2019 in Review

Doug Nolan

It cannot be overstated: Bubbles are of paramount importance – for markets, finance more generally, economies, and social and geopolitical stability.

Two U.S. bursting episodes over the past twenty years would seem to make this proposition indisputable. I would add that Bubble Dynamics have never been more pertinent than they became over the past year. Apply monetary stimulus to a historic financial Bubble and you’re asking for serious trouble: The Story of a Perilous 2019.

Yet “Bubble” these days has no part in conventional analysis or dialogue – for central bankers, economists or market pundits. To even utter the word on CNBC or Bloomberg would suggest one is hopelessly detached from reality. From my vantage point, bullishness and New Paradigm thinking these days rivals that of the early-2000 peak.

Today’s faith in central banking is unrivaled – the willingness to embrace egregious excess unmatched.

To summarize the 2019 policy backdrop in one world: capitulation.

It was to be a year of monetary policy normalization.

The new Fed chairman was to finally return policy rates to a more reasonable level. After leaving rates near zero for seven years, the Fed belatedly took a baby step in December 2015. A full year went by before mustering the courage for a second cautious step. And a year full later (December 2017) rates were still at 1.00%.

Policy rates were only up to 1.25% to 1.50% when Powell took the reins. Having delayed the process much too long, “normalization” was not going to go smoothly. Rates were taken to 2.25% (to 2.5%) by the end of 2018, and the wheels almost came off. Powell’s January 4th dovish U-turn essentially ended any notion of rate normalization. Avoiding market instability was the priority – and celebratory markets took full advantage. In 2019, the odds central bankers would ever actually tighten monetary conditions became exceedingly low.

To accurately comprehend 2019 demands attention to key Bubble Dynamics. First of all, to employ monetary stimulus in the late stage of a Bubble ensures instability. Conventional thinking – both in policy circles and the markets – was that with limited ammunition central bankers should utilize stimulus early and aggressively. Late-cycle Bubbles, by their nature, connote financial and economic fragilities.

There are at the same time powerfully-entrenched inflationary biases – including expansive infrastructures fostering higher asset prices. Policymakers’ focus on bolstering system resiliency ensures a precarious extension of “Terminal Phase” excess – in Credit, speculation, speculative leverage, risk intermediation, malfunctioning markets, resource misallocation and associated financial and economic maladjustment.

In the late phase of history’s greatest global financial Bubble, there’s the thinnest of lines between the onset of crisis and rip-roaring bull markets.

On Thursday, January 3rd, Goldman Sachs Credit default swap (5yr CDS) prices surged 19 to 131 bps – the high since March 2016 and the largest one-day move since 2013. In the currency markets, a “flash crash” saw stunning moves including an 8% intraday move in the Japanese yen/Australian dollar.

Dislocation had begun to unfold across global derivatives markets.

Panic buying saw Treasury yields sink 15 bps, pushing the collapse from November 8th highs (3.24%) to 70 bps. Corporate Credit spreads were blowing out, especially in junk debt. Deleveraging dynamics were global. For example, the spread between 10-year German bunds and the European periphery (i.e. Italy and Portugal) widened markedly. A major de-risking/deleveraging event had gathered momentum. Equities were under pressure, with the DJIA sinking 660 points during that fateful session.

The following day Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at a meeting of the American Economic Association. Only two weeks since the Fed’s December 19th rate increase and press conference, Powell’s comments were not expected to be monetary policy-focused. But the Chairman pulled out prepared comments and orchestrated a dramatic “dovish U-turn”: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…”

Despite economic resilience and a 3.9% unemployment rate, the Fed was prepared to add monetary stimulus to support the markets. The DJIA rallied 747 points January 4th on Powell’s comments. It was a prescient market move signaling the Year of Monetary Disorder.

M2 “money” supply surged $1.024 TN, or 7.1%, in 2019, easily surpassing 2016’s record $880 billion expansion. This was 65% ahead of average annual M2 growth over the preceding decade. Moreover, Institutional Money Fund Assets (not included in M2) jumped $407 billion, or 21.9%, up from 2018’s $27 billion increase - and the strongest money market fund expansion since 2007. In a year of strong Credit growth, total third quarter U.S. Credit (Non-Financial, Financial and Foreign U.S. borrowings) jumped a nominal $1.075 TN (from Fed’s Z.1), the strongest quarterly gain since Q4 2007.

2019 was the year of “the everything rally.”

FOMO – fear of missing out – the year’s amalgamation of Greed and Fear. Stocks, Treasuries, corporate Credit at home and abroad. Don’t ask why – just buy, and the more levered the better. With an enduring U.S. economic expansion, the S&P500 returned 32.61%. With Germany’s economy stagnating, the DAX index returned 25.48%. Fighting persistent recessionary forces, Italy’s MIB index returned a prosperous 33.80%. Recession or, in the case of the U.S., stagnant earnings were irrelevant.

After trading to a January high of 2.79%, 10-year yields sank below 1.50% in August. By late-July, the S&P500 had already gained more than 20%, with the Nasdaq100 up 26% and the Semiconductors surging almost 40%. Who was wrong, booming stocks or booming safe haven bonds? Monetary Disorder made everything seem right.

In a replay of the fall of 2007, Treasuries and safe haven government bonds rallied robustly in the face of bubbling equities prices. There was certainly a short squeeze element bolstering the marketplace, as hedges against Fed “normalization” were unwound. But, mainly, safe havens could monitor Bubble excess in the U.S. and a faltering Chinese Bubble and enjoy high confidence that global central bankers would be soon following through on promises to do “whatever it takes.” Lower market yields were instrumental in fostering risk market excess, and the greater the Bubbles inflated the more the safe havens anticipated rate cuts and more QE.

Treasuries, bunds, Swiss bonds, and Japan’s JGBs were transformed into the most enticing financial instruments imaginable.

Central banks were essentially guaranteeing they would perform well. And in the event of global instability they would provide spectacular returns. A sure moneymaker as well as a trustworthy hedge against “risk off,” the safe haven bond rally morphed into a historic speculative blow-off. Ten-year Treasury yields traded to a low of 1.46% on August 3rd – an embarrassingly high relative yield. Bund yields collapsed all the way to negative 0.71%, with Swiss bonds down to negative 1.12%. Japanese 10-year government yields fell to negative 0.29%.

In a historic development (and emblematic of Acute Global Monetary Disorder), at its August peak $17 TN of global bonds traded with negative yields. Governments in Slovenia, Slovakia, Latvia, Austria, Ireland, Finland, Netherlands, Belgium and France enjoyed charging creditors for holding their money. After trading as high 4.37%, Greek yields sank as low as 1.14%. Italian yields dropped from 2.95% to 0.81%, and Spain from 1.51% to 0.03%. Portuguese yields fell from 1.81% to 0.07%. Crazy.

May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. -- announced with scant explanation on Friday night -- left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders.”

China financial and economic fragilities were a growing market concern over the summer. Instability erupted in China’s money market, with the vulnerable (and now large) small banking sector struggling for financing. And with U.S. trade tensions escalating, the prospect of Beijing officials losing control was palpable. China’s currency faltered in August, with the dollar/renminbi breaching the key 7.0 level on August 5th – on its way to 7.18 by September 3rd.

After repeated failed attempts to rein in Credit excess, tightening measures adopted by a more resolute Beijing actually slowed Credit growth in 2018. Akin to U.S. rate “normalization”, this was not going to go smoothly. And that financial and economic vulnerabilities rapidly manifested with China in the throes of heated trade negotiations with the Trump administration ensured Beijing would once again let off the brake and pump the accelerator.

China saw record total system Credit growth (approaching $4.0 TN) in 2019 – as double-digit Credit growth compounds year after year. In the first 11 months of 2019, Aggregate Financing (excluding central government borrowings) expanded $3.028 TN, 19.3% ahead of comparable 2018 growth. November Consumer (chiefly mortgage) borrowings were up 15.3% y-o-y (36% in two, 66% in three and 139% in five years), as stimulus doused gas on China’s historic mortgage finance and apartment Bubbles.

Fueled by China, Trillion dollar U.S. fiscal deficits and fiscal stimulus around the world, 2019 likely saw record global Credit growth. In the end, systemic fears and the resulting summer global bond price melt-up bolstered vulnerable financial systems and economies. Argentine bonds and the peso crashed in August, but for the most part liquidity abundance sustained both emerging and developed market Bubbles. A less accommodative world of tighter finance and risk aversion would have been inhospitable to the likes of Turkey, Lebanon, Indonesia, Chile and many others. Booming liquidity and markets made a dud out of Brexit.

As the marginal source of EM finance and economic demand, a bursting – as opposed to inflating – Chinese Bubble would have had profoundly negative consequences. It’s remarkable how bullish markets have become on EM considering the rising vulnerability of Asia, Latin America and Eastern Europe to “risk off” trading dynamics.

From my Q3 2019 Z.1 analysis: “Total “repo” (“Federal Funds and Security Repurchase Agreements”) Liabilities jumped another $222 billion during the quarter to $4.502 TN, the high going back to Q3 2008. Over the past year, “repo” surged a record $932 billion, or 26.1%. For perspective, “repo” Liabilities rose on average $51.9 billion annually over the past five years (2014-2018). And the $932 billion gain during the past four quarters is more than double the biggest annual rise over the past decade (2010’s $422bn gain that followed the $1.672 TN two-year crisis-period contraction). Ominously, the past year’s gain also surpasses the previous record four-quarter gain ($824bn) for the period ended in June 2007.”

My thesis holds that unprecedented speculative leverage has accumulated throughout this most protracted period of monetary stimulus. Securities finance has boomed in so-called “repo” markets in the U.S., Europe and Japan, along with China and throughout Asia and the offshore financial centers (i.e. Cayman Islands, Luxembourg, etc.).

Derivatives now truly rule the world. The Fed’s bullish U-turn, the ECB’s quick restart of QE, Japan’s endless stimulus, and scores of rate cuts globally incentivized wild speculative excess that culminated during the summer. “Blow-offs,” however, ensure vulnerability to abrupt reversals, deleveraging and liquidity issues.

Instability erupted in the U.S. repo market in September. Pundits pointed to a confluence of huge Treasury auctions, corporate tax payments and a shortage of available bank reserves. Yet it was no coincidence that illiquidity issues accompanied an abrupt bond market reversal. After trading at 1.47% on September 4th, 10-year Treasury yields were back up to 1.90% by September 13th.

(Worth noting at about this time, on September 16th, there were attacks on Saudi Oil facilities. WTI crude prices immediately spiked from $53.94 to a high of $60.37, though prices closed back below $55 by September 27th.)

The “repo” market is sacred financial “plumbing”. It was, after all, the epicenter of 2008’s crisis eruption. Critical lessons were either never learned or conveniently forgotten. Building upon the dovish U-turn, the Powell Fed embraced “whatever it takes” to ensure liquidity was not an issue during the fourth quarter and especially for typical year-end funding pressures.

Recalling Y2K, it was in the end a bogeyman that had the Fed pouring fuel on a raging speculative Bubble. Powell’s “midcycle adjustment” was completely abandoned. There was for now and the foreseeable future one cycle: easy “money” – and the only uncertainty: How easy? The Ultimate Asymmetric Policy.

Federal Reserve Credit expanded $395 billion in the final 16 weeks of year. Like rates, a year that began with expectations of Federal Reserve balance sheet “normalization” ended with aggressive quantitative easing operations. The Fed announced in October it would purchase $60 billion of T-bills monthly through at least the first-half of 2020, with Fed Credit ending 2019 at $4.121 TN (high since November 2018).

Goldman Sachs CDS ended 2019 at 52.394 bps, only a couple basis points from the low going all the way back to 2007. From a high of 465 on January 3rd, high-yield corporate CDS sank to lows since 2007 (ending 2019 at 280 bps). A notable 80 bps of the high-yield CDS decline ensued following the October announcement of the Fed’s balance sheet expansion strategy. And after trading to a high of 95.5 on December 24, 2018, investment-grade CDS closed out 2019 at 45.3, also near the lows since before the ’08 crisis.

The S&P500 returned 10.4% in the 11 weeks following the Fed’s announcement. The Nasdaq100 returned 13.1%, while the Semiconductors (SOX) jumped 19.4%. The Banks (BKX) returned 17.9% and the Broker/Dealers (XBD) 17.3%. The small cap Russell 2000 returned 12.7% in 11 weeks. The NYSE Healthcare Index returned 14.9%, as the Biotechs (BTK) surged 21.7%.

Quite a squeeze unfolded. The Philadelphia Oil Services Index returned 26.2% between the Fed announcement and year-end. Tesla jumped 71% in 11 weeks. Advanced Micro Devices surged 62% to end 2019 with a 148% gain. Target gained 94% for the year, outpacing Chipotle’s 93.9% and Lululemon’s 90.5%. Apple rose 86.2%, trouncing Facebook (56.6%), Microsoft (55.3%), Adobe (45.8%) and Google (29.1%). Xerox jumped 86.6%. There were 56 stocks within the Nasdaq Composite that posted 2019 gains of better than 200% (174 at least 100%).

The announcement of a “phase one” U.S./China trade deal stoked the year-end rally. There is still little to indicate must substance in this agreement but, like with so many things, it doesn’t really matter. The geopolitical backdrop was fraught with great risk – that markets were content to ignore. Even Thursday night’s U.S. assassination of Iran’s Qassem Soleimani hit the S&P500 for only 0.7% (Russell 2000 down 0.35%). As has become typical, safe haven assets seem more keenly focused. Ten-year Treasury yields sank nine bps Friday to 1.79%, with bunds down six bps to negative 0.29%. Riding blustery Monetary Disorder and geopolitical tailwinds, Gold surged $42 this week to a six-year high $1,552.

It was a year of excess too many to mention. Hedge fund billionaire paid a record $238 million for a central park apartment – followed by a $122 million for a London mansion and $99 million for a property neighboring his oceanside Palm Beach estate. “Beauty mogul” Kylie Jenner becomes a billionaire at 22. Art and collectable markets continued to go bananas. From MarketWatch: “An Italian artist duct-taped a banana to a gallery wall in Miami as part of the Art Basel festival — and it sold for $120,000.”

Compared to financial markets, the economy was rather mundane. Real GDP expanded 3.1% in Q1, 2.0% in Q2 and 2.1% in Q3. Inverting during the summer, the yield curve proved a much better harbinger of central bank stimulus than a predictor of the real economy. The IPO market had its ups and down, with the more ridiculous deals (i.e. WeWork) performing poorly or not at all. While the U.S. was not immune to global manufacturing woes, the service sector boom soldiered on. Not receiving the attention it deserved, U.S. housing gathered momentum. Homebuilder confidence jumped to a 20-year high, as building starts and permits rose the strongest levels since before the crisis.

The year of Monetary Disorder only exacerbated wealth inequalities.

The country became only further divided. When it hardly seemed possible, the political environment digressed further into the embarrassing and alarming. President Trump was impeached. There should be ample shame to be spread around. Both parties should be ashamed of the fiscal recklessness that became firmly entrenched in 2019. Debt and deficits don’t matter. Where is the morality in leaving such debt to our children and grandchildren? As the Fed capitulated on “normalization,” markets completely renounced their function of disciplining excess.

In all the Roaring 2019 payoffs in securities, derivatives and asset markets, Capitalism atrophied into a shell of its former self. Chronically Unsound Money & Credit and the Inevitability of Monetary Disorder.

Things can go crazy at the end of cycles.

2019 Welcomed Wacko and Unhinged.

In a nutshell, it’s one hell of a portentous backdrop – that passes for now as a permanent plateau of prosperity.

I’ll leave future prospects for another day.

 Trump Will Make China Great Again

Despite the latest Sino-American "skinny deal" to ease tensions over trade, technology, and other issues, it is now clear that the world's two largest economies have entered a new era of sustained competition. How the relationship will evolve depends greatly on America's political leadership – which does not bode well.



NEW YORK – Financial markets were cheered recently by the news that the United States and China have reached a “phase one” deal to prevent further escalation of their bilateral trade war. But there is actually very little to cheer about. In exchange for China’s tentative commitment to buy more US agricultural (and some other) goods, and modest concessions on intellectual-property rights and the renminbi, the US agreed to withhold tariffs on another $160 billion worth of Chinese exports, and to roll back some of the tariffs introduced on September.

The good news for investors is that the deal averted a new round of tariffs that could have tipped the US and the global economy into recession and crashed global stock markets. The bad news is that it represents just another temporary truce amid a much larger strategic rivalry encompassing trade, technology, investment, currency, and geopolitical issues. Large-scale tariffs will remain in place, and escalation may well resume if either side shirks its commitments.

As a result, a broad Sino-American decoupling will likely intensify over time, and is all but certain in the technology sector. The US regards China’s quest to achieve autonomy and then supremacy in cutting-edge technologies – including artificial intelligence, 5G, robotics, automation, biotech, and autonomous vehicles – as a threat to its economic and national security. Following its blacklisting of Huawei (a 5G leader) and other Chinese tech firms, the US will continue to try to contain the growth of China’s tech industry.

Cross-border flows of data and information will also be restricted, raising concerns about a “splinternet” between the US and China. And owing to increased US scrutiny, Chinese foreign direct investment in America has already collapsed by 80% from its 2017 level. Now, new legislative proposals threaten to bar US public pension funds from investing in Chinese firms, restrict Chinese venture capital investments in the US, and force some Chinese firms to delist from US stock exchanges altogether.

The US has also grown more suspicious of US-based Chinese students and scholars who may be in a position to steal US technological know-how or engage in outright espionage. And China, for its part, will increasingly seek to circumvent the US-controlled international financial system, and to shield itself from America’s weaponization of the dollar.

To that end, China could be planning to launch a sovereign digital currency, or an alternative to the Western-controlled Society for Worldwide Interbank Financial Telecommunication (SWIFT) cross-border payments system. It also may try to internationalize the role of Alipay and WeChat Pay, sophisticated digital payments platforms that have already replaced most cash transactions within China.

In all of these dimensions, recent developments suggest a broader shift in the Sino-American relationship toward de-globalization, economic and financial fragmentation, and balkanization of supply chains. The 2017 White House National Security Strategy and the 2018 US National Defense Strategy regard China as a “strategic competitor” that must be contained. Security tensions between the two are brewing all over Asia, from Hong Kong and Taiwan to the East and South China Seas.

The US fears that Chinese President Xi Jinping, having abandoned his predecessor Deng Xiaoping’s advice to “hide your strength and bide your time,” has embarked on a strategy of aggressive expansionism. China, meanwhile, fears that the US is trying to contain its rise and deny its legitimate security concerns in Asia.

It remains to be seen how the rivalry will evolve. Unfettered strategic competition would almost certainly lead eventually from an escalating cold war to a hot war, with disastrous implications for the world. What is clear is the hollowness of the old Western consensus, according to which admitting China into the World Trade Organization and accommodating its rise would compel it to become a more open society with a freer and fairer economy.

But, under Xi, China has created an Orwellian surveillance state and doubled down on a form of state capitalism that is inconsistent with the principles of free and fair trade. And it is now using its growing wealth to flex its military muscles and exercise influence across Asia and around the world.

The question, then, is whether there are sensible alternatives to an escalating cold war. Some Western commentators, such as former Australian Prime Minister Kevin Rudd, advocate a “managed strategic competition.” Others speak of a Sino-American relationship built around “co-opetition.” Likewise, CNN’s Fareed Zakaria recommends that the US pursue both engagement and deterrence vis-à-vis China.

These are all variants of the same idea: the Sino-American relationship should involve cooperation in some areas – especially where global public goods such as the climate and international trade and finance are involved – while accepting that there will be constructive competition in others.

The problem, of course, is US President Donald Trump, who does not seem to understand that “managed strategic competition” with China requires good-faith engagement and cooperation with other countries. To succeed, the US needs to work closely with its allies and partners to bring its open-society, open-economy model into the twenty-first century.

The West may not like China’s authoritarian state capitalism, but it must get its own house in order. Western countries need to enact economic reforms to reduce inequality and prevent damaging financial crises, as well as political reforms to contain the populist backlash against globalization, while still upholding the rule of law.1

Unfortunately, the current US administration lacks any such strategic vision. The protectionist, unilateralist, illiberal Trump apparently prefers to antagonize US friends and allies, leaving the West divided and ill-equipped to defend and reform the liberal world order that it created.

The Chinese probably prefer that Trump be re-elected in 2020. He may be a nuisance in the short run, but, given enough time in office, he will destroy the strategic alliances that form the foundation of American soft and hard power.

Like a real-life “Manchurian Candidate,” Trump will “Make China Great Again.”

Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com.

What The Qassem Soleimani Black Swan Means For Markets

by: The Heisenberg
- Just two trading days into 2020, a geopolitical black swan the size of an elephant splashed into the waters of history.

- The assassination of the second-most powerful man in Iran will echo through history, but what does it mean for markets?

- The answer is complicated, but your reaction function need not be.

- Here are some common sense musings.

One of the defining features of markets over the past half-decade has been the disparity between, on one hand, news-based measures of policy and political uncertainty, and on the other, market-based measures of volatility.
This is a topic I've spent considerable time debating, discussing and otherwise expounding on for audiences here, there and everywhere (to speak colloquially).
Perhaps the simplest way to visualize this is to plot the VIX against the Global Economic Policy Uncertainty Index.
You can also use variations on the gauge available here. Additionally (and this is particularly germane in the current macro environment), there's a news-based trade policy uncertainty index available here.
I'm going to quote myself briefly and then transition to Friday's big news on the macro front.
Here's a bit of additional color on the above to set the stage (this is from a Tuesday article):
If you spend some time with the data, you can construct different versions of the visual, replacing the Global EPU with, for example, country-specific gauges. You can also replace the VIX with 3M10Y (for rates vol.) or indexes of FX vol. from JPMorgan or Deutsche Bank. 
In almost all cases, you’ll come away with something that looks vaguely like the chart above – that is, a discernible rise in policy uncertainty disconnected from market-based measures of volatility in recent years. That disconnect was most glaring in 2017 during the low vol. bubble, and multiple attempts were made to explain it. 
Generally speaking, the explanation is that central banks have succeeded in suppressing cross-asset volatility by perfecting the art of forward guidance, which anchors expectations, thereby enhancing the effect of rate cuts and asset purchases.  
It was forward guidance which helped “buy the dip” morph from a derisive meme about retail investors into a viable (indeed, an almost infallible) trading “strategy”.
In the piece from which those excerpts are pulled, I suggested that 2020 is going to serve as yet another test of that dynamic.

Central banks pivoted dramatically in 2019, and while the bar for tightening is generally seen as impossibly high in 2020, it's almost by definition true that the bar for additional accommodation is lower this year than last if for no other reason than the close proximity of the lower bound and the bloated nature of balance sheets. Simply put, policymakers' "ammo" was already running low, and they expended some of it last year.
Figurative "bullets" are thus even scarcer now and will likely be deployed only in a true emergency.
That latter consideration (that central banks would like, as much as possible, to remain on the sidelines in the hope that the easing delivered in 2019 is sufficient to prolong the cycle) will clash in 2020 with political drama associated with the US election, with intermittent trade flare-ups and with wrangling around final Brexit steps as the UK works to craft a post-divorce trade agreement with the EU. Those are the "known unknowns," so to speak.
In addition to those political challenges to central banks' express desire to avoid being forced into taking further accommodative measures to support the global economy and markets, 2020 will invariably bring a hodgepodge of black swans - every year does.
The question is how momentous they are, and, relatedly, whether they are consequential enough to override 2019's rate cuts and the resumption of G3 central bank balance sheet growth, in the minds of market participants.
Well, on Thursday evening, a geopolitical black swan the size of an elephant splashed into the waters of history when the US assassinated Qassem Soleimani, commander of Iran's Quds Force and, by almost any account you care to consult, one of the most influential figures in the Mideast. Oil obviously surged on the news.
Equities immediately plunged, Treasury yields fell and gold surged, in what Nomura's Charlie McElligott described as a "standard safe-haven bid."
This isn't the forum for breathless geopolitical musings, but as anyone with even a rudimentary understanding of Mideast affairs will attest, Soleimani's assassination is a historic event that will echo for decades. There is no debating the significance of what happened on Thursday evening.
There is a reason why this story was plastered on the front page of every major media outlet and newspaper across every country on Earth Friday, and there's a reason why "Franz Ferdinand" was trending on Twitter. Dozens of US lawmakers weighed in and every major country released some manner of statement (many through their foreign ministries).
In the simplest possible terms: The only way this could have been more significant is if the Trump administration had targeted Ayatollah Ali Khamenei himself, and even then, it wouldn't have the operational significance as a strike on Soleimani.
Should the average investor care about this? It's complicated, but below are some simple observations.
If you're in oil and gas names (or if you trade crude itself) this is arguably an even bigger deal than the attacks on Saudi Arabia's oil infrastructure in September (circled on the chart). Why?
Well, because Aramco turned out to be pretty proficient at repairing the damage and restoring lost supply, whereas, by virtue of being dead, Soleimani will not be so easily "restored."
As you've probably read by now wherever you get your news, Iran is going to respond, likely in dramatic fashion, and that raises the risk of further attacks on Saudi Arabia and more disruptions in the Strait of Hormuz and/or the Bab-el-Mandeb.
"Gold, silver and platinum [are] higher on the back of heightened geopolitical tensions since the news that a top Iranian general was killed in a US airstrike in Baghdad," SocGen's Kit Juckes wrote Friday morning, adding that "given the scope for tension to persist, a protracted period of higher oil prices has to be a risk."

"The focus of markets short-term is rationally the risk of a military response from Iran in a market that has become inherently bullish," Citi said, in a note suggesting Brent can move above $70 on Soleimani's death. "Possible retaliation may include targeted attacks on oil facilities in the region, attacks on pipelines or oil flows through the Strait of Hormuz," the bank went on to note.

I don't think I need to keep throwing analyst quotes at you when it comes to why this is relevant for energy names and oil market watchers. If you fancy yourself some stripe of oil aficionado and you couldn't, until today, rattle off some basic facts about Soleimani, you were never an oil aficionado. (Sorry.)
But what about for the broader market or, more simply, how about everyone else? Does the ubiquitous "long-term investor" need to care?
The short answer is always "no." If you're the "I'm going to buy an S&P 500 index fund when I'm 18 and sit on it until I'm 65 come hell or high water" type, then nothing ever matters, not even a 2008-style global crash, let alone the death of one man. (And thank God for that, because think how silly you'd feel right now if you'd sold it all at the lows in 2008!)
But, this time the "no" comes with a big caveat. Thursday night's drone strike has the very real potential to change the course of history in the Mideast. Indeed, is already has. This isn't just "a general," so to speak. This is, to paraphrase one expert who spoke to The New York Times, the equivalent of someone assassinating the CIA Director, the JSOC Commander and the Secretary of State all at once.
So, what to do?
How does an average investor even begin to contemplate something like this and incorporate it into a "strategy?"
First thing's first: The risk of a near term systematic, cascading de-leveraging event like those witnessed during some of the more acute selloffs we've seen in recent years is low. Dealers are still long gamma, and CTAs are still deeply "in trend' in Spooz.
In plain English, that just means that spot SPX would have to move sharply lower (and in a hurry) to kick off the kind of selling-begets-more-selling loop that took hold during, for example, mid-August and early May 2019, and also in early October 2018.
In other words, this isn't necessarily a situation like that which existed in early May of 2019, when all it took was one irritated trade tweet on a Sunday evening to push S&P futures through key levels that started tipping dominoes. So, no need to panic in the near term.
In the medium term, use some common sense, right? Given the above, you now know enough about this to have some conception of the potential for foreign policy blowback.
Although Soleimani's death will never really "blow over," the threat of direct retaliation will obviously be the most acute over the next six or so months.
Think about that, and then consider the following two-pane, which illustrates the extent to which we were, until Friday anyway, in the midst of a "melt-up."
The S&P was overbought, the VIX was below its average in 2018/2019 and stocks had risen in 12 of 13 weeks (they will likely snap that streak on Friday).
It's stretched. Period. And now you've got a historic geopolitical black swan in play.
Does that mean I'm going to try to impress everyone here with some kind of complex hedging strategy? No. I'll do that later (just kidding).
Rather, I would simply say that while surging crude could conceivably push up breakevens, that likely won't be enough to offset the safe-haven bid for US Treasurys if tensions continue to rise.
With US 10-year yields having jumped ~40bps off the lows in August, it might not be a terrible time to add some bonds for protection. Sure, there's less scope for bonds to act as a hedge given that, historically speaking, yields are at rock-bottom levels, but you could have said the same thing at the end of 2018, and bonds worked out ok last year, didn't they?
On a related note, consider that the net supply (i.e., government issuance minus central bank buying) of safe-haven bonds is set to fall this year for the first time since 2016 thanks in large part to the restart of net asset purchases by the ECB and the Fed's reserve management efforts.
(Heisenberg, 2020 estimates are from TD Securities' data)
That means safe-havens are getting scarce again, which could help bonds perform in 2020 even if geopolitical tensions abate, growth holds up and central banks refrain from cutting rates further.
As an aside, ISM manufacturing printed a new post-2009 low on Friday, defying expectations for a rebound and widening the gap with IHS Markit's factory gauge.
Although almost all other indicators are pointing to a positive inflection in the US economy, ISM remains stubborn and is consistent with growth of around 1.3%.
That visual (i.e., the juxtaposition between ISM, GDP and the robust labor market) remains a "who's got it wrong?" situation. If ISM is "right," then bonds will likely be just fine going forward.
Over the medium- to longer-term, the situation between Washington and Tehran seems binary.
Either Soleimani's death will galvanize public support for the regime at a time when it was slipping following the deadly fuel protests, hardening the resolve of the theocracy and making the situation immeasurably more precarious for the West, or the opposite will occur, where that means the Commander's demise will mark a turning point beyond which the populace sees an opportunity to rise up in the absence of a figure whose mystique was a key element in preserving an increasingly shaky status quo.
I would venture that the former is far more likely than the latter. If the regime's resolve only hardens and the Iranian public rallies to the cause, it could well lead to a year's worth of threats and tit-for-tat retaliations that end up influencing the US election.

This week, Bernie Sanders said his campaign out-raised every Democrat in the field by a country mile in the fourth quarter. Sanders is a non-interventionist.
Of course, so is President Trump, ostensibly.
If Sanders were to get the nomination and the Iran problem were to fester into the election, he would doubtlessly use it against the President.
My own well-known political leanings notwithstanding, any objective (i.e., honest) assessment of a potential Sanders win has US stocks careening sharply lower.
Remember, the tax cuts accounted for a massive boost to earnings. Any threat of repeal would lead to an immediate repricing of equities.
Here, for instance, is what happens to Goldman’s 2021 S&P EPS outlook assuming a higher effective tax rate:
Slap a 17X multiple on that $164 and see what comes out. (You won't like it.)
Now let's bring this full circle to where we started. Central banks spent all of last year righting both their own "wrongs" (where that primarily means the Fed making up for over-tightening) and taking out insurance against the possibility that erratic politics and an aversion to fiscal stimulus in some locales (e.g., Germany) will end up undercutting the stability monetary policy has worked so hard to foster over the past decade.
With rates at or near the lower bound and balance sheets still bloated, there is now less figurative ammo than ever to deploy in the event the deployment of literal ammo ends up destabilizing markets or undercutting the global economy at a delicate juncture.
It's been a decade since market-based measures of volatility were allowed to catch up to the surge in what BofA has called "politicians' implied vol.," as proxied above by the EPU. One of the key risks I've identified for 2020 is that the gap illustrated in the very first visual above closes.

On that score, 2020 started with a bang - figuratively and literally.

What Does Suleimani’s Death Change?

The targeted killing by the United States of one of Iran's top military leaders represents a significant symbolic defeat for the Iranian regime, but it does not augur all-out war. After all, Iran and the US have already been at war for decades, and neither side has an interest in an uncontrolled military escalation now.

Shlomo Ben-Ami

benami159_Pool  Press Office of Iranian Supreme LeaderAnadolu AgencyGetty Images_soleimaniirangeneral

TEL AVIV – We no longer live in an era in which wars are officially declared. The US drone strike that killed Qassem Suleimani, the charismatic commander of Iran’s Quds Force, is but one landmark event in a multiyear, multi-front war between the US and its allies and Iran and its many proxies.

Over the course of this undeclared war, the parties have used tactics ranging from targeted killings and cyber attacks to economic sanctions and destruction of infrastructure. In February 2008, a joint Israeli-American operation killed Imad Mughniyeh, the chief of staff and second in command of Hezbollah, Iran’s formidable proxy in Lebanon. (Suleimani was actually standing beside Mughniyeh at the time.)

Later, Israel allegedly assassinated four Iranian nuclear scientists, and then targeted Iran’s nuclear facilities with a malicious computer virus (most likely through a joint operation with the US).

For its part, Iran has long treated Jewish communities abroad as legitimate targets. In 1994, an Iranian-backed squad bombed a Jewish community center in Buenos Aires, leaving 85 dead and hundreds more wounded. And Suleimani himself is believed to have organized the 2012 suicide bombing on a passenger bus transporting Israeli tourists in Burgas, Bulgaria.

Stifled by US sanctions following the Trump administration’s withdrawal from the 2015 nuclear deal in May 2018, Iran has been waging a war of attrition against Western oil interests, by allegedly striking Saudi oil facilities this past September and by seizing oil tankers on the high seas. But, most important, Iran has been building a crescent of proxy forces stretching from Lebanon through Syria and Iraq and down to Yemen.

Suleimani was the mastermind of this strategy. Under his leadership, Iran helped Hezbollah beef up its missile capabilities, led a decisive intervention to prop up Syrian President Bashar al-Assad, supported the Houthi rebels who have been waging a war against Saudi-led forces in Yemen, and backed a wave of resurgent Shia militias in Iraq.

According to Gadi Eizenkot, who completed his term as the Israel Defense Forces’ chief of general staff last year, Suleimani had plans to amass a proxy force of 100,000 fighters along Syria’s border with Israel.

Owing to US President Donald Trump’s expressed reluctance to pursue further wars in the Middle East, the US has scarcely been involved in thwarting Iran’s grand regional strategy.

That task was left to Israel, which has been launching air strikes on Iranian targets in Syria and Iraq for months. In fact, Eizenkot’s successor, Aviv Kochavi, has warned publicly that Israel’s ongoing self-defense measures could result in an all-out war.

Trump refused to respond in kind to Iran’s downing of an unmanned US drone in June 2019. But he seems to have changed his position following the death of an American citizen in an attack by the Iranian-backed militia Kataib Hezbollah on an Iraqi military base in Kirkuk in December.

The US first reacted by attacking Shia militias in Iraq and Syria, to which Suleimani responded by fomenting a “spontaneous” mob that penetrated the US embassy compound in Baghdad.

In light of these events, the US has framed the strike that killed Suleimani and his collaborator, Abu Mahdi al-Muhandis, a top Kataib Hezbollah leader, as a preemptive move to thwart further Iranian attacks on US targets.

Where does this leave us? On one hand, Suleimani’s death is hardly a game changer. The Islamic State did not disband following the death of its founder, Abu Bakr al-Baghdadi.

Likewise, Hezbollah has grown only stronger and more menacing since the CIA and Mossad assassinated Mughniyeh in 2008, and so has Hamas since Israel killed one of its founders, Ahmed Yassin, in 2004.

On the other hand, the US has struck a severe blow to Iran’s soft underbelly. As the embodiment of the regime’s regional strategy, Suleimani’s symbolic importance to the Islamic Republic was probably second only to that of Supreme Leader Ali Khamenei. He was, in Khamenei’s words, a “living martyr of the revolution.” Having long been groomed for higher political office, he cannot easily be replaced.

Still, neither the US nor Iran is interested in an all-out war. To be sure, Iran is bound to retaliate, if only to maintain the morale of its acolytes and proxies. But its reaction will have to be carefully tailored to avoid provoking an uncontrolled escalation.

Otherwise, the regime will be playing into the hands of Israeli Prime Minister Binyamin Netanyahu, who is always eager to drag the US into a war on Israel’s behalf. A disproportionate reaction could also lead to Iran’s ouster from Syria, which is hardly the best way to safeguard Suleimani’s regional legacy.

Yes, there are many radicals and hardliners in Tehran. But they are not necessarily irrational. Iran’s current approach to the challenge posed by Trump is essentially to keep the conflict at a controlled boil until the US presidential election in November, in the hope that a Democrat will return to the White House and revive the nuclear deal.

As for Trump – and despite US Secretary of Defense Mark Esper’s warning that “the game has changed” – a targeted killing does not seem to represent a departure from his oft-stated aversion to military entanglements. On the contrary, it seems to suit his preferences exactly, because it enables him to boast to his base about his courage and decisiveness.

As a reality-TV star, Trump knows that the killing of a highly prominent target will have a much larger media impact than would an air raid on a military base in which all of the victims are anonymous, much less an operation that places US forces at risk.

Shlomo Ben-Ami, a former Israeli foreign minister, is Vice President of the Toledo International Center for Peace. He is the author of Scars of War, Wounds of Peace: The Israeli-Arab Tragedy.

Capitalism Isn’t a ‘System’

Socialists err dangerously when they assume a market economy is a conscious project.

By Barton Swaim

Illustration: David Klein

Airy, abstract words are the currency of democratic politics. Conservatism, liberalism, nationalism, democracy, socialism—you have to use them, but they can easily gum up your thought.

George Orwell famously objected to the haphazard use of “fascism,” and before him Samuel Taylor Coleridge complained bitterly that “Jacobin” has “either no meaning, or a very vague one: for definite terms are unmanageable things, and the passions of men do not readily gather round them.”

The ill-defined word of the moment is “capitalism.”

After Soviet communism fell, capitalism seemed to have won the argument. But anticapitalists didn’t concede.

Maybe socialism and communism hadn’t worked as envisioned, they argued, but capitalism was still the corrosive, dehumanizing force it had always been.

This viewpoint expressed itself in riots outside World Trade Organization conferences and also proposals for “participatory economy,” “eco-communitarianism” and “postcapitalist” arrangements.

These ideologies all involved economies planned by elites according to abstract goals. There was only this difference: Unlike communism, they envisioned no violent overthrow of existing power structures. All their adherents could do was hope and advocate. This was 21st-century Fabianism—the doctrine, dating to the late 19th century, that socialism would come about through gradual reforms, not revolution.

But although capitalism keeps producing historically high levels of prosperity and order, its critics on the left keep hurling new terms at it. Capitalism is now called “neoliberalism” or “hypercapitalism” or, question-beggingly, “late capitalism,” and left-wing intellectuals keep pretending they have something wonderful to replace it with.

In a recent essay, Time’s Anand Giridharadas writes that capitalism is on the run, and he’s jubilant about it. The Business Roundtable has announced its members’ dedication to maximizing “stakeholder” interests. Democrats are endorsing single-payer health insurance and the revolutionary Green New Deal.

One serious contender for the Democratic presidential nomination, Bernie Sanders, is an avowed socialist; another, Elizabeth Warren, avoids the label but favors vast, debilitating taxes on corporations and the rich; and a third, Pete Buttigieg, wants to replace “neoliberalism” with “something better.”

What’s odd about Mr. Giridharadas’s essay, and others like it, is that the reader is simply expected to understand how the word “capitalism” stands for everything allegedly wrong with the U.S. economy. 

It’s a “system,” a “conscious project” that has caused “economic precariousness, stalled mobility and gaping social divides” and developed into “the win-win ideology that has governed the past few decades.” But the details of this system must be too obvious to mention.

So what is capitalism supposed to mean? The word “capital” has been around since the late Middle Ages and meant then more or less what it means now: money used to invest or build and so earn more money. In the 19th century, Saint-Simonians and other proto-socialists started referring to capitalism to signify a system in which those who had capital used it to dominate and exploit those who didn’t.

This was a gross oversimplification of a dizzyingly complex reality. It reminds me of “The Power of Words,” a 1937 essay by the French Christian philosopherSimone Weil.Her complaint was that European political discourse consisted mainly of empty abstractions, of which “capitalism” was among the most prominent. Weil didn’t defend capitalism, but she rightly sensed that the tendency to blame every societal ill on it was a mental deficiency.

A modern European economy, she contended, “consists in certain methods of production, consumption, and exchange, which are continually varying, however, and which depend upon certain fundamental relationships: between the production and the circulation of goods, between the circulation of goods and money, between money and production, between money and consumption.”

This inscrutable arrangement “is arbitrarily converted into an abstraction, which defies all definition, and is then made responsible, under the name of capitalism, for every hardship endured by oneself or others. After that, it is only natural that any man of character should devote his life to the destruction of capitalism.”

What Weil understood at a conceptual level in 1937,Friedrich Hayekexpressed in a far more technical fashion in his 1945 essay “The Use of Knowledge in Society”: that a modern market economy is an immeasurably confusing and constantly changing combination of associations and exchanges—not a “system” of any kind.

Although the term “capitalism” has long worked as a shorthand signifier for a market economy, there is a sense in which to use it at all is to accept the socialist’s premise that a market economy is a consciously created system, manipulated by its creators for their own material ends. But it isn’t that.

A socialist economy is, by definition, a system—it must be created, planned, vigilantly monitored and forcefully regulated in order to function.

But a market economy has no plan. It begins to exhibit the qualities of a system when its wealthiest actors are allowed to bend governmental policies to their advantage, but that is a vastly different thing from a system deliberately designed for stated goals from the beginning.

We will surely go on using the terms “socialism” and “nationalism” and “democracy” without knowing quite what we mean by them.

We can hardly do otherwise. But at least those things exist. “Capitalism,” in the sense in which its leftist critics use the term, never did.

Mr. Swaim is an editorial page writer at the Journal.

State Support Helped Fuel Huawei’s Global Rise

China’s tech champion got as much as $75 billion in tax breaks, financing and cheap resources, as it became the world’s top telecom vendor

By Chuin-Wei Yap

Huawei displayed its 5G services at the PT Expo in Beijing in late October. Photo: Mark Schiefelbein/Associated Press

Tens of billions of dollars in financial assistance from the Chinese government helped fuel Huawei Technologies Co.’s rise to the top of global telecommunications, a scale of support that in key measures dwarfed what its closest tech rivals got from their governments.

A Wall Street Journal review of Huawei’sgrants, credit facilities, tax breaks and other forms of financial assistance details for the first time how Huawei had access to as much as $75 billion in state support as it grew from a little-known vendor of phone switches to the world’s largest telecom-equipment company—helping Huawei offer generous financing terms and undercut rivals’ prices by some 30%, analysts and customers say.

Huawei is vying to build next-generation 5G telecom networks around the world. While financial support for favored firms or industries is common in many countries, China’s assistance for Huawei, including tax waivers that began 25 years ago, is among a number of factors stoking questions about Huawei’s relationship with the state.

“While Huawei has commercial interests, those commercial interests are strongly supported by the state,” said Michael Wessel, a member of a U.S. congressional panel that reviews U.S.-China relations, in an interview.

The U.S. has raised concerns that use of Huawei’s equipment could pose a security risk, should Beijing request network data from the company. Huawei says it would never hand such data to the government.

The largest portion of assistance, about $46 billion, comes from loans, credit lines and other assistance from state lenders, the Journal’s review showed. The company saved as much as $25 billion in taxes between 2008 and 2018 due to state incentives to promote the tech sector. Among other assistance, it enjoyed $1.6 billion in grants and $2 billion in land discounts.

Huawei said in a statement that it received “small and non-material” grants to support its research, which it said were not unusual. Much of the support—for example, tax breaks to the tech sector—was available to others, it noted.

State assistance for Huawei isn’t always quantifiable. In 1999, China’s central government arranged an unusual intervention to rescue the company from allegations of tax fraud, according to accounts by Chinese and other officials.

Local tax breaks for Huawei spurred anonymous accusations around 1998 that it was evading taxes. As the company faced a business slump, Li Zibin, then mayor of Shenzhen city, where Huawei is based, said he took Huawei’s plight to Chinese then-Vice Premier Wu Bangguo.

A Chinese flag flutters at the Beijing headquarters of China Development Bank, which has made a $30 billion credit line available for Huawei’s customers. Photo: florence lo/Reuters 

Mr. Wu, who oversaw state-owned companies, wasn’t sure at first if he should act. He viewed Huawei as privately owned, according to a transcript of Mr. Li’s remarks at a state conference in 2012. Mr. Wu eventually agreed to assemble a team of auditors, Mr. Li said. Huawei was cleared within weeks. Messrs. Li and Wu didn’t respond to requests for comment.

Huawei’s official grants, disclosed in annual reports, total $1.6 billion since 2008. In the five years to 2018, they were 17 times as large as similar subsidies reported by Nokia Corp., of Finland, the world’s second-largest telecom equipment maker. Sweden’s EricssonAB, the third-largest, posted none in the period.

In China’s southern city of Dongguan, state records show, Huawei bought more than a dozen state-owned parcels in largely uncontested auctions between 2014 and 2018 for its research campus. The company paid prices that were 10%-50% of average prices for similarly zoned land in Dongguan, according to Chinese property-value databases. The discounts saved Huawei some $2 billion, according to a Journal review. Huawei declined to comment on the estimate.

Other savings came from state policies to promote China’s tech sector. Tax deductions and exemptions helped Huawei save up to $25 billion in income, value-added and other taxes in at least the past decade, the Journal estimated. Responding to the estimate, a Huawei spokesman said the company is globally tax-compliant.

In his remarks at the conference, Mr. Li said local officials began waiving or reducing levies on Huawei, including income and value-added taxes, in the early 1990s.

Wu Bangguo—who as a Chinese vice premier oversaw state-owned companies—assembled a team of auditors after tax breaks for Huawei led to accusations around 1998 that it was evading taxes. Huawei was cleared. Photo: Xinhua/Zuma Press 

Financial support helped Huawei undercut rivals. In 2010, the European Commission found that Chinese modem exporters including Huawei had benefited from subsidies, according to a confidential report reviewed by the Journal. The commission cut short its probe after the complainant prompting the probe reached a “cooperation agreement” with Huawei. Huawei denied receiving such subsidies.

Besides subsidies, Huawei since 1998 has received an estimated $16 billion in loans, export credits, and other forms of financing from Chinese banks for itself or its customers, the Journal found.

China’s state-controlled banking system underpins cheap loans that lower costs for Huawei and its customers to buy Huawei’s products on credit. State lending facilities for Huawei were among the largest in history.

Mega-lenders China Development Bank and Export-Import Bank of China in the last two decades made available more than $30 billion in credit lines for Huawei’s customers. World Bank and official data indicate these banks were lending to Huawei’s clients in developing economies at some 3% in at least Huawei’s first decade abroad, around half of China’s five-year benchmark rate in since 2004.

A Huawei spokesman told the Journal that CDB’s $30 billion credit line “has seldom been more than 10% subscribed,” and customers’ use of the facility “fluctuates over time.” In 2011, Huawei Deputy ChairmanKen Husaid CDB had lent Huawei’s customers $10 billion since 2004.

Huawei said that lenders—mostly non-Chinese banks, it said—account for only 10% of Huawei’s financing needs as of the end of last year, funded at commercial rates, with the rest coming from the company’s own cash flow and business operations.

“If you’re going to buy a house, and if you are able to say you got backing of a half-million dollar line of credit, that’s going to make you a much stronger bidder,” saidFred Hochberg,former chairman of U.S. Export-Import Bank. “What Huawei did, cleverly, is to make sure that, when they made a bid, it came with financing terms” that surpassed those of competitors.

A worker operates near a sign for the Export-Import Bank of China, which has made a credit line available for Huawei customers. Photo: china stringer network/Reuters 

Official data show Swedish export authorities provided some $10 billion in credit assistance for Sweden’s tech-and-telecom sector as of 2018; Finland authorized $30 billion in annual export credit guarantees economywide from 2017.

Huawei’s largest American competitor, Cisco Systems Inc.,received $44.5 billion in state and federal subsidies, loans, guarantees, grants and other U.S. assistance since 2000, Good Jobs First data show. Cisco didn’t comment.

China’s foreign ministry said in a statement to the Journal that Huawei is a private company “like many others in China” whose achievements “are inseparable from a good policy environment.”

In summer 2009, Huawei pitched to Pakistan a surveillance system for its capital, Islamabad. Pakistan’s prime minister accepted, but Islamabad lacked funds, and its procurement rules required competitive bidding, Pakistan court filings say.

The Chinese offered a solution. China Ex-Im would lend Pakistan $124.7 million for the project and waive most of the 3% annual interest on the 20-year loan. There was a condition, Pakistan Supreme Court filings show: Pakistan could choose only Huawei. Pakistan’s government decided to proceed without competitive bidding.

“On the recommendation of Ex-Im Bank, the prime minister of Pakistan selected Huawei,” then-interior ministerAhsan Iqbaltold Pakistan officials.

A Chinese embassy report showed Beijing’s then-ambassador to Islamabad officiating at the project’s inauguration in 2016 alongside Pakistan’s interior minister, standing before an array of glowing security monitors.

“The Chinese government funded it and Huawei built it,” the embassy said.

—Matthew Dalton contributed to this article.

The Smartest Bet in Gold

By E.B. Tucker, editor, Strategic Trader

I am very confident about gold right now.

After spending six years in a crippling bear market, gold came to life over the summer.

With little press attention, gold quickly shot from $1,270 in early May to nearly $1,550 in early September.


I’ve gone on record predicting gold will surpass its 2011 high of around $1,900.

That’s about a 30% gain from here.

And I expect that to happen in 2020.
A new bull market is underway… and I don’t see it slowing down anytime soon.

Like I told Chris yesterday, gold mining stocks – which provide leverage to a rising gold price – will surge. I’ll explain why in more detail below.

But they’re not the only way to profit as this rally gains momentum.

Today, I’ll show you another way to participate in the coming gold boom that involves miners… and can limit your risk…

First, let me break down why the gold mining industry is a good bet right now…

The World’s Worst Business

As we say all the time, gold mining is the world’s worst business. It’s capital-intensive. It’s labor-intensive. If a gold mine turns up in a difficult country, its leaders endlessly extort the operators.

So if it’s such a bad business, why would you invest in it?

Because the best feature of gold miners is how they perform when gold surges higher in price.
For example, take gold’s current price of about $1,470 per ounce. Many mining companies do not make money or barely break even at that price. However, if the price moves $100 higher, they’ll be in the black. That means a small move higher in gold has the potential to turn a mining firm from a money-loser into a money-maker almost overnight.

Few industries offer that kind of operating leverage. Gold miners are ultra-sensitive to movements in the price of gold. When it moves higher, they surge.

By and large, the gold mining industry hasn’t seen profits for years. That doesn’t get into the industry’s terrible track record of what to do with the profits in those infrequent cases.

After years of this, investors had enough with the industry. The 2013-2019 downturn in gold prices shown in the chart above was the final straw. Companies had little ability to raise money to run the business, much less look for new sources of gold.

That’s a key part of the mining industry. Every ounce mined is one fewer sitting in inventory.

Imagine a shoe store that stopped ordering from its suppliers because its owner ran out of money. He sold existing inventory to pay bills. After a while, shelves get thin. If shoe demand unexpectedly surges, he won’t be ready for it.

Each year, the gold mining industry pulls close to 110 million ounces from the ground. It takes about 10 years to develop a gold mine. The industry, starved for investment capital, has neglected the business of replacing the ounces it pulls from mines each year.

Pierre Lassonde, co-founder of Franco-Nevada (FNV), recently pointed this out. He said that for the ’70s, ’80s, and ’90s, in each decade, the industry found one 50-million-ounce gold deposit, several 30-million-ounce deposits, and numerous 5- to 10-million-ounce deposits.

He went on to say, “But if you look back at the last 15 years, we found no 50-million-ounce deposits, no 30-million-ounce deposits, and only very few 15-million-ounce deposits.”

As the chart below shows, mines currently in production are running out of ore. By 2024, just a few years from now, the 100-plus million ounces produced from existing mines today will fall to fewer than 90 million.


Lassonde goes on to say the industry has not properly invested in replacement supply of mined gold.

This is Economics 101. When supply dwindles at the same time demand surges, you’ve got the makings of a frenzy. Where will new gold supplies come from? It takes a decade to permit and develop a mine.

That could spark a surge in demand for gold. If it does, the gold market – and gold miners – would jump higher quickly. There’s simply not enough supply.

That’s why gold miners are a great option for getting some exposure to the next gold boom. But there’s an even better way to play this trend…

More Upside, Less Risk

Gold royalty companies have all the upside benefit of mining stocks – without many downside risks.

I know the gold royalty industry inside and out. I have deep connections in the business. As a director on the board of a successful gold royalty company, I know big things are coming for the space.

A gold royalty company doesn’t actually produce any gold. Instead, it lays claim to a small percentage – a royalty – on the gold that gold miners produce.

A gold royalty gives the holder a small percentage, usually 1-2%, of all the gold ever produced from a mine. The royalty has a few very important features.

A royalty survives even when a gold mining company fails. Say Company A owes the royalty holder 1% of all the gold produced at its mine. It goes belly-up. Company B buys the mine out of bankruptcy. In this case, Company B still owes the royalty holder 1% of everything that comes out of the ground.

A royalty covers future discoveries of gold on a property. Most mines go on producing far longer than planned. Once the operator is 2,000 meters and $1 billion into a project, it’s reluctant to leave.

Usually, it spends money drilling looking for more gold at the bottom of the mine. The operator often finds it. The royalty holder gets 1% of that, too.

A royalty owner doesn’t care if a mining company endlessly issues stock diluting its shareholders. This happens all the time in the mining business. Operators never seem to make money and never run their companies properly over the long term.

But the royalty cannot be diluted. 1% is always 1% from now until the end of time.

If the price of gold surges, the royalty owner captures all the upside. Say the mining company produces 100,000 ounces of gold in a year. It gives the royalty company 1,000 ounces (1%) which the royalty company sells right away. If gold goes up $100 that year, the 1,000 ounces yields $100,000 more than it did last year.

Meanwhile, the royalty holder’s cost didn’t change. The day it bought the royalty was the last dollar it paid the mining company, even if that was 20 years ago.

As you can see, the royalty business has many advantages when compared to actually mining gold.

You can get started today by looking into shares of Franco-Nevada (FNV). It’s the largest company in the sector and one of the safest ways to take advantage of the coming boom.

Trump's Declaration of War

Conflict with Iran Could Be Inevitable after Killing of General

A Commentary by Maximilian Popp

Iranian General Qassem Soleimani was killed in a U.S. drone strike in Baghdad on Thursday night.

U.S. President Donald Trump has repeatedly insisted he does not want war with Iran. Now, with the killing of General Qassem Soleimani, that conflict could be inevitable. It is the price for instinctual foreign policy devoid of experts.

He wanted to do everything differently, using deals instead of alliances, pressure instead of strategy. Even among Donald Trump's critics, there were many who long thought it might be a bad way to approach foreign policy. After all, preceding U.S. presidents had all struggled for years to find solutions to the same set of apparently insoluble crises: Afghanistan, Iran, North Korea.

Donald Trump made a complete break with traditional U.S. foreign policy. He got rid of the experts in the State Department and discarded the tools of diplomacy --negotiations, trade-offs and the weighing of interests. The guiding principle was "disruption."

Trump claimed that he could solve conflicts purely with his charisma and his imagination. After all, didn't the tech companies in Silicon Valley likewise remodel the world with their innovations?

Now, though, the failure of Trump's approach has become obvious to all. Disruption might be a model appropriate for Google and Facebook, but not for global politics.

On Tuesday, Shiite militiamen attacked the U.S. Embassy in Baghdad, likely at the behest of Iran, and the ambassador had to be evacuated along with embassy staff.

On Thursday night, the U.S. responded by killing the commander of the Iranian Quds Force, Qassem Soleimani, in a missile strike in Baghdad.

Soleimani was considered to be the second-most powerful man in Iran and his assassination is nothing short of a declaration of war.

At almost the exact same time, North Korean dictator Kim Jong Un threatened to carry out new nuclear weapons tests.

Two crises that Trump had promised to contain have now become more acute and threatening than they had been for some time.

The Epitome of Trump's Capriciousness

The killing of Soleimani is the epitome of Trump's capriciousness. The ploy of unexpectly changing directions, of making threats and surprise attacks has not managed to extricate the U.S. from the Iraq-Iran-Syria quagmire. Washington has continued to be dragged into conflicts in the Middle East.

Ever since the U.S., under Trump's leadership, backed out of the nuclear deal with Iran, Tehran has changed course. It has responded to the Trump administration's strategy of "maximum pressure" with provocations, for example by attacking American facilities in the Middle East.

The Iranian regime had hoped the approach might force the Trump administration back to the negotiating table.

Now it looks as though the reciprocal attacks could lead to catastrophe. The U.S. killing of Tehran's most important general, a man celebrated by the regime as a kind of folk hero and revolutionary freedom fighter, marks the continuation of this confrontation. It is a dramatic, shocking move that Tehran can hardly leave unanswered. Trump has said he isn't interested in war, but his course of action is heading toward exactly that.

That is the greatest danger currently facing the world, but it isn't the only potentially dangerous consequence of Trump's instinctual foreign policy. North Korea's Kim Jong Un also remains unpredictable.

For a brief moment, it looked as though he might respond positively to Trump's personal approaches and scale back his nuclear program in exchange for economic concessions. Since his bellicose New Year's address, however, in which he directly threatened America, it has become clearer than ever that the Bomb is more important to Kim than economic relations with the U.S.

Triggering a War by Accident

Trump's failure holds a lesson both for the U.S. government and for the Europeans: Namely that blatant pugnacity may be appropriate for political campaigns, but it has no place in diplomacy. Foreign policy is both arduous and dangerous. It requires endurance, humility and a willingness to compromise.

The nuclear deal with Iran assembled by former U.S. President Barack Obama didn't prevent the regime in Tehran from fomenting strife in the region either -- and Qassem Soleimani was Iran's most important tool for doing so.

Nevertheless, Obama's attempt to break down the Iran problem into its component parts was the right approach. Large conflicts must be solved step-by-step rather than with a single, grandiose deal: you cease working on the development of nuclear weapons and we'll loosen sanctions.

That's how diplomacy works. Europe should continue taking this approach.

The North Korean example demonstrates just how important it is to involve political professionals. Trump, though, has no respect for experts. By getting rid of countless staff members, he has essentially sidelined the State Department, and in negotiations with Pyongyang, this ignorance made itself felt.

Trump relied heavily on the supposed friendship he thought he had with Kim, failing to understand -- and there was apparently no one around to tell him -- just how important nuclear weapons are for Kim's own grip on power. That is the only explanation for why Trump was unable to secure at least a temporary stop to the North Korean nuclear program in exchange for the 2019 summit with Kim in Hanoi.

There is nothing wrong with courageous, surprising foreign-policy initiatives. Former German Chancellor Willy Brandt's rapprochement with the Soviet bloc made the world a safer place.

But they have to be carefully prepared and carefully applied. Diplomacy is a serious undertaking.

Those who don't approach it with the gravity it deserves risk triggering a war by accident.