Decade of Living Dangerously, Part 1

By John Mauldin

Welcome to the 2020s. Some weren’t sure we would make it this far, but we did.

Now we face a new decade and new challenges. How we handle them will determine what kind of conversation we have in 2030.

This concern for the future is one of the things that separates humans from animals. Dogs don’t worry about tomorrow, much less next year. They live completely in the present, giving it their all (an ability I sometimes envy).

Being human, I have to think about the future. And being a writer, people want to know what I think. So today and next week I’ll outline what I expect for both the year 2020 and the decade of the 2020s. My forthcoming book will have an even more detailed vision, so consider this an appetizer.

Crisis Delayed

In some ways, today’s Decade of Living Dangerously letter is a continuation of my 2019 forecast, The Year of Living Dangerously. I think the 2020s in general will be rough. But to be clear, my view of the decade is not my view of the coming year.

In summary, I expect 2020 will look like a slower version of 2018 and 2019.

My base case is for no recession this year, with all the usual caveats, But it’s important to know what we should pay attention to. Some key events began to unfold last year that I think will continue in 2020. Some are hard to grasp, as I said in that letter a year ago.

In a nutshell, I expect to spend this year Living Dangerously. Yes, I’m thinking of the 1982 film starring a very youthful Mel Gibson and Sigourney Weaver, based on an earlier Christopher Koch novel. It has an Asian setting and features corrupt politics, neophyte journalists, international intrigue plus a gender-bending Chinese dwarf. If you aren’t sure how all those fit together, then welcome to 2019. We are all stuck in this craziness and can only make the best of it.

Reviewing old forecasts can be humbling, but I think that mine for 2019 held up well. I outlined several risks, all of which did, in fact, pop up during the year. Fortunately, they didn’t have dire consequences… but they also aren’t over yet.

Risk, by the way, is an often-misunderstood word. It’s the possibility something bad will happen. You take risk every time you get in your car and drive somewhere. Accidents are always possible, no matter how careful you are. The fact that you didn’t crash today doesn’t mean you can throw caution to the wind tomorrow. The risk is still there.

Similarly, the fact we got through the year without Crisis X occurring doesn’t mean the risk is gone. Living dangerously tends to catch up with you.

My top concern for 2019 was a Federal Reserve policy error. The December 2018 rate hike turned out to be that cycle’s last one, though none of us knew it at the time. We saw the Fed both raising rates and shrinking its balance sheet, and markets not liking it one bit. I said they should do one or the other, not both simultaneously. I said it was going to be tough.

We are in a serious pickle. The extraordinary measures central banks took to get us out of the last crisis could make the next one even worse. They seem collectively hellbent on reducing their balance sheets. Avoiding another liquidity crisis will take some seriously active management by the FOMC and central bankers elsewhere, too. I am not confident they can do it.

That liquidity crisis I feared actually happened nine months later. The repo market seized up, causing the Fed to launch a QE-like asset purchase program that is still in progress today. As I explained last month in Prelude to Crisis, the Fed’s bad choices have compounded to the point where all the options are bad.

I see almost zero chance the Fed will end the repo program after the six months it presently plans, because I see zero chance the federal deficit will shrink. (Chances are high it will get even bigger.) Oh, it’s possible they pause for a short time, but then we will see another Taper Tantrum and they’ll reopen the spigots. The Fed’s QE-forever mode is helping stock and other asset prices for now. It may continue into 2020, but not forever.

Market valuations are a little bit stretched, to say the least. Last December we had a 20% correction and the CNN Greed and Fear index went to 1. A year later it was back at 97. In the meantime, the Federal Reserve reversed its balance sheet reductions, cut interest rates and generally accommodated the market’s and Trump’s desires.

If we get anything like the correction we saw a year ago, I think the Fed will respond with another interest rate cut or two, while continuing the current QE and maybe even increasing it. As Milton Friedman famously said, “Nothing is so permanent as a temporary government program.”

Circling the Drain

Another potential 2019 crisis, avoided so far but still with us, lies in the corporate bond market, especially its high-yield segment. Companies continued levering up last year and yield-hungry investors helped them do it. That might be less worrisome if they were using this borrowed money to make capital investments or otherwise generate additional value. Instead, much of it goes to buybacks that prop up share prices but don’t make the company any more valuable. It shifts the capital structure away from equity in favor of debt. It mainly helps option-holding management at the expense of shareholders.

Yet another problem is this debt tends to be short-term and has to be constantly rolled over. This is the same challenge the federal government faces. Congress and the Trump administration are spending more money, forcing the Treasury to sell more paper. This rising demand for liquidity is one factor behind the repo crisis, to which the Fed is responding with QE (or whatever you call it).

Both the Treasury and corporate borrowers compete for the same capital. Each has attractive features it can offer. Treasury has safety but low yields. Corporates have credit risk but higher yields. Low-rated corporates have even more credit risk and even higher yields. But they all have limits.

At some point, junk bond issuers can’t offer high enough yields to compensate for the additional risk they have over Treasury debt. That’s getting harder, not easier, as the federal deficit sucks up more of the available liquidity.

And the quality of the debt just keeps getting worse. BBB bonds now make up more than 50% of investment-grade corporate debt. That is worrying enough. But the spreads over Treasuries are dropping as investors reach for yield with both fists. This was dangerous last year and it is just as dangerous this year. When (not if) there is a recession this market is going to break badly. Investors and index mutual funds chasing this yield could see losses well over 50%.

Source: Bloomberg

I’m fairly conversant with the high-yield/junk bond space, but my go-to guy is really Steve Blumenthal. He thinks investors in some funds could lose as much as 70%+ because so much of the paper is either “covenant lite” or has no covenants at all. Literally nothing backs this paper except the issuing company’s goodwill and promises.

You know how exits clog when everybody tries to leave the theater at the same time. When the bond show ends, there will be nobody on the other side of the trade to buy those bonds in anything like a timely fashion. It will be one of the ugliest and most devastating investment events of our lifetime.

That being said, the bottom of that market will also be the buying opportunity of a lifetime. Patience, grasshopper.

The Fed is trying to manage this and doing a good job so far. Its task could suddenly get way harder if we see any major corporate debt defaults, as is likely if the economy weakens and possible even if it doesn’t. Rates might rise to a point at which already-leveraged companies can’t roll over their existing debts, much less issue more. And then it gets sticky.

And then think about what happens if we have a recession. This chart from the St. Louis Federal Reserve FRED database shows that during the last recession, high-yield rates rose to 21.8%. When that happens next time?

Source: St. Louis Fed

Let’s look at one fund from Vanguard (I’m not picking on them. This was literally the first chart I found, and dozens of funds would show the same). Notice the cliff-like sheer drop in late 2008. Nowhere to run, nowhere to hide. Your NAV was down well over 30%. Buying somewhere close to the bottom would have brought monster returns in a fairly short time. As they say, timing is everything.

Source: Yahoo Finance

Where might this start? Your guess is as good as mine. But like a nuclear explosion, you don’t have to be at Ground Zero to get hurt. The shock waves are hard to escape. Debt defaults bring layoffs at both the defaulting company and maybe its suppliers, losses for bondholders, and it gets worse from there. Recession can easily follow.

Or perhaps it will be the other way around, with the recession causing the debt crisis. Either will be bad.

Corporate credit may well be a bigger risk than the federal government’s fiscal woes. The Fed can help the Treasury. Supporting private companies is trickier, both legally and practically. They may find ways to do it, as we saw in 2008 with TARP etc., but that will be tough in the present political environment.

I know many readers will say we should have let nature take its course in the last debt crisis. In a strict free market sense, that is the right choice. “Creative destruction” is what enables long-term growth. People and businesses that make bad decisions need to feel market discipline.

Unfortunately, that is a tough sell when people and communities are hurting. Finding the right balance is a big leadership challenge—and I’m not confident present leaders would handle it well.

Tax and Spend

All this will happen against two important backdrops.

First, whether we like it or not, government and central bank decisions now drive most of what happens in the economy and markets. That’s not ideal but it’s where we are. Yes, over long periods market forces will win. But as Keynes famously said, in the long run we’re all dead. Meanwhile, these outside forces will get what they want.

Second, what they want is increasingly unclear and subject to change. That would be the case even if 2020 weren’t an election year but, with candidates at all levels whipping up emotions, it will be even more so.

On the key economic issues, it doesn’t particularly matter who controls Congress or the White House. They’re going to tax and spend regardless, differing only in the details. But perceptions matter, and we will probably see a lot of volatility as investors grapple with how the perceived winners will manage those details.

Wall Street is putting a lot of hope in the “Phase 1” China trade deal to boost growth. Count me skeptical. Yes, China agreed to some helpful changes. The US dropped some (not all) of its current and planned tariffs. But those aren’t the real problem. The real problem is that businesses still can’t be confident policy will remain stable, and thus are unable to make growth plans. I think we will keep seeing this in capital investment numbers, and there’s really no good solution. The trade war genie is out of the bottle.

Worse, this trade war may be producing the opposite of its intent. Last week Tesla (TSLA) delivered the first vehicles made in its new Shanghai factory, built specifically to avoid trade barriers. Instead of incentivizing US export production, tariffs are making US companies shift what would have been export production to other countries. We will see more of this. It may be good for those companies but not for American workers.

Profits from overseas operations are one of the primary reasons for sustained and high US stock valuations. The chart below (courtesy of Danielle DiMartino Booth) shows many of the components of said profits are not growing year over year. That needs to change.

If the China deal at least changes the mood for international corporations and global trade flows, then we’ll have more reasons for a positive outlook. Continued decline in global trade flows would be a serious headwind. This is something we really have to pay attention to. It is a top risk for my otherwise rather benign view of 2020.

Get Ready

While 2020 could bring any of several potential crises to a boil, I think we will more likely have a lot of noise but little real change. I expect more of the same: slow but steady GDP growth in the 1.5% to 2% range, widespread dissatisfaction and polarized opinions on both the economy and politics.

Next week we’ll look further into the coming decade and, as you’ll see, the outlook darkens considerably. This is actually good news, in one narrow sense. We have time to prepare for what’s coming. I personally intend to use 2020 to realign my portfolio, get more liquid, and try to get my businesses in position to take advantage of new opportunities.

We will all be tempted to think that electing our desired candidates will fix everything. I assure you, whatever your orientation, it will not. Bigger things are happening and at this point most are beyond political solutions. The elections will be important in many ways but they won’t change the economic trajectory. That chance is gone.

What isn’t gone is your chance to get ready. My goal this year is to help you do it. One important part of preparation, I believe, is to surround yourself with high-quality people. That goes for your business circles as well as for your personal life. When times get tough, having a support system—financially and emotionally—is priceless.

That said, in a few weeks we’ll reopen the Alpha Society, our exclusive Members’ Club, for a very short time... and we’ll have some big surprises for those who become members. More on that son.

Writing, SIC Planning, and More Writing

A small request: I’m looking for an introduction to Andrew Yang, and I wonder if someone out there has a connection. If so, please contact my staff here. (That’s not an endorsement of his presidential campaign. I just think he has some interesting ideas and I want to learn more.)

My travel plans are strangely wide open right now. I know I will have to get to New York, but have no idea when. Philadelphia is likely soon and Tokyo is becoming a possibility. But I am feeling more and more personal pressure to get this book written and off my to-do list. It’s fun but if I ever take on a project this big again, I hope someone slaps the side of my head two or three times.

The Mauldin Economics team and I are heavily into planning this year’s Strategic Investment Conference, which will be in Scottsdale, Arizona, May 11–14 at The Phoenician. Please register as soon as possible when you get your invitation. At the request of many long-time attendees who want a more intimate atmosphere, we are significantly reducing the number of seats. I expect to fill them quickly.

Aside from writing and researching, I spent the last few pleasant days talking to friends on the phone, just wishing them Happy New Year and catching up. We had a quiet Christmas with just two boys coming for a few days. New Year’s Eve would have been even quieter except that Puerto Ricans go all out on fireworks. We saw occasional flashes throughout the evening and then at midnight the display turned spectacular. Some of my close neighbors had quite professional fireworks presentations. Shane and I got to stand outside and basically just enjoy the show. It was actually quite fun. And it was not just our community, but all around us. I didn’t hear any fire engines, so it seemed relatively safe.

I am now well into my 20th year of writing this letter. Each week we get new readers and to you I say welcome. And everywhere I travel, I meet readers who have been with me since the beginning. To all of you I wish a very prosperous and happy new year. Thanks for being one of my closest friends. I treasure each and every one of you.

Your optimistic about the future analyst,

John Mauldin
Co-Founder, Mauldin Economics

Was Marx Right?

Karl Marx and Friedrich Engels did not claim only that capitalist development engenders its own contradictions, but also that those contradictions could be overcome only through the “forcible overthrow of all existing social conditions.” It is up to governments to carry out – and soon – the reforms needed to prove Marx and Engels wrong.

Andrés Velasco , Luis Felipe Céspedes

velasco100_RODRIGO ARANGUAAFP via Getty Images_chilegraffitti

SANTIAGO – In Santiago, Chile, a massive graffito by the exit ramp of a brand-new, privately-built urban freeway reads: “Marx was right!” Indeed, capitalist development begets its own contradictions, as the scribbling itself attests.

Recent months have been the spring – and winter – of Chile’s discontent: peaceful marches and protests, but also plenty of looting and violence. Just as in Hong Kong and Iran, Colombia and Costa Rica, Ecuador and Peru, Iraq and Lebanon, Sudan and Zimbabwe.

And, despite these countries’ diversity, and that of the local incidents that triggered the unrest, pundits and media have settled into a comfortable narrative: “2019 was a year of global unrest, spurred by anger at rising inequality – and 2020 is likely to be worse” the commentary website
The Conversation confidently asserts.

The Guardian adds: “Not all the protests are driven by economic complaints, but widening gulfs between the haves and have-nots are radicalising many young people in particular.” Even the staid Financial Times concurs: “Inequality in ‘stable’ Chile ignites the fires of unrest.”

Yet many of these countries have long been unequal. And economic conditions are nowhere as dire as they were a decade ago, during the global financial crisis. So why are people taking to the streets now?

The puzzle deepens if one notes that in Latin America inequality has been dropping fast, during precisely the same years it rose in the United States and the United Kingdom. According to the World Bank, between 2007 and 2017 the Gini coefficient (an index of income distribution, where zero represents perfect equality and 100 absolute inequality) fell in every Latin American country now erupting in protests – including by a massive eight points or more in Bolivia and Ecuador.

Here is where a Marxian emphasis on progress and its ensuing contradictions provides much-needed help. Karl Marx and Friedrich Engels, recall, marveled at capitalism’s “constant revolutionizing of production,” but noted that this meant “uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation.”

Consider higher education. In many emerging economies – Brazil, Chile, and Ecuador among them, but also Turkey, Lebanon, and Hong Kong – university enrollment has soared in recent decades. With the supply of skilled labor growing more quickly than demand, the gap between the earnings of the university-educated and the rest narrowed. As a result, different measures of income inequality fell.

Not much, unless you belong to the generation caught in the transition. Young people who went to university in the last quarter-century – often to new institutions whose standards were not exactly Ivy League, but which charged high fees nonetheless – ended up earning less than they expected. The result has been a generation of educated, indebted, and often irate young men and women.

Moreover, as the historian Niall Ferguson recently reminded us, surges in access to higher education, coming on the heels of prolonged periods of peace and prosperity, have often coincided with mass street protest. Education attunes you to injustice, and prosperity means that protesting does not jeopardize your livelihood. It happened in the 1960s in Europe and the US. It is now happening worldwide, faster and more intensely than ever, thanks to mobile devices and social media.

Or consider capital accumulation. The definition of a poor country is one in which productive capital is scarce and weak credit markets mean capital cannot be borrowed to make businesses grow. Optimal development policy thus entails keeping wages and taxes low early on, so that firms can use their profits to fuel investment and growth. As the Princeton University economists Oleg Itskhoki and Benjamin Moll have recently shown, that is true even when a policymaker cares only about the welfare of workers, who will benefit from stronger productivity and higher wages as capital accumulates.

But the 1% do not get a free ride forever. Eventually, Itskhoki and Moll argue, redistribution trumps accumulation. At that point the 1% percent must learn to live with lower profits and a higher tax burden – unless, that is, they choose to use their political might to fight that change.

And so it has been with many emerging economies. From South Korea to Singapore, and from Mexico to Chile, very poor countries grew prosperous in an environment of low taxes. But politics may have caused some of them to delay the switch to redistribution for far too long.

Mexico, for example, is an upper-middle-income country, yet tax revenues are a paltry 16% of GDP, less than half the OECD average. In Chile, the ratio is 21%, yet it has been stagnant for nearly a decade. The result is not only insufficient social insurance for the rising middle classes, but also a dearth of spending on innovation and infrastructure, which causes growth itself to falter. The result is likely to be social unrest, which has come to Chile and may reach Mexico once the new government’s honeymoon ends.

Competition policy is a third example of the Marxian dictum that capitalist success begets its own failures. Economists Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti sketched the cycle in an influential 2006 paper. When a country is relatively poor, allowing firms some monopoly rents accelerates capital accumulation without harming innovation, because firms simply adopt technologies imported from more advanced economies. But once a country prospers and reaches the world technology frontier, further growth requires innovation, which in turn requires competition.

Bottom line: successful emerging economies should adopt aggressive anti-monopoly policies if they wish to remain successful. Many, including Mexico and Chile, have. But here’s the rub: the new, more stringent standards will reveal unending collusion scandals, which will fill the headlines and ignite public anger long before more competition produces the innovation and higher incomes to placate that anger. The price of success in fighting monopoly may be more, not fewer, street demonstrations.

Now, Marx and Engels did not just claim that capitalist development engenders its own contradictions. They also concluded that those contradictions could be overcome only through the “forcible overthrow of all existing social conditions.”

The current wave of protesters has not overthrown much yet (except for Bolivia’s president, who was found to have stolen an election).

It is up to governments to carry out – and soon – the reforms that can prove Marx and Engels wrong.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.

Luis Felipe Céspedes, Professor of Economics at Universidad Adolfo Ibáñez, is a former economy minister of Chile.

What to look for at CES 2020: 8K TV, the passenger economy and ‘smart everything’

World’s biggest tech gathering provides a window into the future

Patrick McGee in San Francisco

Segway - S Pod
On a roll: the S-Pod Segway is a personal transporter that can travel at up to 24mph

The world’s biggest technology event will kick off the new decade in Las Vegas next week, with some of the world’s best-known companies vying with hundreds of start-ups to define the next generation of smart devices and digital services.

CES, which started out as a small gadgetry fair in 1967, now hosts an ever-growing proliferation of chipmakers, telecoms groups and car manufacturers for what is a wacky but often accurate glimpse into the future of tech.

In previous editions, the big players have gone all out. Last year Google assembled a rollercoaster-style train just to ferry passengers through a sequence of its own rooms — part of an elaborate demonstration of its voice-activated Google Assistant, all set to a Disney-style musical number.

For 2020, 170,000 visitors are expected to see the latest products, both serious and silly, from 4,500 companies in fields as various as the internet of things, 5G and augmented reality.

Here are the big themes likely to define this year’s event.

AR glasses

Augmented reality has been more hype than reality in the past few years, with most consumers’ experiences limited to entertainment offerings such as video-chat face filters and the game Pokémon Go.

But the real breakthrough may arrive with AR glasses — a technology that many believe will one day supplant smartphones by projecting a virtual phone screen in front of your eyes.

Today the technology is bulky and expensive, but by 2023 it could be a $31bn market, according to projections from Market Research Future.

Kevin Westcott, head of US telecom, media and entertainment at Deloitte, said that the faster internet speeds of 5G could be a major catalyst for the development of AR glasses’ functionality — beginning with gaming.

“Think about playing one of these massive multiplayer games in real life with hundreds of thousands of people competing in live environments,” he said.

Paul Travers, chief executive of Vuzix, a publicly traded company that sells a variety of smart glasses, acknowledged that the technology probably won’t be mainstream for several years, but he argued that the pieces are falling into place for it to move into real life applications.

“This revolution is right around the corner,” he said. “Smartphones are heading the way of the dodo bird.”

‘Smart everything’

At least a quarter of Americans own a voice-activated smart speaker such as an Amazon Echo or Google Home device, according to the Pew Research Center. But most users rely on such assistants for limited tasks such as setting alarms and playing music.

Over the coming year, however, the technology is expected to mature, with more “skills” being added to devices’ repertoires as they become increasingly central to our day-to-day lives.

According to Mr Westcott, 2020 marks the dawn of “smart everything” — where devices ranging from thermostats to cars will connect to the internet, get smart and talk back to us.

Before the app economy, nobody thought we’d have all the types of services we have today,” he added. “We are at the precipice of the next generation of innovation.”

8K televisions

For many, televisions do not need to get any bigger or better — particularly when improvements in resolution are often near-impossible to discern with the human eye. 
But that won’t stop LG, Samsung and China’s TCL from bringing their latest 8K models to the event, offering double the pixel resolution of Ultra HD or 4K TV sets.
LG has already announced it will be showing off eight such TVs, ranging from 65-inch to 88-inch models, each equipped with AI technology that allows them to apply the ideal picture and sound settings to the content being shown.
Paolo Pescatore, analyst at PP Foresight, called the newest displays “dazzling”, but admitted they were likely to remain “prohibitively expensive” for most consumers for the foreseeable future.
Even those with deep pockets are likely to find their use of the devices will be limited for several years while display technology remains ahead of the broader ecosystem feeding it.
“Let’s not forget there is still a distinct lack of 4K programming with the majority of TV channels still in HD,” he said.
The passenger economy
Despite not being known for unveilings of new models, CES has become one of the most important car shows in the world, primarily because it showcases the latest developments at the intersection of the tech and automotive industries.
This year, a host of brands and suppliers are set to show off their latest wizardry for autonomous vehicles, with Yandex, Russia’s biggest tech group, even hoping to offer rides in its self-driving cars — without a safety driver involved.
Of particular interest to the mobility industry is how humans will spend their time in cars when they no longer need to operate them.
Intel has estimated this “passenger economy” will be a $7tn market by 2050, and carmakers are eager to demonstrate their readiness for it.
BMW, for instance, plans to deck out the interior of one of its electric i3 vehicles in the style of “a boutique hotel”.
Meanwhile, in more unconventional modes of transportation, the Chinese scooter maker Segway-Ninebot will be presenting a sit-down version of its self-balancing personal transporter designed for malls and airports at CES.
The S-Pod, inspired by the “gyrosphere” in the 2015 film Jurassic World, can travel at up to 24mph.

Japan and Iran Form an Unlikely Alliance

By: Allison Fedirka

It appears as though Japan, of all countries, is trying to help Iran out of its predicament with the United States. In May, for example, Iranian Foreign Minister Mohammad Javad Zarif traveled to Tokyo, where he met with Japan’s foreign minister and prime minister.

The visit came a few days after Iran issued a 60-day warning that it would resume uranium enrichment if a new nuclear deal was not reached. One week after the visit, rumors started to emerge that Japan could help play a role in U.S.-Iran relations.

These rumors were fueled by a meeting on May 24 between Japanese Prime Minister Shinzo Abe and then-U.S. National Security Adviser John Bolton, and then by President Donald Trump’s official state visit to Tokyo the next day.

Then, in early June, Abe said he would pay an official visit to Iran on June 12-14, the first of its kind since the Iranian Revolution of 1979. (During the visit, he was the first Japanese prime minister to meet with Iran’s supreme leader.)

All the while, tensions between the U.S. and Iran were escalating, culminating in increased attacks and military operations in the Persian Gulf and Strait of Hormuz, including an attack on a Japanese-owned vessel.

Japan helped eased tensions again in August after Zarif’s unannounced appearance on the sidelines of the G-7 summit in France.

After the summit, Zarif went to Tokyo to discuss his opposition to U.S. efforts for building a coalition of naval forces, friendly to the U.S., to safeguard sea-lanes in the Persian Gulf.

Most recently, Iranian President Hassan Rouhani paid a visit to Japan on Dec. 20, a first in 18 years. The meeting, like the ones before it, was shrouded in privacy, but Japanese media have since reported on Japan-Iran developments, highlighting Japan’s role as an intermediary between the two global rivals.

Media outlets in Japan have even quoted Abe as saying the purpose of the meetings was to avoid war through dialogue.

Security and Economic Needs

Japan has put its money where its mouth is.

During Abe’s June visit to Tehran, he expressed an interest in investing in Chabahar, the India-backed port and Tehran’s only port on the coast.

Its current capacity is 8.5 million tons of cargo per year, though port authorities say it currently operates at 10 percent capacity largely due to sanctions.

The port is seen as a counter to Chinese expansion in the region through the Belt and Road Initiative, a constant concern of Japan’s.



It’s a mutually beneficial arrangement. Iran gets much-needed investment, and Japan (possibly) gets a foothold in a strategic port along the Gulf of Oman that could serve as a counterweight to potential Chinese naval bases nearby while improving its budding military relationship with India. More generally Japan has called for support for the Iran nuclear agreement but refrained from saying anything substantial on U.S. sanctions against Iran.
It has also declined to join the U.S. coalition to patrol and protect merchant ships in the Middle East, opting instead to independently send its navy on information-gathering missions around the Strait of Hormuz and Bab el-Mandeb shipping lanes. Japan said it will still cooperate with the U.S. Navy despite not formally joining the coalition. (Its absence sits well with Iran, which has a growing list of enemies in the region.)
Tokyo later upgraded its deployment plans to include sending warships to the Middle East to protect vital shipments of oil and natural gas and made it clear that Japanese warships would not patrol the contentious Strait of Hormuz, the critical chokepoint where an outbreak of conflict with Iran would be most likely. The move complements U.S.-led efforts while still giving Japanese forces the opportunity to protect energy shipments.
The forces prompting Iran and Japan to work closer together stem from security and economic needs. The Iranian economy has been crippled by sanctions, inflation is soaring, the currency has lost 70 percent of its value in one year, and there are regular shortages of basic goods. U.S. sanctions have severely limited Tehran’s options for righting the ship. One option is to improve its public appearance to reassure its citizens that the situation is under control.
Another strategy has been to court other countries for support. Russia and China have stepped in to help circumvent U.S. sanctions, but because the U.S. also considers them its enemies, they are in no position to help ease tensions or resolve core issues. Economic sanctions hamper diplomatic outreach too.
The fact that Iran’s prospective business partners risk U.S. retaliation has been a major factor in slowing Europe’s progress toward implementing plans for the INSTEX trading system. Other potential allies such as India can’t help either, But Japan can.
It has a strategic relationship with the U.S., giving it some room to call the shots with Washington and at the same time with vested interests in helping Iran.
Japan’s economic and security strategy dictates that it should improve ties with Iran and the U.S. to secure safe maritime transit from the Gulf to the Indian Ocean. Japan depends on imports for its energy supply.
Nearl 90 percent of Japan’s oil comes from the Middle East. Naturally, it requires a steady supply of affordable oil from the region and therefore does not want a conflict to break out in the Persian Gulf or Red Sea that would jeopardize supply and raise the cost of crude, both of which would hurt Japan’s economy.
Japan also has an interest in containing and remaining on even footing with its rival, China, which has been working to expand its reach westward into the Middle East and across the Indian Ocean into the Gulf.
Japan does not want to see China (or Russia, for that matter) dominating the Iranian oil market – to say nothing of Japan’s desire to expand its blue-water naval capabilities and training experience, which aligns with Washington’s interest in regional allies taking over more of their security responsibilities.

The U.S. Remains Quiet
The United States has been unequivocal in its decision to leave the Iran nuclear deal, adamant that countries not do business with Iran, and unfailing in its criticism of those that support Iran. And yet, Washington has been uncharacteristically quiet about Japan’s budding relationship with Iran.
After all, Japan and the U.S. are security allies that work closely to contain China, so Tokyo must walk a fine line. It has, for example, remained on Washington’s good side by creatively tip-toeing around U.S. sanctions in Chabahar, which is used to move food and thus exempt from U.S. reprisal.
Japan has also done its part to coordinate actions closely with the U.S. Prior to Abe’s visit to Tehran and after Rouhani’s visit to Japan, Trump and Abe held extensive and private phone conversations.
Though the U.S. approves of Japan’s early efforts to help break the impasse with Iran, there are reasons for remaining quiet over the matter. First, these are the early stages, and it is unclear if the strategy will work out. There is also the fact that the U.S. cannot decrease its pressure on Iran prematurely or come across as backing down with Iran and meeting Tehran’s demands for dialogue.
The U.S. would welcome reconciliation with Iran. Publicly, Washington has conditions that Iran cannot accept despite Rouhani’s frequent comments about being open for dialogue.
Tehran is not willing to end all nuclear activity to open the way for talks and therefore stresses the need for “the right conditions” to move forward. However, the U.S. has subtly shown its flexibility on the matter.

For example, just before the news that Japan was ready to invest in Chabahar, U.S. officials again said exemptions for port activity (for India) remain in place so long as the Islamic Revolutionary Guard Corps is not involved.
It’s worth noting that for all of Washington’s public support for regime change in Iran, it’s not clear that that’s what Washington really wants since it can’t control what will replace it.

Just look at the problems that arose in Syria and the emergence of the Islamic State.
There is no guarantee that a government more aligned with Washington’s worldview would take over – in fact, it’s rather unlikely. Iran has a highly factitious political system that cannot be easily reduced to pro- or anti-American.
It’s too early to tell how successful Japan’s mediation efforts will be. But it’s clear that the U.S. and Iran are on board with these efforts, because they suggest a broad, comprehensive understanding may be possible – one that goes beyond Iran. In addition to Iran, Japan has discussed Afghanistan, Iraq, Syria, Yemen and Palestine with his Iranian and American counterparts.
It’s also clear that there are still some major gaps in understanding that need to be overcome before significant progress in talks can be made. Japanese press reported that Iran feels the U.S. miscalculated the Iranian viewpoint and Rouhani reiterated his readiness to hold talks with the U.S. if it revises its approach.
These are vague instructions on what needs to change from the Iranian point of view but nevertheless provide guidance for Washington on how to think about ways to break the impasse with Iran, with Japan’s help.


Big Money and America’s Lost Decade

Yes, the rich have too much political influence.

By Paul Krugman

Elizabeth Warren’s argument that the wealthy have too much political influence is not always echoed by the media.Credit...Philip Cheung for The New York Times

Elizabeth Warren has been getting a lot of grief in the news media lately. Some of it, no doubt, reflects campaign missteps. But much of it is a sort of visceral negative reaction to her criticisms of the excessive influence of big money in politics — a reaction that actually vindicates her point.

It’s true that earlier in her career Warren, like just about everyone else, did fund-raisers with wealthy donors. So? Charges of inconsistency — “you said X, now you say Y” — are all too often a journalistic dodge, a way to avoid dealing with the substance of what a candidate says. Politicians should, after all, change their minds when there’s good reason to do so.

The question should be, was Warren right to announce, back in February, that she would halt high-dollar fund-raisers? More broadly, is she right that the wealthy have too much political influence?

And the answer to the second question is surely yes.

The first thing you need to know about the very rich is that they are, politically, different from you and me. Don’t be fooled by the handful of prominent liberal or liberal-ish billionaires; systematic studies of the politics of the ultrawealthy show that they are very conservative, obsessed with tax cuts, opposed to environmental and financial regulation, eager to cut social programs.

The second thing you need to know is that the rich often get what they want, even when most of the public want the opposite. For example, a vast majority of voters — including a majority of self-identified Republicans — believe that corporations pay too little in taxes. Yet the signature domestic policy of the Trump administration was a huge corporate tax cut.

Or to take an issue close to Warren’s heart — and her signature policy achievements — most Americans, including a plurality of Republicans, favor tougher regulation of big banks; yet even before Donald Trump took office, the relatively mild regulations put into effect after the 2008 financial crisis were under sustained political assault.

Why do a small number of rich people exert so much influence in what is supposed to be a democracy? Campaign contributions are only part of the story. Equally if not more important is the network of billionaire-financed think tanks, lobbying groups and so on that shapes public discourse. And then there’s the revolving door: It’s depressingly normal for former officials from both parties to take jobs with big banks, corporations and consulting firms, and the prospect of such employment can’t help but influence policy while they’re still in office.

Last but not least, media coverage of policy issues all too often seems to reflect the views of the wealthy. Take, for example, the issue of policies to combat unemployment.

Unemployment in the United States is currently at a historical low, just 3.5 percent — and we’re achieving that low unemployment without any sign of runaway inflation, which tells us that we were capable of this kind of performance all along. Remember when people like Jamie Dimon, the chief executive of JPMorgan Chase, told us that high unemployment was inevitable because of a “skills gap”? They were wrong.

But it took us a very long time to get here, because unemployment receded only slowly from its post-crisis peak. The average unemployment rate over the past decade was 6.3 percent, which translates into millions of person-years of gratuitous joblessness.

Why didn’t we recover faster? The most important reason was fiscal austerity — spending cuts, supposedly to reduce the budget deficit, that exerted a steady drag on the economy from 2010 onward. But who was obsessed with budget deficits? Voters in general weren’t — but surveys indicate that even when the unemployment rate was above 8 percent the wealthy considered budget deficits a bigger problem than lack of jobs.

And the news media echoed these priorities, treating them not as the preferences of one small group of voters but as the only responsible position. As Vox’s Ezra Klein noted at the time, when it came to budget deficits it seemed that “the usual rules of reportorial neutrality” didn’t apply; reporters openly advocated policy views that were at best controversial, not widely shared by the general public and, we now know, substantively wrong.

But they were the policy views of the wealthy. And when it comes to treatment of differing policy views, the media often treats some Americans as more equal than others.

Which brings me back to the 2020 campaign. You may disagree with progressive ideas coming from Elizabeth Warren or Bernie Sanders, which is fine. But the news media owes the public a serious discussion of these ideas, not dismissal shaped by a combination of reflexive “centrist bias” and the conscious or unconscious assumption that any policy rich people dislike must be irresponsible.

And when candidates talk about the excessive influence of the wealthy, that subject also deserves serious discussion, not the cheap shots we’ve been seeing lately. I know that this kind of discussion makes many journalists uncomfortable. That’s exactly why we need to have it.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

A Sea Change in Fuel Prices Is Imminent

January’s deadline to use cleaner marine fuel could ripple through the global fuel market on land and sea

By Spencer Jakab

While ships make up just 5% to 7% of global transport oil demand according to Goldman Sachs, they emit about half of sulfur from transport because they use the dirtiest fuel. Photo: ishara s. kodikara/Agence France-Presse/Getty Images

Much of the hand-wringing about cleaner fuel has to do with things we encounter daily—trains, planes and automobiles.

But possibly the most significant issue, and certainly the most immediate one, is far out at sea.

That is where most transport by ton miles takes place.

A looming change to rules for maritime fuel in January could cause a splash, making goods and travel of every type more expensive.

The International Maritime Organization is about to reduce the limit on sulfur in fuel oil to 0.5% from 3.5%.

While ships make up just 5% to 7% of global transport oil demand according to Goldman Sachs, they emit about half of sulfur from transport because they use the dirtiest fuel—literally the bottom of the barrel. The move will prevent over half a million premature deaths from pollution globally in the next five years according to a study cited by the IMO.

But saving those lives may not come without significant cost and disruption, according to many in the industry. Refineries, as they are currently configured, can’t simply refine out more sulfur. In addition, there just isn’t enough very-low-sulfur fuel oil to go around.

Tor Svelland,a London-based shipping expert who is actively betting on the dislocations through two investment funds, estimates that about 62,000 vessels world-wide that haven’t installed scrubbers to reduce sulfur will be impacted.

That, in turn, will drive the cost of cleaner alternatives including maritime diesel oil—similar to diesel used by trucks and trains—much higher. Right now there is a $350-per-metric-ton gap between the prices of that and high-sulfur fuel oil in use by most vessels. It could widen to as much as $1,000 next year, reckons Mr. Svelland, adding tens of billions of dollars to shipping costs.

The scramble by refineries could be even costlier—in excess of $200 billion in the case of complete compliance with the rules in the first year, estimates Goldman. This could indirectly impact the price of other products such as gasoline. Switching en masse to cleaner liquefied natural gas, which some cruise ships have done, is impractical and costly for shipping lines in the short term.

The rules have been in the works for years and attempts to delay them have failed. Of course there will be some cheating given the substantial cost advantage available to those skirting the rules, but Wood Mackenzie estimates 85% compliance. Vessels calling on ports in developed countries on either end of their journey risk hefty fines or a loss of insurance coverage.
In theory, the changes already should be reflected in the futures market for various fuel varieties, but the impact has been mild. That may be about to change, says Mr. Svelland, as vessels prepare to embark on journeys that will end when the new rules are in force.

“A lot of people were waiting and waiting. Now it’s showing up in the physical market,” he says.

Aside from people whose health may be improved by less sulfur dioxide, there will be other winners: The moves will be a boon to those refiners best able to provide the middle distillates that will be in greater demand, and it will also boost prices for oil producers pumping “sweet” lower-sulfur varieties such as those in Texas, the North Sea and Nigeria.

“Sour” higher-sulfur varieties, including many from the Middle East, Russia and Canada will in turn be disadvantaged. Power producers that use dirty fuel oil and road builders who may see petroleum dregs turned into cheap asphalt should benefit. So might producers of hydrogen for refiners such as Air Products & Chemicals.

Shipowners who already have made the hefty investment in installing scrubbers—about 10% of global tonnage—might find that what they thought was a decent four-to-six-year payback period turns into more like two years, according to Goldman’s estimates of the disparity between clean and dirty fuel prices.

Companies that can install scrubbers may register a surge in demand once the rules are in place. So might shipyards as older vessels nearing the end of their useful lives are scrapped a bit sooner than they might have been. Another impending and expensive rule change involving ballast-water treatment makes newer ships even more attractive.

Given the very long lead time for the fuel switch and the limited evidence of disruption so far, the IMO switch could be seen as a Y2K-type event with lots of sound, considerable expense but no fury.

Yet it could turn out to be a very big deal.

Mainly people in refining or shipping have warned about the shift. The rest of us may soon feel the ripples.