Hair of the Dog

Doug Nolan



“U.S. Stocks Tumble 11% in Worst Week Since Crisis,” read the Friday evening Bloomberg headline. A Wall Street Journal caption asked the apt question: “U.S. Stocks Were at Records Last Week. What Happened?”

A Friday Bloomberg article (Lu Wang) is a reasonable place to start: “It’s a stat so shocking that it’s difficult to believe: In a century spanning the Great Depression and Financial Crisis, the current correction is the fastest ever. To understand how it happened, you need to recall how euphoric markets very recently were.

Hard as it is to remember now, as recently as two Wednesdays ago, with coronavirus headlines everywhere, Apple Inc. was capping off a rally that had added $600 billion to its value in eight months. Lookalike runups in all manner of tech megacaps pushed valuations in the Nasdaq 100 to a two-decade high. In just three months, Tesla’s market cap shot from $40 billion to $170 billion, while a pack of dodgy microcaps, hawking space vacations and fuels cells, were trading hundreds of millions of shares a day.”

Manias are accidents in the making. And after an agonizing week, markets crave for emergency central bank stimulus - yet another rash morning shot of the “Hair of the Dog.”

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” Statement from Fed Chair Jay Powell, Friday, February 28, 2020

February 28 – CNBC (Jeff Cox): “Former Federal Reserve Governor Kevin Warsh said Friday he expects the Fed and other central banks around the world to act soon in response to the coronavirus outbreak. Warsh, occasionally rumored to be a candidate for Fed chairman after Jerome Powell’s term expires, spoke Friday morning to CNBC… He recommended the Fed act as quickly as Sunday to assuage financial markets that have been in an aggressive swoon all week as the virus has spread. ‘This thing’s moving pretty darn quickly,’ he said. ‘At the very least, a statement on Sunday night before Asian markets open would buy them a little time and let us all learn a little bit more about where things are.’”

Friday afternoon saw the President weighed in: “I hope the Fed gets involved, and I hope they get involved soon… They’re all going in, they’re all putting in a lot of money. Our Fed sits there, doesn’t do what they’re supposed to do. They’ve done this country a great disservice.”

Central bankers have done the world incredible disservice. I have referred to 2019 as a “monetary fiasco.” The Fed and global central banks applied aggressive monetary stimulus in the midst of historic “Terminal Phase” financial excess. This misguided stimulus propelled speculative “blow-off” dynamics that significantly exacerbated underlying financial and economic fragilities. Not only making the problem more acute, so-called “insurance” rate cuts reduced stimulus measures available for when speculative Bubbles burst, Credit stumbles and economies falter.

The initial fallout is upon us. The so-called Fed (and global central bank) “put” created dangerous market distortions. Markets were emboldened to disregard risk, while the gaping divergence between inflating asset markets and deflating fundamental prospects grew only more outrageous.

Suddenly so much has changed. For one, markets began to appreciate that a coronavirus pandemic has the clear potential to incite severe global financial and economic upheaval. With markets under pressure, President Trump held a Wednesday afternoon news conference to calm fears. In contrast to well-timed market placation throughout Chinese trade negotiations, his comments fell flat. Coronavirus fears were immune to the Trump “put.”

Of course, the coronavirus will be similarly immune to central bank stimulus, with the short half-life of Chairman Powell’s Friday market-supporting statement worth noting. Yet markets still resolutely embrace the notion central bank rate cuts and QE will eventually spur buying while restoring confidence. And while most of the attention is focused on the Fed’s equities market “put”, probably the more consequential central bank-induced market distortion has flourished throughout the derivatives markets.

Why not sell flood insurance when central banks ensure drought? And with insurance so cheap, why not indulge in risk-taking – build that dream home on the riverbank? Why not leverage in higher-yielding debt instruments with global central banks vowing to keep booming markets highly liquid?

Major cracks emerged this week in key global derivatives markets, as de-risking/deleveraging dynamics took hold (with lightning speed).

Investment-grade corporate CDS surged 20 bps this week to 66.5 bps, trading to the highest level since June 3rd. It was the largest weekly gain in data going back to 2011. High-yield CDS jumped 75 bps to 370 bps, trading intraday Friday at the highest level (390) since June 4th. It was the largest weekly gain since the week of December 11, 2015. With derivatives markets dislocating, liquidity vanished and corporate bond issuance came to a screeching halt. There were no investment-grade deals for the first time in 18 months, as $25bn of sales were postponed awaiting more favorable market conditions.

Goldman Sachs (5yr) CDS jumped 23 this week to 71 bps, the high since October. After trading on February 14th to the low since 2007 (28bps), JPMorgan CDS closed this week at 52.5 bps (highest close since February ’19). Citigroup CDS jumped 20 bps this week to a four-month high 67.5 bps. Morgan Stanley CDS rose 21 to 76 bps.

With derivatives in disarray and “risk off” rapidly gaining powerful momentum, safe haven sovereign bonds went into panic-buying melt-up. Two-year Treasury yields collapsed a stunning 44 bps to 0.915%. Ten-year Treasury yields sank 32 bps to a record low 1.15%. Chaotic Friday trading saw ten-year yields drop 11 bps. Spreads to Treasuries widened significantly – for investment-grade and high-yield corporates as well as mortgage-backed securities.

German 10-year bund yields sank 18 bps this week. Indicative of de-risking/deleveraging, European “Periphery” yields rose – wreaking havoc for “carry trades” (i.e. short bunds to finance levered holdings in higher-yielding Italian bonds). With Italian 10-year yields jumping 19 bps and Greek yields surging 35 bps, the spread to bunds widened a notable 37 bps in Italy and 53 bps in Greece. Yields rose 12 bps in Portugal and six bps in Spain (with spreads widening 29 and 23 bps).

The funding currencies (low-yielding currencies used as funding sources for leveraging in higher-yielding instruments) were on fire. The Japanese yen gained 3.5% versus the dollar, with the euro up 1.7% and the Swiss franc rising 1.4%.

Emerging markets were under intense pressure this week – especially for the higher-yielding currencies popular for “carry trade” leveraged speculation. The Russian ruble declined 4.2%, the South African rand 4.2%, the Colombian peso 4.2%, the Indonesian rupiah 3.9%, the Mexican peso 3.8%, the Turkish lira 2.4%, the Chilean peso 2.2% and the Brazilian real 1.9%.

De-leveraging dynamics abruptly altered the liquidity backdrop, with prospects for illiquid global markets inciting a major repricing of risk throughout the EM universe. CDS prices for a basket of EM bonds surged 60 bps this week to 255 bps, the high going back to December 2016. This was the largest weekly gain since December 2014.

In Asia, Indonesia CDS surged 35 bps (to 94), Malaysia 24 bps (59), Philippines 20 bps (55) and Vietnam 25 bps (109). China sovereign CDS jumped 16 to a six-month high 51 bps. Egypt CDS jumped 69 to 334 bps and Bahrain rose 28 to 201 bps. Latin America was under pressure, with CDS up 39 bps in Brazil (132), 34 bps in Colombia (103), 32 bps in Mexico (104), 21 bps to Peru (63), and 20 bps in Chile (65). Argentina CDS spiked 700 bps higher to 4,895, and Costa Rica jumped 49 to 300 bps. Ukraine CDS surged 107 to 408 bps.

Key higher-yielding “carry trade” EM local currency bond markets came under intense pressure. In chaotic Friday trading, 10-year yields surged 30 bps in South Africa, 26 bps in Colombia, 22 bps in Russia, 18 bps in Indonesia and 15 bps in Mexico. For the week, yields were up 43 bps in Turkey (to 12.46%), 37 bps in Indonesia (6.87%), 31 bps in Mexico (6.80%), 31 bps in Colombia (6.05%), and 28 bps in South Africa (9.10%). Turkish and Russian yields jumped to the highs since November.

It was systematic global de-leveraging, the type of backdrop where members of the leveraged speculating community can quickly find themselves in trouble. Commodity markets succumbed to panic selling. WTI crude collapsed 16% to a 14-month low. The Bloomberg Commodities index sank 6.9% for the week to a 20-year low. Even gold was caught up in the liquidation frenzy, sinking $60 in disorderly Friday trading.

February 28 – New York Times: “From eastern Asia, Europe, the Middle East, the Americas and Africa, a steady stream of new cases on Friday fueled fears the new coronavirus epidemic may be turning into a global pandemic, with some health officials saying it may be inevitable. In South Korea, Italy and Iran — the countries with the biggest outbreaks outside China — the governments reported more than 3,500 infections on Friday, about twice as many as two days earlier.”

Since last Friday’s CBB, coronavirus cases in Italy have surged from nine to 889, with 21 deaths. South Korea saw infections jumped from 346 to 2,931 (one death). Japanese (non-Diamond Princess) infections jumped from 92 to 234 (five deaths). Perhaps most alarming, cases in Iran jumped from 18 to 388. The 34 Iranian deaths (second only to China) suggest infections in the thousands. German cases jumped to 60, up from 18 on Wednesday. Germany’s health minister stated the country was at “the beginning of a coronavirus epidemic.” After detecting its first case Tuesday, infections had jumped to 38 in Spain by Friday.

U.S. cases rose to 66. In an alarming development, three “community transmission” cases were reported (two in California and one in Oregon).

Searching for historical comparisons, experts are increasingly referencing the “Spanish flu” pandemic from 1918 to 1919. Meanwhile, financial market experts are struggling for historical precedent. There was an interesting discussion on Bloomberg Television highlighted in John Authers’ article: “But the stock market’s reaction appears more dramatic than after the two most recent comparable external shocks — the invasion of Kuwait by Iraq in 1990, and the 9/11 terrorist attacks of 2001. Stocks recovered after 9/11, and languished after the Kuwait invasion, so there is no clear precedent for what comes next.”

I wouldn’t dedicate much time to studying past market shocks. We’re in the throes of something unique. Both the 1990 Kuwait invasion and the 2001 terrorist attacks were in post-Bubble backdrops. Moreover, they were pre-QE – prior to monetary stimulus dictating market perceptions, dynamics and prices.

Today’s environment is incredibly precarious specifically due to myriad global Bubble fragilities – market, financial and economic. And especially after last year’s fiasco, Bubble markets are susceptible to waning confidence in central banks’ capacity to sustain liquidity excess and inflating securities and derivatives prices.

I believe there is a reasonably high probability that the historic global Bubble has been pierced.

The coronavirus had already demonstrated the potential to puncture China’s epic financial and economic Bubble. A faltering Chinese Bubble – the marginal source of Credit and demand for so many things globally - is a likely catalyst for piercing Bubbles around the world. Now the coronavirus has the capacity to directly strike at the heart of Bubble Delusions.

The central bank “put” – the capacity to slash rates and employ open-ended QE – has been fundamental to this environment’s incredible capacity to disregard risk. Virtually all market and economic issues would be papered over with monetary stimulus. And as more countries moved to participate in this incredible securities market, central bank and economic growth miracle, markets became even more commanding.

The greater Bubbles inflated the more confident markets became that no country or leader would risk behavior upsetting to the markets. Markets rule – over populations, central banks and governments. Even geopolitical risks could now be ignored.

The past week has seen a momentous development. Markets, for the first time in a long while, must come face-to-face with the harsh reality they don’t in fact have everyone and everything obediently under their thumb. COVID-19 couldn’t give a rat’s ass about the financial markets. And there’s great risk that highly vulnerable markets will struggle with the process of repricing for rapidly mounting financial, economic, social, political and geopolitical risks. In the marketplace, many must move to reduce risk.

Leverage must be lowered. Risk intermediation will be severely challenged, as a colossal derivatives complex operating on the assumption of liquid and continuous markets will confront illiquidity and discontinuities. De-leveraging will face challenges associated with illiquid markets, likely exposing latent issues in the ETF complex.

Whether it’s Sunday, next week or next month, more monetary stimulus is on the way. There’s simply no one else to accommodate de-leveraging (i.e. “buyers of last resort”). And markets will surely rally on the prospect of more QE. But this is turning dangerous. The coronavirus doesn’t care about the central bank “put” either.

If central bank measures don’t immediately resuscitate speculative Bubbles, faith in almighty central bankers might dissolve right along with market confidence. After last year’s melt-up, central banks may be hesitant to move quickly with huge QE programs. But following years of mounting speculative leverage across the globe, I expect central bankers will be shocked by the scope of QE programs necessary to keep the global system from deflating.

This unsettling week provided important confirmation of the Bubble thesis. I believe unprecedented global speculative leverage creates a high probability of a major accident – a “seizing up” of global markets. And from my experience analyzing market Bubbles throughout the nineties and up to 2008, things are surely even worse than I think.

February 26 – Bloomberg (Hannah Benjamin, Tasos Vossos and Molly Smith): “The global credit machine is grinding to a halt. The $2.6 trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, has come to a virtual standstill as the coronavirus spreads fear through company boardrooms. In the U.S., Wall Street banks are facing their third straight day without any bond offerings, a rarity outside of holiday and seasonal slowdowns. European debt bankers had their first day of 2020 without a deal... And bond issuance in Asia… has slowed to a trickle. It’s a remarkable turn of events for a market where investors had been snapping up almost anything on offer amid a global dash for yield. Europe had been enjoying its strongest ever start to a year for issuance, and sales of U.S. junk bonds have been on the busiest pace in at least a decade.”

Extraordinary complacency: the coronavirus and emerging markets

Outlook for EM equities ‘bleak’ amid risk of global recession

Geoff Dennis


Medical staff in protective suits in Wuhan, the epicentre of the novel coronavirus outbreak. The virus could trigger a global recession © REUTERS


Global financial markets are finally catching up to the threat of the spreading coronavirus and are now starting to reflect the real risk that the virus may tip the global economy into recession, typically defined as global GDP growth of less than 2.5 per cent.

The conventional wisdom is that the hit to global growth and risk markets from this virus will be severe but brief, and they will both come surging back after a few months. The “models” for this are the Sars epidemic in 2003 and, to a lesser extent, H1N1 swine flu, in 2009.

In my view, today’s situation is very different and much more threatening — from a macroeconomic (not clinical) standpoint — than those earlier episodes.

There is the obvious, and well-quoted, point that China is much more important to the global economy than in 2003. Today, China accounts for 17 per cent of global GDP (versus 4 per cent in 2003), 11 per cent of global trade (vs 5 per cent) and, most importantly for emerging market investors, 34 per cent of the MSCI EM equity index (vs 8 per cent).

However, I do not think the above data remotely reflect the full threat to the global economy and financial markets from the coronavirus. First, both of those two earlier epidemics, oddly, hit when the global economy was emerging from recession and equities from major bear markets with both ready to surge into recovery mode.

Today, the US economic recovery is very “long in the tooth”, having lasted for more than 10½ years — already the longest (if not the strongest) since 1945.

US GDP growth, even before the virus hit and despite President Donald Trump’s tax cuts and a huge budget deficit, was only about 2 per cent and slowing. Meanwhile, many other advanced economies are in recession or close to it, such as Japan, Germany, Italy (where the virus is most widespread in Europe) and post-Brexit UK.

In EM, growth is very weak in South Korea, Thailand, Brazil, Russia, South Africa and Turkey to name a few countries, while Mexico, Argentina and Saudi Arabia are already effectively in recession. Once-stellar growth in India is slowing sharply too.

In China itself, investment banks are falling over themselves to publish the lowest growth forecast for Q1; 2 per cent year on year seems about right to me at this stage, which represents a sharp contraction on a quarter-over-quarter basis.

Given the above, the risk of global recession from the effects, direct and indirect, of the virus is clear. Secondly, and related to this, global equity markets, more the US than emerging markets, have been in a bull market for 11 years.

Despite recent losses, the S&P Composite is still up more than 350 per cent from its early 2009 low and the MSCI EM index by a more modest 132 per cent from its late-2008 low. This has left valuations very stretched, at least, in the US with widespread earnings downgrades/warnings inevitable from the effects of the virus, building on those already seen from Apple, Mastercard, Microsoft and United Airlines.

Thirdly, however, with valuations, at worst, “fair value”, the threat to EM is different. The MSCI EM index is dominated now by China (with a weighting of 34 per cent, as noted above), but also has Korea as a large market with a weight of just under 12 per cent.

The direct effects of the virus on GDP and earnings-per-share growth in these two big EMs will be severe, without even considering how the virus — and its effects — may spread to other EMs.

Overall, if the world economy is about to slide into recession, which seems a better than 50 per cent chance at this point, the outlook for EM equities is bleak. The recession “playbook” looks awfully like the actual behaviour of financial markets in recent “down” days: stocks down (with EM stocks down more), oil down, bonds up, gold up and the dollar fairly flat.

In EM, the classic investment strategy for such market conditions is to raise cash; favour “closed economy” markets such as India and Brazil; overweight defensive, mainly domestic and high-dividend, sectors, including consumer, healthcare, telecoms/communications services, utilities and infrastructure; and to avoid cyclicals, such as energy and materials, as well as tourism and airline stocks.

There are two other points. Unlike in other downturns, the macro policy weapons available to fight the debilitating economic effects of the coronavirus are thin on the ground especially in developed markets. The bond market is telling us that the US Federal Reserve will cut rates soon, maybe in March, but will that be much help in this situation?

The European Central Bank has limited tools while fiscal policy is also largely tapped out across DMs, with the obvious exception of Germany.

Finally, I am shocked at the complacency of certain governments to the threat from the coronavirus. Let us face it, even if the virus does not turn into a global pandemic, it may trigger the next global recession. As the markets have started to tell us, this is serious and not a time for any complacency.


Geoff Dennis is an independent emerging market commentator.

Can China’s Economy Withstand the Coronavirus?

The COVID-19 epidemic’s tail risks are significant and frightening, but as of now, they do not seem particularly likely to materialize. Instead, the outbreak’s economic consequences will probably be substantial but transitory.

Michael Spence

spence124_STRAFP via Getty Images_chinacoronavirusfactoryworkerhealthinspection


MILAN – The new coronavirus, COVID-19, that emerged in Wuhan, China in December has already killed thousands, altered the daily lives of hundreds of millions, and put the entire world on edge.

Because epidemiologists have not yet fully discerned the virus’ transmission mechanisms, no one can say for sure when the outbreak might be contained, let alone what its economic fallout will be.

This does not mean, however, that no educated guesses can be made. Historical experience with similar large shocks suggests that the short-run economic damage may be considerable. As investors de-risk their portfolios, market volatility should be expected, especially in sectors deemed to have the largest exposures, such as travel and tourism, luxury goods, and autos.

A number of credible estimates (some public and some private) suggest that China’s annual GDP growth could fall by 2-4 percentage points per quarter until the virus peaks. In particular, consumption and output will take a hit, not least because of mobility restrictions, both voluntary and enforced. The bump that the Lunar New Year holiday usually provides is already lost.

The question is when that peak will come. Optimistic forecasts indicate a partial recovery in the second quarter of this year. I believe that it is more realistic to expect a third-quarter recovery, with a material impact on annual global growth. But one cannot rule out the possibility of a prolonged pandemic causing far more extensive damage to economies, owing to business failures, declining employment, faltering private investment and weak or late policy responses.

Barring such a “black swan” event, however, history suggests that the COVID-19 outbreak’s long-term effects may rather small, even negligible. This is all the more likely, because China’s economy is far from fragile. Indeed, it is less dependent on trade than it was in 2003, during an outbreak of another coronavirus, severe acute respiratory syndrome (SARS), and it is equipped to bounce back from reasonably large shocks rather quickly.

One under-appreciated source of strength is the rapid expansion of China’s digital economy. As much as 35.3% (though probably closer to 25%) of all Chinese retail sales now occur online; mobile Internet penetration is very high and rising; and China’s mobile-payments systems are the world’s most advanced.

Because most people and businesses are connected and active online, it is easy to generate large amounts of data that, thanks to artificial intelligence, instantly expand the scope and effectiveness of digital ecosystems.

This will go a long way toward boosting China’s economic resilience, especially in the face of a crisis that limits physical mobility. Advanced digital infrastructure means that workers in many jobs and industries can continue to work from home, even if they are quarantined or locked down. Similarly, sophisticated online educational platforms may be able to offset some of the effects of school closures.

Moreover, for businesses experiencing cash-flow and working-capital challenges, credit can be extended, and terms adjusted, remotely. This would minimize the long-term damage to the service sector, especially small and medium-size enterprises.

Online insurance products can also be extended in several areas, including health. Ordering medical supplies online might circumvent crisis-induced shortages, as algorithms quickly detect and respond to blockages and bottlenecks.

Online platforms can also provide a powerful defense against opportunistic price gouging, which limits the availability of essential goods and services, especially for the most vulnerable. Amazon, for example, has already warned sellers to refrain from charging exorbitant prices for face masks or risk getting kicked off the site.

As an even greater share of the economy is brought online, tracking its performance becomes easier, faster, and more precise. Such data can be used to tailor policy responses and improve the accuracy of forecasts, thereby boosting business confidence, encouraging investment, and accelerating the recovery.

As for the rest of the world, tourism is facing a particularly large negative shock, even in countries that are not badly affected. Companies that have a significant presence China – such as in the automobile and luxury sectors – are also likely to suffer, but they will probably recover alongside the Chinese economy.

Even if COVID-19 is contained fairly soon, however, the crisis could hasten efforts to move key elements of global supply chains away from China. This process has been underway for several years, driven by the shift in China’s comparative advantage from cheap labor-intensive production to higher-value-added tradable activities. Trade tensions between the United States and China have reinforced this trend. The coronavirus could provide an additional impetus.

But more important than China’s position in global value chains is the recognition that global supply networks overall are wound too tightly and lack resilience, though it is far from clear whether the COVID-19 outbreak will spur change. After all, this was also the lesson of the 2011 Tōhoku earthquake and tsunami in Japan, which triggered a meltdown at the Fukushima Daiichi nuclear-power plant and disrupted global supply chains.

Some expect the COVID-19 outbreak to take a toll on the Chinese government’s credibility as well. This seems unlikely. Despite early delays, the Chinese authorities ultimately took decisive action. It may not have been perfect, but in a crisis like this, there are no great choices, and there is no guarantee that chosen measures will work.

Nonetheless, there are lessons for China’s leaders. An obvious one is that objective, bottom-up information is critical to early detection and response. It seems likely that, once the crisis is contained, China will take steps to ensure that the system neither blocks nor filters the flow of such information in the future.

The COVID-19 epidemic’s tail risks are significant and frightening, but as of now, they do not seem particularly likely to materialize, especially if one assumes continued diligent, aggressive, and adaptive domestic and international responses. Instead, the outbreak’s economic consequences will probably be substantial but transitory. What will not pass, unfortunately, are the human costs.


Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.

Star Economist Roubini on the Economic Effects of Coronavirus

"This Crisis Will Spill Over and Result in a Disaster"

Economist Nouriel Roubini correctly predicted the 2008 financial crisis. Now, he believes that stock markets will plunge by 30 to 40 percent because of the coronavirus. And that Trump will lose his re-election bid.

Interview Conducted by Tim Bartz

Economist Roubini: "The markets are completely delusional."
Economist Roubini: "The markets are completely delusional." / AP


Nouriel Roubini is one of the most prominent and enigmatic economists in the world. He correctly predicted the bursting of the U.S. housing bubble in addition to the 2008 financial crisis along with the ramifications of austerity measures for debt-laden Greece.

Roubini is famous for his daring prognostications and now, he has another one: He believes that coronavirus will lead to a global economic disaster and that U.S. President Donald Trump will not be re-elected as a result.

DER SPIEGEL: How severe is the coronavirus outbreak for China and for the global economy?

Roubini: This crisis is much more severe for China and the rest of the world than investors have expected for four reasons:

First, it is not an epidemic limited to China, but a global pandemic. Second, it is far from being over. This has massive consequences, but politicians don’t realize it.

DER SPIEGEL: What do you mean?

Roubini: Just look at your continent. Europe is afraid of closing its borders, which is a huge mistake. In 2016, in response to the refugee crisis, Schengen was effectively suspended, but this is even worse. The Italian borders should be closed as soon as possible. The situation is much worse than 1 million refugees coming to Europe.

DER SPIEGEL: What are your other two reasons?

Roubini: Everyone believes it’s going to be a V-shaped recession, but people don’t know what they are talking about. They prefer to believe in miracles.

It’s simple math: If the Chinese economy were to shrink by 2 percent in the first quarter, it would require growth of 8 percent in the final three quarters to reach the 6 percent annual growth rate that everyone had expected before the virus broke out.

If growth is only 6 percent from the second quarter onwards, which is a more realistic scenario, we would see the Chinese economy only growing by 2.5 to 4 percent for the entire year. This rate would essentially mean a recession for China and a shock to the world.

"The Chinese government will need a scapegoat."

DER SPIEGEL: And your last point?
.
Roubini: Everyone thinks that policymakers will react swiftly but that’s also wrong. The markets are completely delusional. Look at fiscal policy: You can do fiscal stuff only in some countries like Germany, because others like Italy don’t have any leeway. But even if you do something, the political process requires a great deal of talking and negotiating. It takes six to nine months, which is way too long.

The truth is: Europe would have needed fiscal stimulus even without the corona crisis. Italy was already on the verge of a recession, as was Germany. But German politicians aren’t even thinking about stimulus, despite the country being so exposed to China. The political response is a joke - politicians are often behind the curve. This crisis will spill over and result in a disaster.

DER SPIEGEL: What role do the central banks have to play?

Roubini: The European Central Bank and the Bank of Japan are already in negative territory. Of course, they could lower rates on deposits even further to stimulate borrowing but that wouldn’t help the markets for more than a week. This crisis is a supply shock that you can’t fight with monetary or fiscal policy.

DER SPIEGEL: What will help?

Roubini: The solution needs to be a medical one. Monetary and fiscal measures do not help when you have no food and water safety. If the shock leads to a global recession, then you have a financial crisis, because debt levels have gone up and the U.S. housing market is experiencing a bubble just like in 2007. It hasn’t been a time bomb so far because we have been experiencing growth. That is over now.

DER SPIEGEL: Will this crisis change the way the Chinese people think of their government?

Roubini: Businesspeople tell me that things in China are much worse than the government is officially reporting. A friend of mine in Shanghai has been locked in his home for weeks now. I don’t expect a revolution, but the government will need a scapegoat.

DER SPIEGEL: Such as?

Roubini: Already, there were conspiracy theories going around about foreign interference when it comes to swine flu, bird flu and the Hong Kong uprising.

I assume that China will start trouble in Taiwan, Hong Kong or even Vietnam.

They’ll crack down on protesters in Hong Kong or send fighters over Taiwanese air space to provoke the U.S. military. It would only take one accident in the Strait of Formosa and you would see military action.

Not a hot war between China and the U.S., but some form of action.

This is what people in the U.S. government like Secretary of State Mike Pompeo or Vice President Mike Pence want. It’s the mentality of many people in D.C.

DER SPIEGEL: This crisis is obviously a setback for globalization. Do you think politicians like Trump, who want their companies to abandon production abroad, will benefit?

Roubini: He will try to reap benefits from this crisis, that’s for sure. But everything will change when coronavirus reaches the U.S. You can’t build a wall in the sky.

Look, I live in New York City and people there are hardly going to restaurants, cinemas or theaters, even though nobody there has been infected by the virus thus far.

If it comes, we are totally fucked.

"Trump is dead. Quote me on that!"

DER SPIEGEL: A perfect scare-scenario for Trump?

Roubini: Not at all. He will lose the election, that’s for sure.

DER SPIEGEL: A bold prediction. What makes you so sure?

Roubini: Because there is a significant risk of a war between the U.S. and Iran. The U.S. government wants regime change, and they will bomb the hell out of the Iranians.

But Iranians are used to suffering, believe me, I am an Iranian Jew, and I know them! And the Iranians also want regime change in the U.S. The tensions will drive up oil prices and lead inevitably to Trumps defeat in the elections.

DER SPIEGEL: What makes you so sure?

Roubini: This has always the case in history. Ford lost to Carter after the 1973 oil shock, Carter lost to Reagan due to the second oil crisis in 1979, and Bush lost to Clinton after the Kuwait invasion. The Democratic field is poor, but Trump is dead. Quote me on that!

DER SPIEGEL: A war against Iran is needed to beat Trump?

Roubini: Absolutely, and it’s worth it. Four more years of Trump means economic war!

DER SPIEGEL: What should investors do to brace for the impact?

Roubini: I expect global equities to tank by 30 to 40 percent this year. My advice is: Put your money into cash and safe government bonds, like German bunds.

They have negative rates, but so what?

That just means that prices will rise and rise - you can make a lot of money that way.

And if I am wrong and equities go up by 10 percent instead, that’s also OK.

You have to hedge your money against a crash, that is more important.

That’s my motto: "Better safe than sorry!"

Samsung Galaxy S20 First Look: Crazy Cameras and 5G in Every Phone

Does a new camera system and the latest network connectivity justify the naming leap from Galaxy S10 all the way up to S20? Probably not, but Samsung’s latest models are still impressive.

By Joanna Stern

Samsung Galaxy S20 First Look: Three Phones, 5G, So Many Cameras
This year's flagships from Samsung—the Galaxy S20, S20+, S20 Ultra—are packed. But can you tell them apart? WSJ’s Joanna Stern explains how they differ in size, cameras, price and network connectivity.


Executive #1: We need to make a big splash with this new Galaxy S11.

Executive #2: Idea! What if we skip over 11 through 19 and call it the Galaxy S20?

Executive #1: Because it’s, like, 2020? Perfect! But will it really be twice as good as the S10?

Executive #2: Does that matter?


That’s how I imagine Samsung’sdecision to leap from S10 to S20 went down. At a time when global smartphone sales have stalled and Samsung’s looking to maintain its lead, the marketing tricks are in full force.

That’s not to say Samsung won’t once again be out in front, technologically, with its newest models, announced Tuesday and shipping March 6. The Galaxy S20, S20+ and S20 Ultra have all the features to make the competition feel inferior: a new camera system, faster 5G connectivity across the line and improved screens with fingerprint sensors built right in. And unlike last year, the starting price is now $1,000, and the Ultra is a lot more.


Samsung's new Galaxy S20, S20+ and S20 Ultra, from left, have different screen sizes, prices and camera combos. Photo: Kenny Wassus/The Wall Street Journal .


Samsung is offering other options—more than ever, in fact. It is discounting last year’s S10 line. The once-$750 S10e will sell for $600. It’s also releasing a next-gen folding phone, the Galaxy Z Flip, which will be available this Friday for $1,380. Let’s hope Samsung’s second folding phone is better than its first. I look forward to testing it later this week.

So is the company’s new flagship a reason to ditch your already great smartphone? Probably not. I know what you’re thinking: Not even for our cellular savior, 5G? I remain unconvinced by Samsung or the U.S. carriers that the faster wireless network will bring significant changes to our smartphone habits. Again, marketing tricks.

If you’re overdue for an upgrade, though—or you just want to see the latest in smartphone evolution—the Galaxy S20 is actually exciting. You just have to decipher the differences between the three models. Luckily, I spent a short time with the Galaxy S20 fam last week.

What They Share (Hint: 5G)

No matter which Galaxy S20 you go for, you get the following: a choice of colors, at least 128GB of storage and clean and simple Android 10 software. They also all have beautiful, updated AMOLED displays that are supposed to render games and movies more smoothly. (A free Tesla to any non-gamer who can spot the difference.)

What they all don’t have? A headphone jack. The USB-C port is your one-stop shop for charging and plugging in headphones now. Samsung is releasing brand new $150 Galaxy Buds+ with improved battery life and sound quality, too.

And yes, the S20, S20+ and S20 Ultra all have 5G connectivity, making this the first mainstream phone to make use of the faster networks. But … it’s not as simple as having 5G. May I suggest instead of solving this week’s crossword, you decipher the types of 5G and which Samsung phone supports which flavor?



All three of the Samsung Galaxy S20 models have 5G connectivity. / Photo: Kenny Wassus/The Wall Street Journal .


The base Galaxy S20 supports 5G that runs on frequencies under 6GHz. It’s referred to as “sub-6” 5G aka not-super-fast 5G. Sprint, T-Mobileand AT&Toffer this type. In my tests last summer of Sprint’s sub-6 network, I got speeds faster than 4G LTE but not as fast as the speedier, higher-frequency 5G networks known as millimeter wave (mmWave, if you’re a huge nerd). On the other hand, sub-6 is more reliable than mmWave, which is too weak to penetrate most walls, and therefore doesn’t work indoors.

Verizonwon’t have the baseline Galaxy S20 at launch, because it doesn’t have a sub-6 network yet. However, a Verizon spokesman said Samsung will release an S20 that works on the carrier’s mmWave and forthcoming sub-6 networks closer to the summer.

The step-up Galaxy S20+ and S20 Ultra support both networks right out of the box. These phones will be available at all four U.S. carriers, including Verizon.

But that still doesn’t mean you’ll get 5G service if you buy one of these phones. These networks are still in their early phases. Coverage is just starting to roll out across the country. And even when you get a true 5G signal, the speed will only be noticeable when streaming videos, downloading large files or playing games. Carriers are betting big on new types of apps to take advantage of 5G, but right now having a 5G phone just isn’t something to brag about. 
On the upside, since 5G can be more power intensive, Samsung has equipped all the phones with bigger batteries, promising all-day use.

How They’re Different (Hint: Cameras)

The biggest differences between the phones? Size, price and cameras.

Here’s the breakdown:

Galaxy S20 (Starts at $1,000)

With a 6.2-inch display, the S20 is the “smallest” of the bunch. It has only three cameras on the back—a wide, ultrawide and telephoto. Samsung completely gutted the camera system on all the cameras, with the goal of improving the sensors, low-light performance, night mode and video stabilization.

The Galaxy S20 Ultra has a 10X optical and 100X digital zoom. Here is a photo being snapped from about 13 feet away. / Photo: Kenny Wassus/The Wall Street Journal .


For some, the biggest addition will be what Samsung calls a “hybrid optical zoom” built into the telephoto lens. On the base S20 and S20+, that provides 3X optical zoom plus 30X digital zoom. All capture 8K video, too. While you may roll your eyes at that, I’m particularly excited about a new tool that allows you to capture a high-resolution photo from your video footage.

In the short time I had with the phones, I couldn’t test video or photo quality, but I did try “Single Take,” a very cool software trick. I often struggle with the decision to take a still shot or video—especially with my two-year-old. Within 10 seconds, the system captures it all so you don’t have to choose. After the cutest moment has passed, you can review a bunch of photos and video clips that were simultaneously captured.

Galaxy S20+ (Starts at $1,200)

Moving on up, the 6.7-inch Galaxy S20+ has a quadruple camera system on the back. There’s the same wide, ultrawide and telephoto cameras as the S20, plus an added “time of flight” camera. No, it won’t take your phone into orbit—it won’t even take pictures. But it does capture depth information meant to enable photo tricks and augmented reality applications.

Galaxy S20 Ultra ($1,400)

Finally, there’s the whopping 6.9-inch Galaxy S20 Ultra with a camera array the size of an Olympic pool. It has four rear cameras, with two improvements over the S20+. The wide angle camera captures 108 megapixels, and the telephoto has some serious—and potentially creepy zoom: 10X optical and 100X digital.

It’s pretty nuts. Standing about 13 feet away from some tiny handwriting on a notepad, I could tap in and make out the text. It’s pretty amazing to think we can now have such a powerful camera in our pockets—it’s also frightening. I’ll let you think about the things you might not want to have captured from afar, by a total stranger snapping pics with this phone.


Samsung's new Galaxy S20 Ultra gives new meaning to ‘camera bump’ with four cameras, including a telephoto at bottom with a folded zoom and prism. / Photo: Kenny Wassus/The Wall Street Journal .


The big S20 bummer? You need a ginormous $1,400 phone to get the best camera features. Samsung: Some of us want the best cameras without having to buy new pants. And don’t you dare try selling me a folding phone to address that complaint!

I’m looking forward to testing the S20 camera features in my full review, though by the time that’s out in the next few weeks, I fear the Samsung Galaxy S-One Billion may already be on its way.

More ‘money’ Treasuries would calm repo markets

By: Claire Jones


$414bn is a big number – even if you’ve got the right to print as many dollars as you like.

When repo rates spiked at 10 per cent in mid-September, it shook the US Federal Reserve. So much so that the central bank has in the intervening months bloated its balance sheet by more than $414bn to $4.2tn:




The Fed hasn’t liked doing that at all, nor the accusation that the expansion marks the restart of its quantitative easing programme. Yet until last week, the bank had kept quiet on what it planned to do instead.

Last Thursday, we heard the most comprehensive response to date.

Randall Quarles, the Fed’s man for supervision, signalled a series of changes the Fed hopes will both lower demand for central bank cash, and make banks more willing to lend out their reserves. In short, the fixes work by making treasuries behave more like cash.

To judge the success of Quarles’ fix, which we explain in more detail below, we need to answer two questions.

First, would it have stopped the turmoil of last September? To which, we think the answer is yes. Second, does it fix some pretty major flaws in the Fed’s operations with markets? To which the answer is no.

Let’s back up a little and explain why this matters.

The reason the Fed cares so much about the spike in overnight repo rates is because it wants the impact of its monetary policy to transmit throughout the entire financial system.

The repo market reflects the health of this transmission and the Fed is looking to have a spread between it and the central bank-agreed federal funds rate that they can measure in single, or perhaps low double, digit basis points. So for repo jump to about eight percentage points above the federal funds rate in mid-September caused a great deal of concern. And if it had remained as elevated as that from days on end, it could also have been disastrous for the health of the financial system.

At the same time, the Fed wants to wean the banks off its crisis stimulus by lowering the amount of reserves in the system – which for the best part of a decade has been a shockingly large amount:




The Fed can do this by offloading its stock of treasury bills in return for cash. This in turn shrinks the Fed’s balance sheet by lowering lenders’ reserves held at the Fed – something the central bank is keen to do in order to show that monetary conditions are returning to normal.

Months on, we still don’t really know exactly what caused the spike, with myriad factors at play. But one often mentioned culprit is the new liquidity rules for banks, known in supervisor parlance as the liquidity coverage ratio, or LCR.

The LCR is intended to give banks a bigger buffer of assets that are either cash, or cash-like (ie, can be easily sold in order to access cash), to cushion them against a bout of turmoil in which riskier avenues of funding would close. The ultimate aim being to reduce reliance on taxpayer support.

The result is that banks have almost doubled their holdings of high-quality liquid assets (such as central bank reserves, and Treasury securities – dubbed Level 1 HQLA). Which is to the Fed’s liking, given that it makes the financial system more resilient against bouts of panic.

What’s less to the Fed’s liking (but also of the Fed’s making) is the way in which this has led to lenders wanting to hold massive amounts of central bank reserves.

We mentioned earlier that the Fed wanted to shrink its balance sheet by offering Treasuries in exchange for cash. But the trouble is that while both Treasuries and central bank reserves count as Level 1 HQLA, they are not quite perfect substitutes – especially, as Quarles acknowledges, in times of panic:


It may be difficult to liquidate a large stock of Treasury securities to meet large “day one” outflows. For firms with significant capital markets activities, wholesale operations and institutional requirements (such as hedge funds), this scenario is not just theoretical. In the global financial crisis, several firms experienced outflows exceeding tens of billions of dollars in a single day.

The result of this is that, for the purposes of liquidity stress tests that banks conduct*, Treasuries and central bank reserves are far from perfect substitutes, leading the banks to have to hold huge amounts of assets to meet regulatory requirements and intraday liquidity obligations. Via a recent Brookings Institution speech by Quarles’ predecessor Daniel Tarullo, now of Harvard:

During JPMorgan’s Q3 earnings call in October, Jamie Dimon identified these requirements as the constraint that prevented JP Morgan from doing more repo and said his bank is required to maintain at least $60 billion in reserves at the Fed on an intraday basis. Although one would expect that JPMorgan’s size and complexity mean that its requirement is considerably higher than that of other banks, some back of the envelope extrapolation would suggest that the aggregate requirement for all banks could be significant.

Of course, none of this mattered during the era of QE, when lenders were flush with central bank cash. But as the Fed has tightened, it has become more and more of a problem. Without making treasuries more cash-like, a repo spike was perhaps inevitable.

And this is where Quarles’ idea comes in. Here’s the money quotes:

My suggested options are grounded in the principle that the Federal Reserve has an important role in providing liquidity to depository institutions. Today this role is played by the discount window, through which Reserve Banks provide fully collateralised loans to healthy institutions. While the range of eligible collateral for such liquidity provision is very broad, it may be worthwhile to focus for the moment on the Federal Reserve’s potential to provide liquidity that is collateralised only by Level 1 HQLA. With firms posting Level 1 assets as collateral, the Fed would be well positioned to provide liquidity to bridge the monetisation characteristics of HQLA securities versus reserves. Acknowledging this potential role in stress scenarios, the Fed may promote efficient market functioning while assuming very limited risk. If firms could assume that this traditional form of liquidity provision from the Fed was available in their stress-planning scenarios, the liquidity characteristics of Treasury securities could be the same as reserves, and both assets would be available to meet same-day needs…

...We have also already publicly clarified in the 2019 resolution planning guidance that firms can assume discount window access in their Title 1 plans if they can meet the terms for borrowing, such as recapitalizing the bank subsidiary.

We could build on this approach by also allowing firms to rely on the discount window in their ILSTs as a means of monetizing, for example, Treasury securities in their scenarios. This approach would acknowledge a role for the discount window in stress planning, improve the substitutability of reserves and Treasury securities in firms’ HQLA buffers, and maintain the overall level of HQLA that firms need to hold.


Under this regime, then, treasuries would become much more of a substitute for cash, as in theory they could be exchanged for cash over the course of the day at the discount window.

The impact would be twofold. Lenders would need to hold fewer reserves at the central banks, thereby enabling the Fed to shrink its balance sheet. Banks would also be more willing to lend cash, knowing that they had regulatory cover to meet intraday obligations.

(As an important aside, Quarles also said that for the purposes of assessing compliance with additional rules for the biggest lenders, the Fed was thinking of looking at balance sheets over the entire quarter, rather than focusing on a year-end snapshot. This is something that we think would further ease tensions given that at least one big bank had threatened to stop lending dollars at this time.)

If this regime had been in place in mid-September then a spike to eight percentage points above the federal funds rate would have been unthinkable.

We’d note too, that it has a good chance of happening regardless of who wins the race for the White House later this year. While Quarles was appointed by the Trump Administration, Tarullo, who is regarded as being close to leading Democrats, homed in on a remarkably similar theme:

In stressed circumstances, when liquidity providers generally become more cautious even as borrowers need more funding, monetization through other market actors may not be immediately possible. Thus, if the aim of resolution planning and liquidity requirements is to assure funding self-sufficiency by banks under all circumstances, there will be a preference for reserves. So long as reserves have been plentiful, this preference is a feasible regulatory choice. If they prove not to be, though, these requirements might contribute to the kind of [repo markets turbulence] that motivated this conference. Given the pace of increase in the supply of Treasuries created by the post-2017 budget deficits, the importance of the asymmetric regulatory treatment of Treasuries and reserves may become more significant. This, I think, is a regulatory issue worth revisiting, though – as already noted – the absence of publicly available firm-specific and aggregate information may make it difficult for those outside the regulatory agencies to debate the matter in anything but conceptual terms.

Quarles’ fix also clarifies that, as we have previously argued, the current balance sheet expansion is not QE. It indicates that the actions of the past few months do not represent a policy shift to a permanently bigger balance sheet. The Fed clearly wants to squeeze its size to levels more in line with those seen pre-crisis (although there is still a long way to go).

We are not sure why the Fed is so intent on sticking with the discount window – Quarles says in the speech “there may be benefits to working first with the tools we already have”, rather than creating a new facility.

It would be a neater fix to start afresh with a standing repo facility designed with the specific purpose of exchanging treasuries for reserves, rather than trying to use a discount window long seen as a last resort (complete with the stigma one would expect). While allowing the discount window to be used in this way in theory has the same effect, in practice we still do not know whether lenders would view the stigma of actually accessing it as barrier.

Still by making treasuries more like cash, we think Quarles’ fix is a big step forward in consigning the repo market’s troubles to history.


*The article was changed here to reflect that the ILSTs are internal tests conducted by banks, and not the Fed.

How Xi Jinping’s “Controlocracy” Lost Control

Although the global coronavirus epidemic has only recently made international headlines, some in China have known about it since the beginning of December. Thanks to Chinese President Xi Jinping's high-tech dictatorship, that information was not made public, and the virus was allowed to take off.

Xiao Qiang

qiang3_STRAFP via Getty Images_coronavirusbedshospitalchina

BERKELEY – In his 2016 book The Perfect Dictatorship: China in the 21st Century, Norwegian political scientist Stein Ringen describes contemporary China as a “controlocracy,” arguing that its system of government has been transformed into a new regime radically harder and more ideological than what came before. China’s “controlocracy” now bears primary responsibility for the coronavirus epidemic that is sweeping across that country and the world.

Over the past eight years, the central leadership of the Communist Party of China has taken steps to bolster President Xi Jinping’s personal authority, as well as expanding the CPC’s own powers, at the expense of ministries and local and provincial governments. The central authorities have also waged a sustained crackdown on dissent, which has been felt across all domains of Chinese social and political life.

Under the controlocracy, websites have been shut down; lawyers, activists, and writers have been arrested; and a general chill has descended upon online expression and media reporting. Equally important, the system Xi has installed since 2012 is also driving the direction of new technologies in China. Cloud computing, big data, and artificial intelligence (AI) are all being deployed to strengthen the central government’s control over society.

The first coronavirus case appeared in Wuhan, the capital of Hubei province, on December 1, 2019, and, as early as the middle of the month, the Chinese authorities had evidence that the virus could be transmitted between humans. Nonetheless, the government did not officially acknowledge the epidemic on national television until January 20.

During those seven weeks, Wuhan police punished eight health workers for attempting to sound the alarm on social media. They were accused of “spreading rumors” and disrupting “social order.”

Meanwhile, the Hubei regional government continued to conceal the real number of coronavirus cases until after local officials had met with the central government in mid-January. In the event, overbearing censorship and bureaucratic obfuscation had squandered any opportunity to get the virus under control before it had spread across Wuhan, a city of 14 million people.

By January 23, when the government finally announced a quarantine on Wuhan residents, around five million people had already left the city, triggering the epidemic that is now spreading across China and the rest of the world.

When the true scale of the epidemic finally became, Chinese public opinion reflected a predictable mix of anger, anxiety, and despair. People took to the Internet to vent their rage and frustration. But it did not take long for the state to crack down, severely limiting the ability of journalists and concerned citizens to share information about the crisis.

Then, on February 3, after Xi had chaired the Standing Committee’s second meeting on the epidemic, the CPC’s propaganda apparatus was ordered to “guide public opinion and strengthen information control.” In practice, this means that cutting-edge AI and big-data technologies are being used to monitor the entirety of Chinese public opinion online.

The controlocracy is now running at full throttle, with facial-, image-, and voice-recognition algorithms being used to anticipate and suppress any potential criticism of the government, and to squelch all “unofficial” information about the epidemic.

On February 7, Li Wenliang, one of the physician-whistleblowers who tried to sound the alarm about the outbreak, died of coronavirus, which unleashed a firestorm on social media. The Chinese public is already commemorating him as a hero and victim who tried to tell the truth. Millions have taken to social media to express their grief, and to demand an apology from the Chinese government and freedom of expression.

For the first time since coming to power, Xi’s high-tech censorship machine is meeting with intense resistance from millions of Chinese Internet users. The controlocracy is being put to the test. Most likely, though, the outbreak itself will be used to justify even more surveillance and control of the population.

Xi is an unabashed dictator. But his dictatorship is far from “perfect.” His obsessive need to control information has deprived Chinese citizens of their right to know what is happening in their communities, and potentially within their own bodies.

As of February 9, the outbreak has killed more than 900 people and infected another 40,000 in over 25 countries. For all its advanced digital technologies and extraordinary economic and military power, China is being governed as if it were a pre-modern autocracy. The Chinese people deserve better. Unfortunately, they and the rest of the world will continue to pay a high price for Xi’s hi-tech despotism.


Xiao Qiang, Founder and Editor-in-Chief of China Digital Times, is a research scientist at the School of Information, University of California, Berkeley.

How to Survive the "Deep State"

by Doug Casey



Almost everyone looks for a political solution to problems. However, once a Deep State situation has taken over, only a revolution or a dictatorship can turn it around, and probably only in a small country.

Maybe you’re thinking you should get behind somebody like Ron Paul (I didn’t say Rand Paul), should such a person materialize. That would be futile.

Here’s what would happen in the totally impossible scenario that this person was elected and tried to act like a Lee Kuan Yew or an Augusto Pinochet against the Deep State:

First, there would be a "sit-down" with the top dogs of the Praetorian agencies and a bunch of Pentagon officers to explain the way things work.

Then, should he survive, he would be impeached by the running dogs of Congress.

Then, should he survive, whipped dog Americans would revolt at the prospect of having their doggy dishes broken.

Remember, your fellow Americans not only elected Obama, but re-elected him. Do you expect they’ll be more rational as the Greater Depression deepens? Maybe you think the police and the military will somehow help. Forget it…they’re part of the problem. They’re here to protect and serve their colleagues first, then their employer (the State), and only then the public. But the whipped dog likes to parrot: "Thank you for your service." Which is further proof that there’s no hope.

So what should you do, based on all this? For one thing, don’t waste your time and money trying to change the course of history. Trying to stop the little snowball rolling down the mountainside might have worked many decades ago, but now it’s turned into a gigantic avalanche that’s going to smash the village at the bottom of the valley. I suggest you get out of the way.

What, you may ask, would I do if I were dictator of the U.S. and had absolutely no regard for my personal safety? Here’s a seven-part program, for entertainment purposes only:

• Allow the collapse of all zombie corporations – banks, brokers, insurers, and government contractors. The real wealth they supposedly own will still exist.

• Abolish all regulatory agencies. Although Boobus americanus believes they exist to protect him, and that may have been an intention when they were created, they, at best, serve the industries they regulate. The U.S. Food and Drug Administration, for instance, kills more Americans every year than does the Department of Defense in a typical decade. The SEC, the Swindlers Encouragement Consortium, lulls the average investor into thinking he’s protected. They, and other agencies, extract scores of billions out of the economy to feed useless mouths in return for throwing sand in the gears of the economy.

• Abolish the Fed…you need a strong currency to encourage saving. Actually, you don’t need a currency at all. Gold is vastly better as money.

• Cut the size of the military by 90% and abolish the Praetorian agencies. In addition to bankrupting the U.S., the military is now a huge domestic danger, even while it’s mainly an instrument for creating enemies abroad.

• Sell essentially all U.S. government assets. Although some actually have value, they are all a drain on the economy. For instance, the U.S. Postal Service loses $5 billion a year; Amtrak loses another billion or so per year. The Interstate Highway System, airports and the air-traffic-control system, the 650 million acres of U.S. government land, and many thousands of other assets should all be distributed in shares or sold. This would liberate an immense amount of dead capital. The proceeds could be used to partially satisfy some government obligations.

• Eliminate the income tax, as a start, which will be possible if the other six things are done. The economy would boom.

• Default on the national debt and contingent liabilities. That’s somewhere between $23 trillion and $200 trillion. There are at least three reasons for that. First is to avoid turning future generations into serfs. Second is to punish those who have enabled the State by lending it money. Third is to make it impossible for the State to borrow in the future, at least for a while.

I like this program from a practical point of view, because when a structure is about to collapse, it’s much wiser to conduct a controlled demolition than to just let it fall when no one expects it.

But I also like it from a philosophical point of view because, as Nietzsche observed, that which is falling deserves to be pushed.

There are, however, two very important reasons for optimism: science and savings.

Science: Science and technology are the mainsprings of progress, and there are more scientists and engineers alive today than have lived in all previous history put together. Unfortunately for Western civilization however, most of them are Asians. Most American PhDs aren’t in Rocket Science but Political Science, or maybe Gender Studies. Nonetheless, the advancement of science offers some reason to believe that not only is all this gloom and doom poppycock, but that the future will not only be better than you imagine, but, hopefully, better than you can imagine.

Savings: Things can recover quickly because technology and skills don’t vanish overnight.

Everybody but university economists knows that if you want to avoid starving to death, you have to produce more than you consume and save the difference. The problem is twofold, however. Most Americans have no savings. To the contrary, they have lots of debt. And debt means you’re either consuming someone else’s savings or mortgaging your own future.

Worse, science today is capital intensive. With no capital, you’ve got no science. Worse yet, if the U.S. actually destroys the dollar, it will wipe out the capital of prudent savers and reward society’s grasshoppers. Until they starve.

Of course, as Adam Smith said, there’s a lot of ruin in a nation. It took Rome several centuries to collapse. And look at how quickly China recovered from decades of truly criminal mismanagement.

On the other hand, Americans love their military, and this heavily armed version of the post office seems like the only part of the government that works, kind of. So maybe the U.S. will start something like World War III. Then, the whole world can see a real-life zombie apocalypse. Talk about free entertainment…

Action

But let’s return to the real world. What should you do? And how will this all end?

From a personal standpoint, you should preserve capital by owning significant assets outside your native country, because as severe as market risks are, your political risks are much greater.

• I suggest foreign real estate in a country where you’re viewed as an investor to be courted, rather than a milk cow. Or maybe a beef cow.

• Look for depressed speculations. At the moment, my favorites are resource companies. Soybeans, wheat, corn, sugar, coffee, copper, and silver are historically undervalued.

• Short bubbles that are about to burst, like bonds in general, and Japanese bonds denominated in yen, in particular. If you have a collectible car from the ‘60s that you hold as a financial asset, hit the bid tomorrow morning. Same if you have expensive property in London, New York, Sydney, Auckland, Hong Kong, or Shanghai, among other places.

The Second Law to the Rescue

From a macro standpoint, don’t worry too much. The planet has been here for 4.5 billion years and it has a life of its own. You don’t have to do anything to save the world. Instead, rely on the Second Law of Thermodynamics.

There are very few laws I believe in, but this is one of them. There are many ways of stating the law, and its corollaries, but this isn’t an essay on physics. In essence, it states that all systems wind down over time. Entropy conquers all. That all systems collapse without constant new inputs of energy.

And that the larger and more complex a system becomes, the more energy it requires. The Second Law is why nothing lasts forever.

In human affairs, you can say stupidity is a corollary to the Second Law, in that it throws sand in the gears of society and accelerates the tendency of things to collapse. But stupidity doesn’t always mean low intelligence…most of the destructive sociopaths acting as top dogs have very high IQs. I want to draw your attention to more useful definitions of stupidity.

One definition of stupidity is an inability to predict not just the immediate and direct consequences of an action (which a typical six-year-old can do) but also to fail to predict the indirect and delayed consequences.

An even more helpful definition is: Stupidity is an unwitting tendency towards self-destruction. It’s why operations run by bad people always go bad. And why, since the Deep State is run by bad people – the sociopaths who are actively drawn to it – it will necessarily collapse.

The Second Law not only assures that the Deep State will collapse but, given enough time, that all "End of the World" predictions will eventually be right, up to the heat death of the universe itself. It applies to all things at all levels…including, unfortunately, Western civilization and the idea of America. As for Western civilization, it’s had a fantastic run. Claims of the politically correct and multiculturalists aside, it’s really the only civilization that amounts to a hill of beans.

Now, it’s even riskier calling a top in a civilization than the top of a stock or bond market. But I’d say Western civilization peaked just before World War I. In the future, it will be a prestige item for Chinese families to have European maids and houseboys.

As for America, it was an idea – and a very good one – but it’s already vanished, replaced by the United States, which is just one of 200 other nation-states covering the face of the Earth like a skin disease. That said, the U.S. peaked in the mid ’50s and has gone down decisively since 1971. It’s living on stored momentum, memories, and borrowed Chinese money.

Let me bring this gloomy Spenglerian view of the world to a close with some happy thoughts. You want to leave them laughing. Not everybody went down with the Titanic.

Looking further at the bright side: Just being born in America in the 20th century amounted to winning the cosmic lottery…an accident of birth could have placed us in Guinea or Zimbabwe. On the other hand, if I wanted to make a fortune in today’s world, I’d definitely head to Africa.

But just as the Second Law dictates that all good things, like America, must come to an end, so must all bad things, like the Deep State in particular. That’s a cosmic certainty. We all love the idea of justice, even if most people neither understand what it is, nor like its reality.

Finally, it occurs to me that, while I hope I’ve explained why the Second Law will vanquish the Deep State, I’ve neglected to explain how whipped dogs can profit from the collapse of Western civilization.

The answer is that they can’t.

Fortunately, parasites can only exist as long as their host. Which is actually a final piece of good news I want to leave you with.