a fellow socialist as well as a Marxist as UK leader.

The latest time for the next UK election will be June 2022. With the mess that Theresa May has caused the Conservative party, it is not unlikely that Corbyn, the Labour leader, will become British Prime Minister before 2022.

If AOC will be bad for the US, Corbyn will be even worse for the UK. He will socialise many major utilities such as the railways, water and electricity. He will subsidise or nationalise all failing industries that employ a high number of workers. And obviously he will increase taxes dramatically for the wealthy and for big corporations.

When Corbyn became Labour leader in 2015, I was convinced that he would be the next Prime Minister. Not because of his qualities but due to the coming collapse of the UK and world economy. The mood in the world in the early 2020s will lead to socialists taking over in most countries. When people are desperate, they will see the socialist/communist promises as the only solution to their miseries. At that point, the media, which will be almost exclusively left-wing, will support the socialist cause and the propaganda machine will hail socialism as the solution to the world economy’s woes.


The worst part of socialism is not that it steals from normal people and gives to the poor. Much worse is that socialism disincentivises all parts of society. The wealth creators and company builders lose their motivation because either their business is socialised or virtually all profits are taken by the state thorough taxation. In addition bureaucracy and control makes it impossible to operate a business efficiently. For normal workers, socialism takes away the incentive to work and contribute to society. Why work when the state takes care of you regardlessly. The consequence of socialism is also that most members of society become miserable and depressed.


Keynesian and MMT theories of deficit spending, combined with direct government ownership, will be hailed as the solution to the US and UK economic problems and also for the rest of the world’s.

Thus, deficits and debt will go up exponentially. No one will listen to the argument that it was debt that caused the problem in the first place and thus it will be impossible to solve a debt problem with more debt. Nor will people understand from history that socialism or communism has never worked in any country over time.

The consequences will be obvious. Rapidly rising deficits and debts will lead to global currency debasement. Obviously, all currencies can’t fall against each other at the same time. But they will all fall against real money which is gold and also against silver. Currency debasement will lead to high inflation which will be rapidly followed by hyperinflation.


At that point, central banks will not be able to hold interest rates down. Most forecasters are today predicting that rates will be held low for many years. I disagree with that. The coming insolvency of governments and businesses, combined with money printing, will lead to a collapse of bond markets and a surge in interest rates. Central banks will lose their manipulative powers due to the sheer weight of debt, most of it bad debt. US rates at that point will be at least 10% but probably 20% or more. Imagine US debt of $40 trillion in 2025 at say 15%. That would be a $6 trillion interest bill which means that 100% of tax revenue will be used to pay interest. But with the economy under severe pressure, total tax revenue at that point will be down dramatically. So more money printing will be required, leading to higher deficits and higher debts with higher interest rates and more defaults.

At that stage, even the proponents of MMT and socialism will realise that you cannot create wealth by printing money. That will then lead to the final stage of this cycle which will be a deflationary implosion of debts and assets and a depression.

There is no other possible outcome of the mess the world is in today. That is absolutely guaranteed.

What we don’t know is when it will happen and how long it will all take. Events of this magnitude often take longer than you expect. Those of us who saw the problems of 2007-9 coming would not have thought that the temporary rescue at that time would have lasted 10 years until today.


So rather than trying to time the coming secular economic downturn, it is more important to plan how to protect yourself. How do I protect my wealth? Gold and silver will be the only money to survive, just as it has for 5,000 years. Do I have enough and is it stored in a safe place and jurisdiction?

Will I be safe where I live, from crime, from social unrest or war? What are the alternatives?

Will I have enough food and other necessities like medicines?

What is guaranteed is that future taxes for the wealthy will be punitive when the socialists take over. In the UK, many wealthy people are moving their money out of the country and also moving themselves. There is also a risk that the UK and other countries will copy the US system of world wide taxation of all citizens regardless of where they live. The first step to protect against this would be a second passport followed by renouncing the US, UK or other citizenship.

The above list is far from exhaustive. Also, these decisions are both drastic and personal.

Therefore, everyone will decide based on their specific circumstances. Many wouldn’t want to leave the country where they were born or their family and friends.

With the world going through the most dramatic changes in the next 5-10 years, life will be very different and very difficult for most of us.

But remember Rudyard Kipling’s words in his wonderful poem “IF”:
“If you can meet with triumph and disaster
And treat those two imposters just the same”
Finally heed the advice that the ancient Persian ruler received from a Sufi Poet who was asked to come up with a quote that would be accurate at all times and in all situations:

Netanyahu Means War

As Israeli Prime Minister Binyamin Netanyahu heads into a fifth term after running an openly racist and chauvinistic election campaign, the lasting consequences of his tenure are already obvious. He has left his country deeply divided, morally stained, and further than ever from achieving lasting peace in the region.

Fawaz A. Gerges

gerges5_obi GideonGPO via Getty Images_trump netanyahu

LONDON – After a bitter re-election campaign, Israeli Prime Minister Binyamin Netanyahu has secured his legacy as a leader more committed to domination than to peace. Over the course of the past decade, he has completely sabotaged any chance of reconciliation between Palestinians and Israelis, and left Israel itself deeply divided.

All those who desire peace in the Middle East should be deeply worried about the consequences of Netanyahu’s policies, which will be felt for decades to come. Annexing occupied territories, disenfranchising Arab Israelis, and brutally subjugating the Palestinian people is a recipe for perpetual conflict between Israel and its neighbors. Even more ominously, Netanyahu’s rhetoric has added a culture-war dynamic to the mix, thus transforming a clash over land ownership into a “clash of civilizations.” That will encourage the forces of radicalism and extremism on all sides.

At home, Netanyahu has systematically turned Israel into an illiberal democracy. Through fearmongering and racism, he has sought to drive a permanent wedge between Israel’s Jewish majority and the Israeli Arab community, which accounts for around 20% of the country’s population.

Last year, for example, Netanyahu pushed through a “nation-state law” that affords Jews the “unique” right to self-determination, thus formally classifying Arab Israelis as second-class citizens. When the law drew criticism from the Israeli actor Rotem Sela, Netanyahu replied that Israel is “the national state, not of all citizens, but only of the Jewish people.” Given this open hostility, it is little wonder that voter turnout among Arab Israelis in this election was 15 percentage points below that of 2015. When your own prime minister declares in no uncertain terms that you are not an equal member of the political community, participating in it can feel futile.

But in addition to undermining democracy at home, Netanyahu has also sabotaged the peace process and jeopardized Israel’s long-term security. Though he often boasts of keeping Israel secure and strong, his definition of security is so narrow and transitory as to be meaningless. His approach is based entirely on short-term calculations and balancing power, at the expense of actual peace. Courting Arab strongmen will not deliver Israel lasting security. Only by making peace with the people of the Arab world, not with the dictators that rule over them, can Israel guarantee its long-term security.

Ultimately, genuine security will be achieved only when Israelis and Palestinians find a way to resolve their century-old conflict and live side by side, either in two states or together in one democratic state. There is no other viable solution. As long as the Palestinians are oppressed and denied a nation-state of their own, there will be conflict.

Nonetheless, over the past 13 years, Netanyahu has enthusiastically supported the expansion of Jewish settlements in the occupied West Bank and East Jerusalem. As he well knows, the settlements are a physical roadblock standing in the way of a contiguous, independent Palestinian state.

Moreover, during the recent election campaign, Netanyahu pledged that, if re-elected, he would prevent the establishment of a Palestinian state in the West Bank by “controlling the entire area.” We should take him at his word. His annexation pledge is consistent with his long history of opposing a two-state solution. With a new electoral mandate and a blank check from US President Donald Trump, he will feel even more emboldened to bury the prospects of Israeli-Palestinian peace for good.

Regardless of how reckless his policies become, Netanyahu will face no major deterrents. The political center in Israel has shifted dramatically to the right, and his own coalition is made up of ultra-nationalist parties that are pressing for annexation. He may now meet their demands in exchange for legislative measures to protect him from forthcoming indictments on corruption charges.

Whereas US President Barack Obama checked Netanyahu’s most radical instincts, Trump has encouraged them. To rally support for Netanyahu in the election, Trump formally recognized Israel’s sovereignty over the occupied Syrian Golan Heights, bragging later that he arrived at the decision after receiving a “quick” history lesson from his son-in-law, Jared Kushner. Then, when asked by CNN if he thought Netanyahu’s talk of extending Israeli sovereignty to West Bank settlements would hurt the Trump administration’s long-gestating peace plan, US Secretary of State Mike Pompeo replied bluntly: “I don’t.”

This response indicates that Netanyahu will have carte blanche from the US and that the Trump administration will not be calling for the creation of an independent Palestinian state. That means the peace process is dead; Netanyahu wins. Clearly, Trump and Netanyahu are two sides of the same political coin. They will do almost anything to please their conservative bases, and questions of right and wrong will not enter into their calculus.

The Palestinian people have been forsaken. Palestinian leadership is too weak and divided to resist Israel’s occupation and settlement expansion. Saudi Arabia and other leading Arab regimes that once provided a check on Israel’s policies are now focused on Iran, not on the Palestinian question.

Still, conflict is not inevitable, and even the Israeli-Palestinian problem can eventually be resolved. But that can happen only with both sides bridging divides. For the region, normalization of diplomatic ties with Israel and its integration in the Middle Eastern neighborhood will always remain conditional on its reconciliation with the Palestinians.

Netanyahu has shown no desire to come to terms with the Palestinians. His racist policies and bellicosity toward Palestinians and Israel’s neighbors have deepened divides, not bridged them. The path he is on can only end in more war and suffering.

Fawaz A. Gerges, Professor of International Relations at the London School of Economics and Political Science, is the author of ISIS: A History and Making the Arab World: Nasser, Qutb and the Clash That Shaped the Middle East.

You, Dear Investor, Are Patient, Prudent and Calm

Wall Street often mocks Main Street for its lack of investing prowess. But the evidence is mounting that individual investors aren’t so dumb after all.

By Jason Zweig

                                                                                          Illustration: Alex Nabaum

Bit by bit, the myth of the “dumb money” is dying.

For decades, Wall Street has derided individual investors as ill-informed, fickle and hapless. Instead of buying and holding, or buying low and selling high, the “dumb money” blindly chases performance, buying high and selling low. The perennial message from Wall Street: The only way the dumb money can get smart is by taking our advice—at a reasonable fee, of course.

That was always nonsense, but new evidence of its foolishness is piling up fast. A study of clients of Vanguard Group, the giant asset manager, is the latest look at how individual investors make decisions. It shows them, overall, to be patient and prudent. It also offers a hint as to how investors and their financial advisers can get a little smarter still.

One caveat: The study is based on surveys, run every two months since February 2017 among more than 11,000 investors, that measure the views of an unusual group. Vanguard paid for the surveys.

Vanguard’s clients tend to follow the investment gospel preached by the firm’s late founder, John Bogle: Diversify across a few dirt-cheap market-tracking index funds, then hold them for decades. Many of these investors are immunized against the common contagions of performance chasing and itchy-fingered trading.

Wall Street often mocks Main Street for expecting stocks to produce absurdly high future returns. Yet, over time, the average investor in the Vanguard surveys has estimated that stocks would return 5.2% over the coming 12 months and an average of 6.3% annually over the ensuing 10 years. Most professional fund managers would rather chew broken glass than set their expectations that low.

Investors in the study have about 68% in stocks on average. Even when they raise or lower their expectations of future stock returns, they seldom make big trades based on those beliefs: Optimists don’t load up on stock as they get more bullish, and pessimists don’t bail out as they get more bearish.

“They are putting their money where their mouth is, but they’re not betting the ranch on it,” says Matteo Maggiori, an economist at Harvard University. “They’re pretty cautious.” Prof. Maggiori conducted the research along with Stefano Giglio, a finance professor at the Yale School of Management, New York University finance professor Johannes Stroebel and Stephen Utkus, head of the Center for Investor Research at Vanguard.

Over the period covered by the study, U.S. stocks rose steadily, with one 6% decline in early 2018. (The nearly 14% fall in the fourth quarter of 2018 came too recently to be included in the analysis.) Yet most investors didn’t significantly change their portfolios or their expectations.

“The striking thing is that severe fluctuations in stock prices can occur with only marginal results on people’s behavior,” says Mr. Utkus. “It’s almost like people have a belief in stocks, and the intensity of their willingness to change their exposure to them is very muted.”

The Vanguard study also suggests a key clue in determining investors’ tolerance for taking risk.

Advisers often use such factors as age, wealth and professed willingness to lose money to estimate how risky an investor’s portfolio should be.

Older investors in the Vanguard sample do have lower exposure to stocks, with those over the age of 70 keeping about 20 percentage points less of their total holdings in stocks than do those under the age of 40.

Controlling for age and other characteristics, however, wealthier investors don’t take a lot more risk than do those with less money. The top fifth of investors by wealth, who tend to have more than about $800,000 in assets, keep only about 1.3 percentage points more of their portfolios in stocks than do much smaller investors once their age and other demographics are factored in.

What does determine which investors jack up their exposure to stocks or slash it back? Above all, it’s how confident they are that their predictions of stock returns will be proven accurate—along with how frequently they log into their account and how often they trade.

Financial advisers often ask investors to say whether they would buy, sell or hold stocks if the market fell 10%, 20%, 30% or more.

Instead, they should ask investors to predict how much stocks will gain over the coming year and the next decade—and to say how confident they are in their forecasts.

One way to do that, suggests Annie Duke, a decision strategist and author of the outstanding recent book “Thinking in Bets,” is to make them bet on it.

Let’s say you estimate on your adviser’s questionnaire that stocks will return 10% over the next year and an average of 9% annually over the next decade.

Next, says Ms. Duke, you should set a range around each forecast, based on how certain you are. Make it narrow if you’re confident (say, from 8% to 12% and 7% to 11% for the example above). Make it wider if you’re unsure (something like 4% to 16% and 3% to 15%).

Now the clincher: If the final result falls outside your range, you must donate a sum to a charity or political campaign you hate. How much are you willing to bet on that basis?

“Thinking in bets” this way, says Ms. Duke, “gets you to realize that your beliefs have consequences.” It should also help your adviser determine whether you are overconfident—or not confident enough—about returns. That should make you both a little smarter.

How Fascism Comes to America

By Doug Casey

I think there are really only two good reasons for having a significant amount of money: To maintain a high standard of living and to ensure your personal freedom. There are other, lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can't think of something better to do with your time.

But I'll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you'd like – and when, how, and with whom you prefer to do it. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today's world and will wind up savaging billions in the years to come.

As you know, I believe we're well into what I call The Greater Depression. A lot of people believe we're in a recovery now; I think, from a long-term point of view, that is total nonsense. We're just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.

Real Reasons for Optimism

There are reasons for optimism, of course, and at least two of them make sense.

The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprises. But what if outside forces make that impossible, or at least much harder than it should be?

The second reason for optimism is the development of technology – which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn't generated by individuals and businesses to fund further technological advances?

There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated – perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology – it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way – the classical world, followed by the Dark Ages, followed by the medieval world. Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish, or short. I'm reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology. 
Real Reasons for Pessimism

Those are the two mainsprings of human progress: capital accumulation and technology.

Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that's become so complex that it's too difficult for most people to sort out cause and effect. Furthermore, most people in the OECD world have become so accustomed to good times, since the end of WW2, that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I'm very optimistic, progress – certainly over the near term – isn't guaranteed.

These are the main reasons why the standard of living has been artificially high in the advanced world, but don't confuse them with the two reasons for long-term prosperity.

The first is debt. There's nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it's self-liquidating; and most of it would necessarily be short term.

But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it's compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt, consumer debt, and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics.

The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they're indirect and delayed. If the central bank deposited $10,000 in everyone's bank account next Monday, everyone would think they were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We've had a number of inflationary cycles since the end of the last depression in 1948. I believe we're now at the end of what might be called a super-cycle, resulting in a super-depression.

The third is the export of dollars. This is unique to the U.S. and is the reason the depression in the U.S. will in some ways be worse than most other places. Since the early '70s, the dollar has been used the way gold once was – it's the world's currency. The problem is that the U.S. has exported perhaps $10 trillion – but nobody knows – in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy.

But at some point quite soon, dollars won't be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the U.S., to be traded for titles to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It's actually a game with no winner.
What's Next

These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated.

The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they've also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they'll redouble their efforts in the fiscal and monetary areas I've described above, albeit with increasingly disastrous results.

They'll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they'll blame things on foreigners. Fortunately (the U.S. will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious – but distracting – new wars.

It's most unfortunate, but the U.S. and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They'll all be perfectly fascist – private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it's totally the whim of the people in control, and they'll prove ever more ruthless.

So where does that leave us, as far as accumulating more wealth than the average guy is concerned? I'd say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you're an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you'll take action.

There's much, much more to be said on all this. I've said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis.

Essentially, act now, because the world's combined economic, financial, political, social, and military situation is as good as it will be for many years… and a lot better than it has any right to be.

One more thing: Don't worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we've seen it in big countries such as Russia, Germany, and China. And in scores of smaller ones – the list is too long to recount here. The good news is that things almost always get better, eventually.