The Great Wall (Street) of China

2020 marks the year when Beijing finally threw open its doors to US banks despite broader Sino-American tensions

Patrick Jenkins 

© FT Montage, Nicholas Kamm, AFP/Johannes Eisele, AFP

At the high point of Donald Trump’s relationship with Xi Jinping, when they met in Beijing three years ago, the Chinese president responded to his US counterpart’s pressure to liberalise financial services with a pledge: “We will never close our doors. They will only open wider and wider.”

Barely had Air Force One whisked Mr Trump from Beijing than, sure enough, China’s finance ministry announced sweeping reforms to remove ownership limits on foreign financial services companies operating in the country — much to the delight of Wall Street.

As the Financial Times series on the “New Cold War” outlined last week, US-China relations today look very different. A battle is being fought on many fronts between the world’s top two economies. Yet in the realm of finance, there is no evidence of relations breaking down.

JPMorgan is just completing the $1bn buyout of a joint venture partner in asset management to give it full control of China International Fund Management. The bank has also set in a train a process to take control of its Chinese securities and futures joint ventures. 

Goldman Sachs is meanwhile poised to buy out its securities joint venture partner, in a deal that could establish it as the first major fully foreign-owned investment bank allowed to operate in China.

If 2020 has been the year when Sino-American tensions escalated to resemble the 1980s stand-off between the US and the USSR, it has also been the year when Beijing — after 20 years of baby-step financial liberalisation — finally threw open its doors to Wall Street.

JPMorgan and Goldman are far from alone in winning greater control of their Chinese operations.

Like JPMorgan, Morgan Stanley in March took majority control of its securities joint venture, increasing its stake from 49 to 51 per cent, with a plan to push for 100 per cent ownership. Last month, Citigroup secured regulatory authorisation to become the first US custody bank in China, allowing it to hold securities on behalf of fund managers in China. 

That followed the August news that BlackRock had secured the go-ahead to run its own wholly owned mutual fund business in the country and that Vanguard would set up a new regional headquarters in Shanghai.

The big question is: why? When US rhetoric has become poisonous, translating into damaging disruption to Chinese manufacturers and existential threats to China’s tech giants, why has Wall Street not been dragged into the stand-off?

Mutual expediency is the short answer. It suits the big banks, asset managers and insurers to be given freer access to what will soon be the biggest economy in the world, albeit one where profits in the short-term remain elusive. 

If western financial institutions are more embedded in the blood flow of the Chinese economy, that also suits western governments. A more predictable regulatory landscape, underpinned by Beijing’s five-year planning system, has reassured foreign money.

As for Beijing, President Xi’s growing appetite for a Chinese slant on western capitalism makes financial market liberalisation an obvious means to the end: Chinese financiers can gain from greater exposure to western counterparts and the economy can benefit from the access to capital they bring.

Chinese policymakers are concerned that lending by domestic banks and non-banks is the dominant source of corporate finance. At the same time, there is scope to do more with the mounting savings of middle-class Chinese: there is a gap in the country’s personal finance market between the two traditional extremes of under-the-bed cash-hoarding and wild speculation on single stocks. 

A more developed insurance and pensions market is another key policy goal. Most of all perhaps, China believes that having friends on Wall St will be a soft-power relaxant of geopolitical tensions.

The timing of the latest push is interesting, though. Some see a correlation with the political crackdown on Hong Kong with foreign firms being used as a lever to advance Shanghai’s relative rise. There may also be some truth in speculation that Beijing is keen to cut some of the biggest players in Chinese private sector finance down to size.

Will the financial detente last? If Joe Biden wins next month’s US election, Wall Street’s advance into China may face new hurdles given his hawkish stance on Beijing. 

But even under President Trump, there are worries, says one seasoned banker. 

“We’re constantly on tenterhooks that we’re going to wake up to a tweet saying something like: ‘JPMorgan, Goldman Sachs: GET OUT OF CHINA!’”


What takeovers of fund managers tell you about markets

Trian, an activist hedge fund, has taken stakes in two asset managers. It has mergers on its mind

Martin amis, a novelist, was once asked why he preferred roll-ups to ready-made cigarettes. “It’s simply the best burn available,” he replied. In finance, a roll-up is a strategy of buying lots of small companies in the same industry and combining them into a big one. 

A big firm can cut costs by reaping economies of scale—in marketing or it, say, or in negotiations with suppliers. The markets are attracted to the glow. They often assign big companies a higher valuation than small ones.

Could a roll-up work in fund management? The question is often asked, only to be dismissed: you would have to be unusually daring (or smoking roll-ups of the jazz variety) to consider taking on such a challenge. 

So a few eyebrows were raised when it emerged last week that Trian, a hedge fund led by Nelson Peltz, a veteran agitator for corporate change, had taken stakes of almost 10% in two asset managers, Invesco and Janus Henderson. 

Asset management is undergoing significant change, noted Trian in its regulatory filings. Firms with scale and a breadth of products are better placed to succeed. So Trian has in mind “certain strategic combinations” to generate value from its newly acquired stakes.

Both Invesco and Janus Henderson are the product of recent industry mergers. Were Trian to act as broker to a merger between them, the result would look awfully like a roll-up. If so, it is a bold gambit. But it is one that is telling about the state of the industry, and the markets more broadly. 

The pressures in fund management come from two familiar sources. The first is lower expected returns. 

Long-term interest rates in both nominal and real terms have been declining steadily for four decades. They took a decisive fall after the global financial crisis of 2007-09. 

The pandemic has postponed any prospect of a revival. 

The value of many assets has risen in lock-step with the fall in real interest rates. Share prices in America have rarely been higher relative to company earnings. Since fund-management companies charge a fixed fee on the stock of the assets they manage, a stockmarket boom is a boon to current revenues. 

But higher valuations today mean lower expected returns tomorrow. 

And that translates into a gloomier outlook for asset managers in general.

The second factor is the growth of low-cost index investing. An index fund holds shares in proportion to its constituents’ market capitalisation. Trading costs are negligible. 

The fund buys shares when they qualify for the index and sells those that drop out. 

The market for large-capitalisation stocks is liquid enough to absorb any sales or purchases without moving prices whenever index funds need to match inflows or redemptions. 

There are powerful economies of scale in index investing, which is why just three firms—BlackRock, Vanguard and State Street—have come to dominate it. 

The marginal cost of running a bigger fund is trivial: it simply requires a bit more computing power. There are no expensive portfolio managers. 

So management fees are low—just a few basis points.

You can see the effect in the diverging path of share prices (see chart). Conditions seem ripe for an industry roll-up. Scale seems to be an advantage; there are plenty of target firms to buy; and the prices of many firms have become more attractive. 

“A lot of midsized players are now priced for ripping out costs,” as one industry bigwig rather brutally puts it.

As anyone who has fiddled with a tobacco pouch and papers can attest, the results of a roll-up are not always great. For a start, there are the problems that bedevil any biggish merger: clashes of business culture; incompatible it systems; mutinous staff; and so on. 

It is far from easy to find savings in asset management, where the biggest cost is people. 

And the industry’s main problem is growth. For the past half decade, the flow of new business has gone to index funds, much of it to the Big Three. 

Active managers have suffered outflows. Their business is steadily shrinking. Drawn-out mergers often make the outflows even worse. 

New clients may stay away while a tie-up is pending. And bigness is not itself a very distinctive capability. The index giants are already working that particular corner.

Yet for all the pitfalls, there is something almost inevitable about a fund-management roll-up. The scale economies of index investing create excess capacity. Mergers are a way to reduce it. 

Like the tobacco version, industry roll-ups are messy. You can be easily burned. 

But if you need a fix, you’ll try it—if only because there are no alternatives around.

The American Dream: Bringing Factories Back to the U.S.

By Matthew C. Klein

Illustration by Dave Murray

For years, investors cheered as U.S. companies shifted manufacturing overseas to reduce costs and boost profit margins. That could soon start to change, with decades of offshoring replaced by reshoring.

The shortages of personal protective equipment and other essential items during the early stages of the pandemic were a powerful reminder that corporate managers’ obsession with efficiency and cost-cutting at the expense of diversification and resiliency had made the American economy vulnerable. 

A report from the McKinsey Global Institute found “180 products across value chains for which one country accounts for 70% or more of exports, creating the potential for bottlenecks.” 

Worse, many of those products come from an increasingly hostile China, a circumstance with profound national-security implications for the U.S. and other democracies. That’s why Democrats and Republicans alike are looking for ways to revive U.S. manufacturing.

They’ll have to work hard. Despite the trade conflict, the coronavirus, and fear of a new cold war, a recent survey by the American Chamber of Commerce in Shanghai found that 71% of U.S. manufacturers had no plans to move production out of China, while only 4% said they would transfer some to the U.S. 

Moreover, even those that expected to move some production from China planned only small changes, not wholesale shifts in supplier relationships.

U.S. companies have directly invested about $260 billion in Chinese operations since the early 1990s, according to an analysis from the Rhodium Group. Replacing those assets elsewhere would be expensive—especially if the new property, plants, and equipment were in America—and the running costs would be far higher, as well. 

The worst-case scenario for investors is that they will have to bear trillions of dollars of losses as companies write down stranded assets, are forced to hold more inventories, and shift operations in ways that lower margins.

The good news is that reshoring doesn’t have to hurt. The past few decades of globalization drove business cycles closer together and made companies increasingly dependent on global sales. 

Researchers at the Boston Consulting Group’s think tank note that this came at the cost of tighter correlations of financial assets across countries, which means that reshoring could help diversify international stock portfolios and improve the risk/return trade-off for investors. 

What’s more, investors stand to benefit if reshoring means a longer-term revival in innovation and flexibility in production. And higher operating costs could be offset by higher revenues, whether that’s through higher wages leading to greater consumer demand, government support, or some combination.

But reshoring won’t succeed without long-term commitments of money, attention, and expertise from the federal government. Companies have spent decades developing supply chains and procurement practices to cut costs to maximize returns for their shareholders and to cut prices for consumers, so the only way to alter their behavior is to offer new, radically different incentives. 

“Made in America” won’t happen at scale unless Washington makes it significantly more profitable than the alternatives.

Some politicians seem to appreciate this, which explains why the latest batch of ideas from Democrats and Republicans—who are sometimes working together on these issues—are about structural changes to the U.S. economy. In 2019, Sens. Tammy Baldwin (D., Wis.) and Josh Hawley (R., Mo.) co-wrote legislation to make American manufacturing more competitive by lowering the value of the dollar, while Sen. Marco Rubio (R., Fla.) called for a new “industrial policy” to encourage business investment in the U.S. to counter Chinese protectionism. Since the pandemic began, Sen. Elizabeth Warren (D., Mass.) and Rubio have cooperated on bills to reduce America’s “overreliance” on Chinese pharma products.

Both presidential candidates want to bring manufacturing back, but their strategies differ. Democrat Joe Biden has unveiled a plan to boost federal spending on U.S.-made goods, support research and development, change the tax code to discourage offshoring, and close loopholes in rules that already require Uncle Sam to “Buy American.”

“The U.S. economy is far less resilient to shocks than it needs to be,” Jared Bernstein, one of Biden’s top economic advisers, tells Barron’s. “Serial abuse from dumb industrial policy” inflicted by Washington hollowed out the U.S. manufacturing sector, he says, and America needs to “onshore certain supply chains, both medical and defense.” One area of particular concern is the “increasing share of defense procurement that comes from foreign production.”

That last concern is shared by the Trump administration, which has defended the legality of its tariffs, on the grounds that they are necessary to protect the “defense industrial base.” 

But where Biden seeks to boost the nation’s manufacturers through additional procurement and R&D subsidies, Trump’s preferred approach has been corporate tax cuts and deregulation to encourage domestic investment, with levies on imports to discourage purchases of foreign-made goods. 

The Pentagon has also recommended “direct investment in the lower tier of the industrial base…to address critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure.”

At the same time, Robert Lighthizer, the administration’s chief trade negotiator, is encouraging other countries to buy more U.S. products. The most substantial deal has been with Canada and Mexico, and is notable for its emphasis on labor standards, local content requirements, and environmental regulations. 

It also contained an unusual provision that any signatory that agrees to “a free trade agreement with a non-market country”—such as China—can get kicked out of the North American pact. George Magnus, the former chief economist of UBS and a China expert, told Barron’sthis could become a template for future deals that promote trade while excluding China. (Lighthizer didn’t respond to requests for comment.)

One thing that’s often lost in the debate on reshoring is that the U.S. is still a manufacturing superpower, producing more than $6 trillion of goods in 2019. 

The problem is that, while the U.S. and global economies are far bigger than they were in 2000, America’s manufacturing sector hasn’t grown at all. Real output and productive capacity have been stagnant for two decades. 

While it’s not surprising that labor-intensive textile and apparel manufacturing have almost completely relocated to places with low wages such as Bangladesh, many technologically advanced industries, including metals, machinery, and electronics have also shrunk significantly. The most extreme change has been in pharmaceutical and medicine manufacturing, where production has dropped more than 20% since the peak in 2006.

The upshot is that the growth in both U.S. and global demand for manufactured goods since 2000 was satisfied entirely by foreign producers. 

Imports displaced American production while American exports lost market share in foreign markets—even in high-tech sectors that Americans had pioneered, such as semiconductors and aerospace.

According to an analysis from the Coalition for a Prosperous America—a nonpartisan group backed by labor unions, ranchers, and manufacturers—imports from the rest of the world went from satisfying 23% of America’s domestic manufacturing needs in 2002 to 31% by 2019, with substantially larger increases in high-value sectors such as computers, electronics, appliances, machinery, and pharmaceuticals. 

As a result, the U.S. now imports about $1 trillion more in manufactured goods than it exports each year, a deficit equal to roughly 4.5% of gross domestic product.

Imports ballooned at the expense of American workers because companies outsourced production—and the associated capital expenditures, which would otherwise have depressed profit margins—to countries with lower labor and environmental standards, bigger subsidies for businesses, and cheaper currencies than the overvalued U.S. dollar. 

While American companies sometimes opened their own factories in China and other low-cost countries, they often preferred to contract the work out to third parties. (Think of Apple and Foxconn, the electronics manufacturer that makes the bulk of the iPhones, in addition to videogame consoles, laptops, and televisions for other multinationals.)

Foreign profits of U.S. multinationals boomed—to shareholders’ delight—but the strategy came with significant costs. The offshoring fad hollowed out America’s ecosystem of suppliers, researchers, and skilled workers. The factories that remain are highly specialized and reliant on outside suppliers and capital equipment. That has had consequences for jobs, economic dynamism, and national security.

“What’s missing is the capability to pivot” to respond to sudden changes in demand, Erica Fuchs, a professor of engineering and public policy at Carnegie Mellon, said in recent testimony to Congress. Americans faced shortages of masks and ventilators in the first months of the pandemic, in part because medical-supply companies lacked U.S. “technicians and operators with the know-how” to adjust to changing circumstances. 

In contrast, Chinese factories accustomed to making a wide range of goods for multinational customers could quickly adapt to redirect production, she tells Barron’s.

Technological progress often comes from tinkering and experimentation, which is harder to do if research, production, and design aren’t all in the same place. Fuchs, along with colleagues Chia-Hsuan Yang and Rebecca Nugent, found that companies that can cut costs by offshoring to lower-wage countries face fewer incentives to innovate. 

That might have contributed to the sharp slowdown in U.S. productivity since the mid-2000s. Similarly, economists David Autor, David Dorn, Gordon H. Hanson, Gary Pisano, and Pian Shu found that American manufacturers that didn’t offshore production responded to competition from cheap Chinese imports by slashing their research and development spending.

This is a problem even in the heart of America’s high-tech economy—and it’s a long-term threat for investors. While Silicon Valley is now known for software, it originally prospered as a manufacturing center that supported fundamental scientific research in physics, electronics, and materials science. 

Many of the world’s leading electronics hardware companies are still headquartered in Silicon Valley, but most don’t manufacture anything there.

Consider what this has meant for Intel (ticker: INTC). While Intel still makes the chips it designs, it has fallen behind rivals such as Taiwan Semiconductor Manufacturing (TSM) and Samsung Electronics (05930.Korea) in manufacturing. Since the beginning of 2004, TSMC shares have returned almost 1,000%; Samsung’s have gained more than 400%; and Intel’s are up less than 100%.

Hassan Khan, who focused on the semiconductor and advanced-electronics industry when he was a consultant at McKinsey, says that TSMC and Samsung have an advantage, in part because they have practice making chips for a wide variety of custo
mers with different designs and preferences. 

In contrast, Intel is vertically integrated and makes chips only for itself. That makes the two big foreign firms more flexible and innovative when it comes to production techniques than Intel, which recently raised the possibility of shifting at least some output to contract manufacturers.

There is historical precedent for vertically integrated manufacturers being left behind by the market: A similar fate befell IBM, once the world’s leader in silicon processing, Khan notes. One solution is to focus on design at the expense of production. Advanced Micro Devices (AMD) spun off its manufacturing arm into GlobalFoundries in 2009. That has been great for AMD’s stock, but less so for Americans’ ability to make the most sophisticated chips.

Rebuilding America’s high-tech ecosystem is doable, but it could take decades. Brookings Institution economist Geoffrey Gertz notes that China’s rise as a manufacturing power was a result of “a decadeslong intentional push by the Chinese government,” and that a comparable commitment would be necessary to restore what has been lost in the U.S.

China’s production ecosystem developed with the help of targeted infrastructure investment, generous subsidies for businesses, procurement rules that favored “indigenous” companies, and managed competition. 

All of that could be part of a long-term American strategy, should voters decide it’s worthwhile. (State-sponsored technology theft, the suppression of workers’ rights, and lax environmental regulations probably wouldn’t be.)

In the crucial pharmaceutical industry, offshoring was driven less by sustained government intervention than by glitches in the U.S. tax code. The U.S. headline corporate tax rate effectively stopped applying to the profits earned by foreign subsidiaries of American companies in the late 1990s. 

That led to increasingly aggressive efforts to shift profits to tax havens, especially after the corporate tax holiday of 2005. The good news is that fixing those glitches could quickly lead to a resurgence in U.S. pharmaceutical production, although investors would have to accept higher effective corporate tax rates for pharma companies.

Inventing new drugs and figuring out how to produce them is expensive, but once that’s done it isn’t that hard to manufacture them at scale. That makes it relatively easy for pharma companies to shift their profits to low-tax jurisdictions. 

“Many pharmaceutical companies conduct the bulk of their research and development in the United States, but then seek to minimize their tax burden by transferring their intellectual property to places like Bermuda and producing their drugs in yet another low tax jurisdiction like Ireland,” Brad Setser of the Council on Foreign Relations recently testified. 

“The resulting products are then imported back to the United States, where typically they are often sold at a higher price than in the rest of the world.”

This behavior was turbocharged by the 2017 Tax Cuts and Jobs Act, which penalized U.S. companies for putting intangible assets offshore unless they also increased their physical assets. 

The perverse result, Setser explains, was that a company “would automatically lower its calculated U.S. tax if it built a factory in Ireland” while “a firm that reduces its tangible U.S. assets by licensing its intellectual property to an offshore subsidiary that supplies global markets from a factory abroad would have a lower tax rate than a firm that keeps its factory in the United States.”

The results can be seen in the data. After steadily rising for decades, American production of pharmaceuticals and medicines peaked at the end of 2006 and has since declined more than 20%. 

Over that same period, real imports have more than doubled. Much of the growth in imports of pharmaceuticals and medicines since then can be attributed to corporate tax havens such as Belgium, Ireland, the Netherlands, Singapore, and Switzerland. Since the end of 2016, 70% of the growth in U.S. imports of pharmaceuticals and medicines by dollar value has come from these tax havens.

Bringing manufacturing back to America isn’t impossible by any means—especially in capital-intensive sectors such as electronics and pharmaceuticals. It may even benefit investors, at least in certain industries. 

Success will depend on Americans’ willingness to commit to a long-term strategy and investors’ willingness to pay the costs. 

The experience of the past few years suggests that rhetoric without major policy changes won’t do much, one way or the other.

Bob Woodward on the 2020 Election

“How Can You Not Be Worried?”

Famed Journalist Bob Woodward brought down U.S. President Richard Nixon with his reporting on the Watergate scandal. Now he talks to DER SPIEGEL about Donald Trump’s "catastrophic" handling of the coronavirus, the outcome of the coming election and his new book, “Rage.”

Interview Conducted By Roland Nelles

Foto: Stephen Voss / DER SPIEGEL

Washington seems dead amid the COVID-19 pandemic. Many of the offices around the White House have been closed, and the few restaurants in the United States capital that have stayed open are usually empty.

Bob Woodward, 77, is also working from home. For decades, he has been among the most important chroniclers of political affairs in the capital. In the early 1970s, he uncovered the Watergate scandal together with his colleague Carl Bernstein at the Washington Post, leading to the 1974 resignation of President Richard Nixon. He later wrote books about the Sept. 11 terrorist attacks and George W. Bush and Barack Obama. Woodward has been awarded two Pulitzer Prizes.

For his new book, "Rage,” which was just published in German, he interviewed top government figures over a span of 10 months, including President Trump.

Due to the COVID-19 pandemic, DER SPIEGEL spoke to Woodward via telephone.

DER SPIEGEL: Mr. Woodward, in your book, you conclude that Trump is the wrong man for the job of the presidency. Why?

Woodward: I concluded that the evidence is overwhelming that he failed catastrophically in managing the virus. In a top-secret meeting with his National Security Adviser Robert O’Brien and others on Jan. 28, it was laid out to him in the clearest terms that a pandemic was coming, that it was going to be like the 1918 Spanish flu epidemic that killed 675,000 people in this country. 

Fifty million people died in that pandemic a century ago. And Trump, instead of telling the public about it, covered it up.

DER SPIEGEL: As of now, more than 8 million people have been infected with the virus in the U.S. So far, 217,000 Americans have died.

Woodward: The president could have leveled with the public -- particularly at his State of the Union Address on Feb. 4 when talking to Congress -- and laid out what's going on, what's happening. He only spent, what, 15 seconds on the virus? 

He said we are doing everything we can. And 40 million people are watching this. He could have said, "I've been warned, and we have a major public health crisis coming."  

And he did nothing of the kind.

DER SPIEGEL: Do you have an explanation for his behavior?

Woodward: I think, doing all this reporting on him and spending nine hours talking with him just this year, he doesn't understand his responsibility as president to protect the people, and he doesn't understand his responsibility to tell the truth. And he does not understand his moral responsibility to carry out the duties of the presidency. 

I know some Republican senators who agree that Trump is the wrong man for the job but will not say so publicly and are silent. Based on the evidence I had, I was not going to join the ranks of the silent.

DER SPIEGEL: Trump was willing to talk to you for your book, seemingly to explain his view of things. You conducted 18 interviews with him. Sometimes he called you during the night.

Woodward: It was after 10 in the evening.

DER SPIEGEL: You always had a voice recorder with you so that you could record him if he called you unexpectedly.

Woodward: I had to do that. Only once did I not have the machine with me and I couldn't record him. So, I took notes.

DER SPIEGEL: How did the meetings with Trump in the Oval Office go?

Woodward: The first interview was on Dec. 5, 2019, so that's last year. And I went in and took my little tape recorder, my Olympus tape recorder. I turned it on, put it down on the Resolute desk and said to him, "This is all on the record for a book that will come out in September and October," and I repeatedly told him I was recording it. He knew that, acknowledged. 

I went into the office, and he had pictures of Kim Jong Un there. He had propped in the binder copies of the letters he had exchanged with Kim, and then in the center of the desk, he had these formal appointment orders for judgeships, which are very important to him. And it was kind of like these are the props he has.

DER SPIEGEL: Trump wanted to make an impression on you?

Woodward: He showed me the pictures of Kim Jong Un, which he said were unique. But they were all familiar. The same pictures were everywhere on the internet.

DER SPIEGEL: You write about these letters that Kim Jong Un sent to him that were full of flattery, in which Kim Jong Un called him "Excellency" and once wrote that his relationship with Trump was like a fantasy film. What were you thinking when you read through these letters?

Woodward: Well, I thought this is Trump doing it his way. He told me that all he gave Kim Jong Un was "a fucking meeting.” It was risky. But Trump argues that we have not had a war, and he thought there might be a war at one point. 

I am not so sure of that. This is something Trump maybe did right. Maybe he did it wrong. We don't know. 

Having served in the U.S. Navy during Vietnam, painfully aware of war and its consequences, I have to give Trump some credit, for not having a war.

DER SPIEGEL: There were preparations for a nuclear strike. Jim Mattis, the secretary of defense at the time, went to the National Cathedral in Washington D.C. to pray.

Woodward: What a moment in history that the secretary of defense has to go pray and reflect on his responsibility that in order to protect our country, he may have to incinerate millions of people. It's chilling.

DER SPIEGEL: There are a lot of interesting scenes in the book where you describe the relationship between Trump and other top officials, including Mattis and Rex Tillerson, the then secretary of state, and then Director of National Intelligence Dan Coats. All these people come to the conclusion that this president is a threat to the national security of the United States. Why did they serve under him?

Woodward: Well, he recruited them. All three of them‑‑Mattis, Tillerson, and Coats‑‑were at the end of their careers. He made pledges or implied they were going to have control of their departments and access to him. 

And this is one of his frauds, one of his broken promises. Trump just ignored them, issued orders by tweet, no organization, no consultation. As Mattis says, it's government by Trump's impulse of the moment, dangerous, hazardous, makes no sense. 

This is a leadership failure.

DER SPIEGEL: You exposed the Watergate scandal. Is Trump in any way comparable to Richard Nixon?

Woodward: Nixon was a criminal, and we wrote that. And it was proven with his secret tape recordings. No one has proven that Trump is a criminal to my satisfaction. Yes, there are lots of questions. There's the Mueller investigation, the impeachment, but no one ever established criminality on his part. 

Trump has failed above all to protect the country from the pandemic. 

In Vietnam, the total number of deaths on the American side was 58,000, and the pandemic will soon have caused four times as many deaths in the U.S. It is the president's duty to warn the people. Trump did not do that. Instead, he denied and failed to manage the crisis. 

And there is still no plan.

DER SPIEGEL: Many people would say that democracy is in danger in the United States, and that Trump wants to govern like an autocrat. Do you agree?

Woodward: I write in the book that leadership failed, but democracy is holding on, at least for the moment. He doesn't go around shutting down the press. No one has raided my offices or home. The free press still operates. We have a functioning electoral system, though he's attacked that too.

DER SPIEGEL: The polls strongly suggest that Trump is going to lose the election on Nov. 3.

Woodward: Well, it is certainly possible that he is going to win. A number of people think it's not possible. I don't believe the polls. I talked to him at some length about this. Are you familiar with Barbara Tuchman's book, "The Guns of August”?

DER SPIEGEL: … about the outbreak of World War I …  

Woodward: … which I talked to Trump about. Barbara Tuchman points out that in Europe before the war, the old order was dying, and people didn't realize it. And I think in 2016, in this country, the old order was dying. Both parties failed to meet the moment. 

They didn’t understand the expressed and unexpressed views of the populace. And in an amazing way, Trump intuitively, not intellectually, I believe, but intuitively understood this. 

And he saw history's clock in 2016. That’s how he won. I talked to him about it, and he said, "Yes, I did.”  

And he said he's going to do it again.

DER SPIEGEL: Do you think that Trump is not going to accept the outcome of the election if he doesn't get elected?

"Pomposity stalks the halls of all institutions in the United States."

Woodward: Well, he said that, and, you know, he casts suspicion. Here again is the unthinkable. If there's any responsibility a president has, it's to ensure the transfer of power, ensure the integrity of the voting process, the most basic right that Americans have, and he's trampled all over it and said, "We won't know who's been elected." 

There is an unprecedented level of chaos and disorganization threatening the election.

DER SPIEGEL: Are you worried about your country's future?

Woodward: Yes. How can you not be worried now? We may have been living in a bubble in this country for hundreds of years. 

Yes, there have been some extremely difficult and terrible times for Americans. There have been crises like the Kennedy assassination, Vietnam. Now Trump has destroyed any sense of innocence. 

How do you restore trust in the institutions? I mean in us, for example, the news media. 

We are mistrusted. We have to acknowledge that.

DER SPIEGEL: What does that mean for you?

Woodward: I learned something that truly surprised me in the last month. The book comes out, and a reporter at CNN, Jamie Gangel, and my wife, Elsa Walsh, persuaded me, "Oh, put out audio of people, conversations with Trump." And I said, well, you know, it's in the book. They said, "No. You've got to put out the audio so people can hear themselves. 

People don't trust the news media, but when they hear it themselves, they'll accept it" ‑‑ because Trump has the most recognizable voice in the world. People will have heard those and say, "Ah. That's him. 

That's what he's saying. This is the context.” 

I think in the end people accepted the truths in this book also because they heard these recordings of the conversations. Nobody shouted "fake news."

DER SPIEGEL: You recently recounted on U.S. television that Katharine Graham, your boss at the Washington Post during the Watergate scandal, warned you that you shouldn’t become overconfident as a journalist. Why is the story important to you?

Woodward: In 1974, after Nixon had resigned, she wrote Carl Bernstein and myself a letter on a yellow legal pad: "Dear Carl and Bob, you did some of the stories about Nixon, and he's gone. Now, that's fine, but don't start thinking too highly of yourselves. Let me give you some advice. 

The advice is: Beware of the demon of pomposity." 

As you know, pomposity stalks the halls of all institutions in the United States, not just the media, but business, politics, academia, you name it. There's a lot of pomposity, over‑self‑confidence, and I thought that was a really important warning, important advice.

DER SPIEGEL: We understood that to mean you worry you might have been too harsh in your judgment of Donald Trump. Are you going too far as a journalist here? Would it be better as a reporter to stick to reporting the facts rather than saying at the end of a book: He's the wrong man for the job?

Woodward: No, I don't think I went too far. I've been thinking about whether I was leaving my territory a little bit there as a reporter. But I feel that I definitely have enough insight to make a judgement in this regard.

DER SPIEGEL: Mr. Woodward, we thank you for this interview.

Bob Woodward's new book, "Rage," was published in the United States by Simon & Schuster in September. The German edition was published on Oct. 16 by Hanser Verlag.

The Tedium of Passion

Thoughts in and around geopolitics.

By: George Friedman

I normally try to forget the books I write, at least for a while. They can be a trap, enclosing you forever. 

But I can’t escape the last book I wrote, “The Storm Before the Calm,” about the anger that would encompass American life for at least the first part of this decade. 

I drew my conclusions from moments like the Great Depression and Andrew Jackson’s assault on the eastern banks. But to a great extent I got my bearings from the 1960s and 1970s for the obvious reason that I lived through them.

It was a time of intense outrage at anyone who disagreed with you, a time of utter certainty of one’s own view. Lyndon Johnson was regarded as a baby killer, and the war in Vietnam as a tool to enrich defense companies. Opponents of the war were viewed by their critics as tools of the communists and haters of America. Entwined in this was a culture war. 

On one side was what was called the counterculture, which saw America as fundamentally corrupt, combining the dehumanization of the suburbs with insoluble racism. On the other side was what was called middle America, viewing the counterculture as degenerates who were destroying the fabric of America by rejecting everything that was decent and honorable.

I recall members of the American Legion and members of construction unions confronting hordes of anti-war demonstrators dressed bizarrely, I suspect because they wanted to show contempt for the middle class and a sense that they had transcended the World War II veterans into a higher truth. 

I was young and dressed like a slob, still my preferred sartorial statement, and went into a 7-Eleven in Boone, North Carolina, during a best forgotten road trip. The person behind the counter called me a “hippie degenerate punk” and threatened vague mayhem if I didn’t leave. 

I was in similar clothing when I denied that the Viet Cong were the heirs of the American Revolution to a young lady I thought I was getting somewhere with. She grew enraged and refused to talk to me when I called them Stalinist thugs, the latter a far greater loss than a storekeeper in Boone.

I found myself in trouble. Socially I belonged to the baby boomers, who, like the millennials today, thought of themselves as having the mission to perfect humanity. But I was born in Hungary and lived with a family that remembered its recent past. For me, the perfection of humanity was not the goal. The goal was avoiding the power of tyranny. I saw tyranny through my parents’ eyes. 

That era was a moment of great passion, with evil masquerading as the good, and people expressing it by hating anyone who disagreed with them. I love the United States because it was better than where I had come from. It did not demand perfection. 

To the radicals of the 1960s, America had to be reconstructed through revolution. To middle America, the nation had been penetrated by monsters trying to destroy it.

It all became very personal. Someone who opposed the Vietnam War did not socialize with someone who supported the war. The basic assumption that normally controls the United States – that reasonable people can disagree without loathing each other – was suspended, replaced with a passionate belief that anyone who differed from oneself was deeply flawed and likely despicable. 

Things changed only after Richard Nixon was driven from office, the anti-war activists started looking for jobs and the pro-war movement realized the war was a waste.

Passion is an overrated virtue because it has no sense of proportion. Passion makes everything look more significant than it is and sees disagreement as sacrilege. Passion makes it seem that this is the worst of times. 

Because of my parents I knew the tales of European passion, but unlike my parents I wasn’t frightened by it. I was bored by it. The core certainty of each side was not merely that it was right but that the other side was wicked. 

Passion and self-righteousness blended with a rage at those who disagreed.

The passion of Hitler or Lenin, of course, was not boring. It was evil, but there was never a boring minute around either side. 

The idea that I have mentioned in the past – that civilization is the ability to believe something, yet be open to the possibility that your belief is in error – is boring. 

Constantly drawing in your horns when your passions demand that you gore your opponent is tiring, and the inability to hate because your opponent might be right takes a glittering moment and turns it into duller shades. 

Being moderate is the foundation of civilized life, yet it’s one that always repels those who are certain that they are self-evidently right.

We are of course in a moment where respect for the views of those you disagree with has withered. This happens in America with some regularity. But the time we live in is not as exciting, tense and fraught with danger as the media might suggest. It is simply tedious. 

As Shakespeare put it, “It is a tale told by an idiot, full of sound and fury, signifying nothing.” 

As we have seen in the past, the United States is far too robust, and far too resilient, for the passions of the moment to destroy it. If it weren’t, it would have been destroyed long ago. 

Robert E. Lee couldn’t break the union, and he had a powerful military behind him. Joe McCarthy and the anti-war movement couldn’t do it. The current cast of characters certainly can’t do it. 

The founders knew that the best solution for political passions is boredom. 

Eventually the actors take a break, and the audience needs to get home, pay the babysitter and get some sleep.

For those who have never lived through this, they have never seen passion like this. 

For those who have lived through it before, it’s more of the same.