Strategic Investment Potpourri

By John Mauldin 


If it seems I have been talking about the Strategic Investment Conference for weeks… well, you’re right. 

It really was that much to unpack, and I’ve still only scratched the surface. 

I will wrap up next week.

First, however, I want to make sure you get a few other important points. 

I’ve been organizing the SIC letters by subject: China, inflation, deflation, technology, and politics/geopolitics

In general, that is how I organize all my letters, typically around one topic. 

But throughout the SIC, speakers made important points that don’t neatly fit into a broader theme. 

I’ll cover some (not all) in this letter. 

We’ll jump around a bit as the sections don’t necessarily connect to each other. 

They are in no particular order, but all important.

Let me also apologize to the SIC speakers whom I haven’t featured. 

It was all wonderful and I can’t possibly cover everything. 

If you like what I’ve been sharing, you need to join us next year, for what most believe was the single best economic conference ever. 

How we will improve the experience next year, I’m not sure. 

But for 19 years we’ve made each event better than the last.

Now, let’s jump in.

Build to Rent

On Day 1 we heard from two of the country’s top residential real estate experts: Barry Habib and Ivy Zelman. 

I invited them because housing is both personally important to most people and also an important (and neglected) investment opportunity.

I shared some of Barry Habib’s wisdom back in April (see Tiny Housing Bubbles), and he expanded on those ideas at SIC. 

I want to draw your attention to Ivy’s presentation because she talked about something new: the “build-for-rent” segment. 

Large investors are building single-family homes not to sell, but to rent. 

This concept has been growing for several years and has now really caught on as the potential investment returns become so clear. 

It’s now a fundamental part of the commercial real estate pantheon. 

Quoting from Ivy:

We rarely think of build-for-rent. 

It's really part of single-family development, but we jokingly call it the prettiest girl at the dance right now because there is a wall of capital that has shifted to this asset class. 

And there's a tremendous amount of incremental “right-now money” being poured into this asset class.

And it is countercyclical, but there's no question that there's an uncertain amount of supply that's coming. 

And will this rental product actually hold up with respect to rental prices rising at the rate they're rising?

So, just to give you some perspective, build-for-rent actually in 2020 was twice what it was in 2018. 

But even with that number being double from that time period, it still only represents today a 4-1/2% market share nationally. 

Now, keep in mind though, at a national level, that doesn't really give you the perspective of what's happening in the Texas market or the Carolinas and Florida, and in Arizona and Nevada where I believe that single-family rental just today with what's in the pipeline probably accounts for 10-plus percent of that market. 

And what we do know is that when I talk to builders, and I'll say, "So, how many of your sales this quarter went to build-for-rent operators?" 

And they'll say, "I don't know. 

We probably this year in total could do 200 units, but our plans for next year are to do 2,000."

There's a massive ramp coming. 

And everybody's trying to find a dance partner on the dance floor whether they’re hedge funds, pension funds, private equity firms, or sovereign wealth funds. 

There's just more capital than I've ever seen other than the multi-family back before the great financial crisis.

Alarm bells may ring when you hear about capital flooding into a segment. 

In this case, though, it’s for an asset necessary to a growing number of young Millennials. 

For whatever reason, they aren’t home buyers but have to live somewhere. 

They need more than an apartment as they start families.

Further, they want the apartment-like convenience of walking away at the end of the lease for another job somewhere else or to actually buy a home. 

They want the pleasure of living in the single-family home without actually having to purchase one.

In many ways, the financial aspects look similar to the multifamily market (apartments) but simply adjusted to the new generation’s tastes and priorities.

Room to Breathe

Constance Hunter, chief economist at global accounting giant KPMG, gave us a fantastic update on her team’s economic outlook. 

She talks to as many as 40 global CEOs a week, truly at the center of the information spiderweb. 

Unlike the section on housing above, which was focused on the US, Constance is looking at the world.

With that perspective, Constance reminded us the COVID recovery won’t proceed at the same pace everywhere. 

It depends on the prior trends, virus conditions, vaccinations, and other factors. 

But in any case, the US will probably be first to regain its pre-pandemic trend.


Source: Constance Hunter


Note the UK, which is relatively ahead of most others in vaccinations, isn’t in the same position economically. 

Even Brazil is slightly ahead. 

That speaks to the continuing Brexit turmoil and trade uncertainty the country faces.

As for the US, Constance noted the Fed is heavily focused on employment, not just inflation.

Even if jobs keep growing strongly from here (which isn’t guaranteed), we are still a couple of years away just from recapturing the pre-pandemic jobs trend. 

Will the Fed tighten when the economy is still millions of jobs underwater? 

Unlikely, if we are to believe their rhetoric.


Source: Constance Hunter

A Rare Asset

Cryptocurrencies were a big topic at SIC, and not just with the younger crowd. 

I was interested to hear Felix Zulauf, who is about as conservative a Swiss investor (not to mention personally) as you can possibly be, make positive comments on Bitcoin. 

Rather than put words in his mouth, I’ll just quote him. 

Felix was interviewed by Grant Williams. 

They went from talking about gold straight into Bitcoin, which is itself important.

Grant Williams: I want to come back to the point you made about liquidity there in a second, but let's stick with gold and cryptocurrencies for the time being, particularly Bitcoin. 

No matter what you say, whichever side of the debate you stand on, there's some kind of legitimacy problem with Bitcoin simply because there are so many doubters. 

Has the recent action, do you think, with people clearly kind of using gold [and going] into Bitcoin as an inflation hedge, as a risk or an asset, whatever you feel it might be, does that legitimize it in any way or is it really pure price speculation at this point? 

Because Bitcoin has been so aggressive and [in its volatility].

Felix Zulauf: It is a rare asset because it is limited, and you know that it won't go beyond that limit. 

That is not true for all the cryptocurrencies, because each one is limited, but there are more and more of them, so therefore, there is no limitation. 

But for the one that dominates the marketplace like Bitcoin, there is a legitimate reason to own it. 

I do not believe that Bitcoin will disappear very quickly.

The problem with Bitcoin is that several countries have now declared it as illegal. 

It's not allowed in China. 

I think it's not allowed in Turkey. 

It's not allowed in India, if I'm not mistaken. 

So, those countries are countries that feel potential capital outflow. And therefore, this is actually a harbinger of capital controls where they are not in place yet. 

Countries that fear that their capital flows away outside of the country are fearful, and therefore, they forbid buying and transacting in cryptocurrencies like Bitcoin. 

That's not the case in the western world yet.

I do believe that Bitcoin will stay, will probably go higher over the years because the fear of currency development that is logical, will mean that the central banks will become much more aggressive in the next cycle when the next problem shows up, et cetera. 

And therefore, I think it's legitimate. 

It's more volatile. 

It's probably not a replacement for a currency, but it's an asset where you can store some value and some savings. 

It's not a currency because it's too complicated and it's too much energy consuming for its transactions… 

But I think your cryptos will stay.

Narrative Water

I put John Hussman and Ben Hunt as a panel of two because they’re both fascinating yet misunderstood. 

Neither mind saying controversial things, and eagerly engage their doubters. 

Personally, I found their session to be one of the most enjoyable and enlightening of the conference. 

Putting two great thinkers together draws out important insights.

John Hussman, for instance, has taken a lot of heat for being labeled a permabear. 

Which lately turned out not to be the case. 

He held to classic standards of valuations which have simply not been useful the past few years. 

In his defense, he is not the only person to hold such views

Yet faced with undeniable error, John adapted. 

I liked the way at SIC he segued from his own history to Ben Hunt’s idea of “narrative” as a market driver.

John Hussman: 

Finally in late 2017, after a number of incremental adaptations that were not sufficient, I finally threw my hands up and said, "There's not a limit. 

We can't rely on [historical] limits to speculation. 

There is something in people's heads that is different here that is not based on fundamentals. 

That is not based, not even constrained by historically reliable limits." 

That doesn't mean that valuations will persist forever to go up. 

What it does mean is that we have to constrain any bearishness we might have to periods where market internals are also negative. 

In other words, where people's mentality has shifted toward risk aversion, and we can talk about why that's important, Ben and I, but it has a lot to do with narrative.

With that, Ben, I think probably what I'll do is pull you in this way—you've talked about this David Foster Wallace story of these two young fish swimming, and then there's an older fish that comes by and says, "How's the water, boys?" and swims away. 

After a while, the two younger fish look at each other, one of them says, "What the hell is water?" 

You talk about that water being a narrative. 

It's swimming without even knowing that we're swimming in it. 

Talk about that. 

Then what I want to do is wind that back to what happened with quantitative easing and zero interest rates, because I think it's enormously related and it's something that investors should really think about.

Ben Hunt: 

I think that's right, John. The water in which we swim is the water of narrative. 

Look, we all know this. 

By narrative I mean it's the articles that we read, it's conferences like this, the speakers that we hear at a conference like this, it's what we hear on CNBC, it's what a politician says to us, is what Uncle Warren tells us at the Omaha conference. It's all of that.

We know, I think in our hearts, that we are impacted by this. 

We're human beings, we're a human animal, and we've evolved over millions of years to respond to these messages. 

That's what it means to be a social animal, a truly social animal like human beings are.

We know it's part of us, but I think the problem or the difficulty has always been, I'll say, recognizing how pervasive and how impactful it is on us. 

Because I’ve got to tell you, John, I had a very similar, John, call it an epiphany, but it's a very similar process for me as well, I think a little bit earlier than yours. 

For me it really happened in the summer of 2012 with Draghi's “Whatever it takes,” with these words around an OMB program. 

It was just words and it was so impactful to me that that's all it took, the words. 

The words were enough.

John Hussman: 

Yeah. 

In Buddhism, it's interesting, there's a distinction between reality, what you would call truth with a capital T, and what are sometimes called objects of mind. 

Objects of mind are mental formations that we use to construct our own reality of the world.

This is, I think, really important. 

If you read, for example, Soros, he talks about reflexivity. 

I did my doctorate in, basically, asymmetric information and equilibrium and that sort of thing, inference from other people's information through prices and so forth. 

If you think about markets, markets are basically places where people have beliefs, they turn them into behaviors, they produce market behavior, and then that market behavior comes back around and informs their beliefs.

Read John’s last sentence again, and then again. 

Mental beliefs become individual behaviors, which become market activity, which then affects beliefs. 

Knowing where you are in that cycle is critical to investing success. 

It’s also incredibly difficult.

That self-fulfilling process creates the water that we swim in, what Ben calls the narrative, the massive amount of information that inundates us daily. 

In the early part of my career, we had The Wall Street Journal and a few other publications. 

Certainly no financial TV. 

Now we “swim” in an ocean of information (to which Mauldin Economics and I contribute our own few gallons). 

If we’re not careful, we absorb information from sources that simply reinforces our beliefs rather than challenging them.

We especially see this in political information, but I think we tend to consume economic and investment information in the same way, without realizing it. 

Behavioral economists call this “confirmation bias.”

I try to seek out competing ideas by reading many sources, purposely seeking those who disagree. 

A few SIC attendees said they were frustrated all of the speakers at the conference didn’t agree. 

I smiled, because that meant I did my job. 

The SIC is designed to make us think, not tell us what to think.

Labor Scarcity

Karen Harris heads Bain’s Macro Trends Group, which produces some fascinating research. 

Her SIC presentation on the Post-COVID World unearthed a bunch of important issues. 

One of her comparisons I found especially enlightening: In recent decades we enjoyed not just abundant capital but abundant labor. 

Yet as her chart shows, growth in the number of workers probably won’t continue because it came from non-repeatable factors.


Source: Karen Harris


In the 1970s we had a large Baby Boom generation entering the workforce. The number of working women grew rapidly. 

And then we had India and China integrating their enormous populations into the global labor supply None of those are going to happen again, or anything like them. 

The working-age population is now flat or even declining in some large economies, including China and other parts of Asia.

That will be a problem for business. 

Karen thinks the solution will be more automation as labor becomes scarcer and more expensive. It will increase productivity, but with significant side effects we will have to address.

Help Wanted

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New York, DC, and Maine

I leave for New York on Sunday for meetings Monday through Wednesday. When I originally scheduled the trip, I did not check my calendar and did not realize that Sunday is Father’s Day. I just assumed I could schedule a dinner meeting for Sunday night. It turns out everybody I talked to had obligations. So, if you find yourself in New York on Sunday evening and would like to talk to your humble analyst, I will be in the lobby bar at the Marriott Renaissance on 37th near Seventh Street (which is on the sixth floor) at 6:30 pm.

I will also be on the Larry Kudlow show (Fox Business) between 4 and 5 pm.

Finally, a thought on dumb and dumber lumber. Longtime readers know that I am not a big believer in tariffs used for protectionism. Therefore I was not pleased with Trump’s imposition of tariffs on Canadian lumber. It might help a few businesses here and there, but it runs up the cost of housing and construction for the rest of us. Now, I read that Biden may actually increase the lumber tariffs when there is clearly a shortage. Color me perplexed. Isn’t the cost of lumber high enough already? You can’t tell me American producers don’t have enough margin room today.

And with that thought, I’ll hit the send button. Have a great week and I’m looking forward to not being as socially distanced next week. Follow me on Twitter.

Your ready to get on a plane analyst,



John Mauldin
Co-Founder, Mauldin Economics

China’s wolf warriors bristle at Covid blame

A new US investigation into the origins of the pandemic raises the stakes for Beijing and Washington

Gideon Rachman 

The Xi administration and its wolf-warrior diplomats have spent the past year alienating potential partners


The slump in relations between China and Australia sounds like a small detail in the great picture of world affairs. 

But this is a corner of the canvas that merits close attention. 

It provided an early indication of China’s extreme sensitivity to international calls for an inquiry into the origins of Covid-19.

The deterioration in the relationship between Beijing and Canberra has been startling. 

Back in 2014, President Xi Jinping gave a speech to the Australian parliament hailing a new trade deal and the “vast ocean of good will between Australia and China”. 

But over the past year, China has imposed tariffs and other measures on Australian wine, food and coal, and Chinese officials have accused the country of racism and war crimes.

The origins of the dispute may be just as significant as the way it unfolded. 

Late last year, Chinese diplomats released a dossier listing 14 grievances against Australia. 

The gripes included blocking foreign investment deals and funding “anti-China” research. 

But one particular grievance stood out.

Looking at the chronology of the dispute, it is apparent that the moment China truly escalated matters was when Canberra demanded an independent inquiry into the origins of Covid-19. 

Scott Morrison, the Australian prime minister, even called for international experts to be given “weapons inspector-style powers” in conducting their probe. 

China’s ambassador to Canberra responded by warning that this perceived insult might trigger a boycott of Australian produce by Chinese consumers. 

Within months, the Chinese government itself had taken the initiative by imposing tariffs.

Beijing did eventually agree to a World Health Organization investigation. 

But the inspectors were very limited in what they could see. 

China’s evident desperation to control the narrative backfired — fanning the suspicions of those who believe that the country has something to hide.

In reality, a guilty conscience is not the only plausible explanation for Beijing’s response. 

The broader difficulty is that China’s reaction to any criticism in the outside world seems to be a toxic mix of threats, shrill rhetoric and secrecy. 

This applies whether the topic is Xinjiang, Taiwan or Covid-19.

This style of “wolf warrior” diplomacy is frequently counter-productive. 

But it is also an inevitable product of a domestic system that demands sycophancy towards President Xi — and which enforces that demand with censorship and repression. 

It is unrealistic to expect a system that is closed and paranoid at home to be flexible and open in its engagement with the outside world. 

A lot of aggressive messaging from China’s diplomats may even be primarily intended for ordinary citizens or bosses back home. 

The goal is to show that the Xi government is standing up for China.

When it came to investigating Covid-19, the Chinese government was also indirectly shielded by Donald Trump. 

The fact that the former US president is widely regarded as a liar — and had a clear political motive for blaming China for the pandemic — made it easy to dismiss all suggestions of a lab-leak in Wuhan as just another far-right conspiracy theory.

Joe Biden’s more cautious approach is paradoxically more threatening to Beijing because it carries more credibility — both at home and overseas. 

The US president has openly admitted that his intelligence agencies are divided about the lab-leak theory. 

He may be genuinely fearful of the consequences if the theory is confirmed. 

Even if the Biden administration attempted to limit the fallout from such a finding, there would probably be lawsuits in the American courts — demanding vast reparations from China. 

The White House’s efforts to maintain a delicate balance between confrontation and co-operation with China would be blown out of the water.

The stakes for China are very high. 

Over the past year, China has succeeded in changing the narrative over Covid-19. 

After initially reeling under the impact of being the first to be hit, Beijing has managed to highlight China’s success in containing the disease, compared with the high death tolls in the west.

The news of the fresh US inquiry suddenly puts Beijing on the spot again. 

Faced with this immensely difficult situation, China will need all the friends it can find. 

But the Xi administration and its wolf-warrior diplomats have spent the past year alienating potential partners. 

The latest blow was the European Parliament’s decision to freeze the ratification of a major investment agreement between China and the EU — following Beijing’s imposition of sanctions on European officials and institutions, which was itself a response to EU sanctions imposed over Xinjiang.

Relations with India have also taken a steady turn for the worse over the past year. 

For New Delhi, the turning point was China’s aggression in the Himalayas last year — which resulted in the death of troops on both sides. 

Senior Indian analysts believe that the pressure that Beijing was feeling over Covid-19 in the summer of 2020 may have been a background factor in the decision to escalate tensions.

There is a clear risk that if China feels newly cornered over Covid-19, it will once again respond with aggression — or with the search for some kind of international diversion. 

The drive to understand how the pandemic began is inevitable and necessary. 

It is also dangerous.

Buttonwood

Why China has learned to relax about its currency

In a sign of tolerance, it has not slammed the door on capital inflows


In a world in which transparency has become a fetish, it is refreshing to try to get a read on the People’s Bank of China (pboc). 

Its various nods and winks give market analysts something to interpret—or over-interpret. 

On May 31st it announced that it would increase the proportion of foreign-currency deposits that commercial banks must keep on reserve at the central bank, from 5% to 7%. 

After some chin-scratching, pboc watchers came to a conclusion: China was sending a signal that the yuan had been rising a bit too quickly.

China used to intervene directly—by buying and selling dollars—to get the exchange rate it wanted. 

As recently as 2016 it ran down its foreign-exchange reserves from $4trn to $3trn to support the yuan. 

But for the past four years or so its reserves have been stable; there has been no large-scale intervention to either put a floor under the yuan or to check its rise. 

The surprise is not that China has thrown a little sand in the gears of its currency market. 

It is that it has become so tolerant of some fairly big swings in the yuan’s value.


The yuan began its recent ascent a year ago (see chart), as China’s factories reopened and demand for goods surged in the locked-down rich world. Chinese exporters took a greater share of world manufacturing, says Mansoor Mohi-uddin, of Bank of Singapore, which in turn increased the trade demand for yuan. Some headwinds became tailwinds. The yuan had traded at a discount to reflect fears of an escalation in the Sino-American trade wars. Exporters worried about a further hit to their revenues were inclined to hoard dollars—in part as security against their dollar debts. The prospect of Donald Trump’s electoral defeat changed the picture. The chances of further tariffs on Chinese goods were much reduced. Moreover, monetary conditions favoured speculative flows out of dollars and into yuan. In contrast to the Federal Reserve, the pboc did not slash interest rates when the pandemic struck. The seven-day reverse-repo rate, one of China’s benchmarks, was trimmed by just 30 basis points to 2.2%, while the Fed funds rate was cut to 0.1%. The higher interest on offer in China’s money markets favoured its currency.


That is not all. 

China has been opening its markets to overseas investors. 

Non-residents can more easily buy and sell stocks and bonds on the mainland’s markets. 

China’s government bonds and “A” shares have qualified for inclusion in global benchmarks, such as the msci equity indices and the Bloomberg Barclays bond index, which are tracked by huge pools of capital. 

A steady flow of foreign purchases has pushed up the yuan. 

China has not stood in the way. 

Tellingly on May 31st the pboc picked a tool that does not interfere much with portfolio inflows.

Still, there is a paradox. 

China has relaxed its hold on the yuan at a time when the ruling Communist Party has sought to exert greater control on private-sector businesses and on Chinese life in general. 

If China-watchers know anything, it is that control is prized in Beijing. 

Being in control does not mean that everything has to be nailed down, though. 

In the eternal trilemma between monetary autonomy, openness to capital and currency stability, something has to give. 

China has chosen to forgo a stable currency. 

That allows it greater traction over the domestic money supply and credit growth, which its regulators are more fretful about.

China’s global ambitions for the yuan also influence its policy choices. 

It has the world’s second-largest bond market and third-largest stockmarket. 

Yet foreigners still own fairly few of its assets. 

Even central banks, which have had access to China’s bond markets for a while, keep only 2% of their reserves in yuan. 

That is barely more than they hold in the Canadian dollar. 

Four years ago there was a vigorous internal debate about the merits of freer capital flows, says Eswar Prasad of Cornell University. 

But for the past two years the consensus has shifted in favour of them. 

If the yuan is to be a global currency, it needs first to be set free.

Even so, no one is confusing the yuan with a free-floating currency. 

There are ways—including all that subtle central-bank semaphoring—for China to exert influence. 

It is still far from transparent about where its tolerance bands begin and end. 

Such ambiguity is wise: give the markets a number and they will test it. 

Perhaps surprisingly China has not stood in the way of a much stronger yuan. 

But its policymakers reserve the right to keep currency markets guessing.

When the Money Supply Dries Up

by Jeff Thomas


In 1944, the US had been the primary supplier for arms for the allies during World War II and, as such, exited the war with more wealth than any of the other nations that had entered the war earlier, draining their treasuries of money. 

Since payment was largely demanded in gold, the US held three-quarters of the world’s gold and therefore was in a position to call the shots with regard to the free world’s economic future.

At Bretton Woods, the US took advantage of this situation, setting up the World Bank and the IMF and declaring the dollar to be the default currency for all countries concerned. 

From that point on, the US was in the catbird seat, able to dictate economic terms to other countries and even to behave irresponsibly, eventually creating previously unheard-of levels of debt, thereby inspiring other nations to do their best to create their own debt in order to keep pace as best they could.

Eventually, of course, such irresponsible economics will cause any country, no matter how powerful, to collapse economically, no matter how many Keynesian economists such as Thomas Piketty, Paul Krugman, and Larry Summers declare otherwise.

Beginning in 1944, the US became the world’s foremost empire, for the strongest of reasons—it held the world’s wealth. 

This advantage led to a period of great power and, in the latter years, as the empire began to stumble economically under its own great weight, led to the creation of organisations and legislation designed to bring in new revenue, as the old forms of revenue declined.

In recent years, we’ve seen the rise of the extraordinary assumption that "money laundering" (the practice of protecting one’s wealth from rapacious governments), should be regarded as a crime. 

As such, "tax havens"—those jurisdictions that provide freedom from governmental usurpation—have also been vilified as being somehow criminal because they recognize the basic right of freedom to prosper.

Along the way, we’ve witnessed the creation of the Organisation for Economic Co-operation and Development (OECD), a euphemistic appellation that might rightfully be termed the "Organization for Forced Compliance with Arbitrary Taxation Diktat by Powerful Nations." 

This US-led organisation has served to periodically threaten freer nations to comply with the less free nations, so that citizens in the latter group cannot escape being stripped of the fruit of their labours. 

In addition, the US has created the Foreign Account Tax Compliance Act (FATCA), which is ostensibly intended to enforce taxation of US citizens abroad, but which has been used almost entirely to bilk foreign banks that have US citizens as clients. 

(Again, the rules are arbitrary and ever-changing, and banks that fail to satisfy the US are fined enormous sums in a rather colossal Mafia-style shakedown.)

There's a massive increase in currency creation and inflation taking place all around the world. 

It's clear there is a war being waged on savers and retirees.

Unfortunately, there's little any individual can practically do to change the trajectory of this trend in motion. 

The best you can do is to take action to ensure a devalued dollar doesn't wreak havoc on your nest egg.

We've found an ideal solution that will help keep your wealth safe and within your control, even during the worst of times.

-

Along the way, the US has increasingly created legislation restricting the international movement of money by its people in addition to such a patchwork quilt of laws that every citizen is likely to break several laws each day, simply by existing normally.

All of this is taken for granted as a "given" by both Americans and those of us who view the US from afar. 

However, we rarely, if ever, take the time to reflect on the fact that, historically, this is nothing new. 

This is, in fact, quite the norm for an empire in decline. 

From the latter days of the Roman Empire, such practices (if in a less sophisticated form) have been implemented in order to have a last squeeze of the lemon before economic collapse takes place.

So, what then, in these many instances, has been the deciding factor that ends such draconian usurping of private wealth? 

Well, in fact, what tends to occur is that enforcement increases serially, right up until the moment when such enforcement can no longer be funded. 

Sooner or later, the amount that’s being bilked from those who are productive is insufficient to force them to continue to be bilked.

In ancient Rome, once the system had deteriorated to the point that the military was almost entirely mercenary, all that was needed was for the government to fail to provide full, regular payment to the troops. 

Once "the cheques began to bounce," the military turned on their former benefactors. 

In addition to the cessation of enforcement, the military itself was now a threat to the leadership.

And of course, we have seen this in other empires since that time. 

Even with all the gold that Spain was pulling out of the New World in the 16th century, it wasn’t sufficient to pay for the excessive foreign military adventures of Philip II and eventually the coffers ran dry, collapsing his ability to even maintain control at home. 

When even the interest on the debt could not be serviced, the ability to maintain control not only ceased to advance—it went into reverse.

Whenever the ability to enforce draconian legislation goes into decline, the people of a nation suddenly realise that they’ve been living in fear of a paper tiger. 

It doesn’t take long before some people choose to defy the system. 

When they’re seen to succeed, others follow in droves.

So, what does this say of the US and its power? 

Well, as Doug Casey has been known to say, "Countries fall from grace with remarkable speed." 

Quite so.

On an international level, this means that international leaders will be watching the economic decline of the US closely. 

Countries such as China and Russia have been loading up on precious metals in preparation for a collapse in fiat currency. 

In addition, they’ve created their own version of the World Bank, the Asian Infrastructure Investment Bank, and have been hard at work inking deals with other nations for international settlement in currencies other than the dollar.

Most people in the world today cannot remember a time before Bretton Woods, yet they may soon witness the Bretton Woods agreement becoming a dead duck.

But, if we extend this premise, we also should be questioning the other constructs of the postwar period that have become dinosaurs. 

What of the United Nations? 

This organisation was once meant to be a body for arbitration and world planning, but has in latter decades become a quagmire of bickering and gainsaying—with its decisions rarely being adopted by the nations in question. 

And yet the US alone pays some $8 billion annually to keep the UN afloat. 

Surely, when the world at large ceases its willingness to carry further US debt, the US government will jettison the expense for the UN before it cuts either its military spending or its entitlement programmes.

Similarly, NATO (with only 11 of its 30 members currently meeting the recommended payments) would experience a similar fate.

With the above entities heading south, the Wolfowitz Doctrine, which has since 1992 been the basis of US aggression policy, would become unachievable.

In addition to the decline or cessation of the above international adventurism, enforcement of revenue pursuit in the guise of FATCA and OECD schemes would equally suffer from a loss of funding. 

It would not be a question of whether the empire still wished to squeeze the lemon more than ever before—it would. 

But once the funds to do so dried up, the US and EU would find themselves in the situation that we currently observe in Venezuela: The money to pay for the enforcement is simply not there anymore. 

The decline would begin with bounced cheques, followed by massive layoffs in the enforcement departments, followed by a decline in receipts, necessitating further layoffs, and continuing in a downward spiral.

At present, countless people live in fear of the present empires and their ever-increasing efforts at usurpation. 

However, as history shows, once debt has reached its nadir and begins its rapid fall, so does the empire’s ability to enforce draconian confiscations. 

Western powers reignite Beijing’s anger after G7 and Nato warnings

China flexes its muscles in Taiwan and Hong Kong in retaliation for Biden-led ‘united front’

Tom Mitchell in Singapore and Kathrin Hille in Taipei 

China’s air force made its largest incursion into Taiwan’s air defence zone following western condemnation of its activities © Taiwan Ministry Of Defence/EPA-EFE


For more than six weeks, Taiwanese military officers wondered where the Chinese fighter jets had gone.

During May, only four entered the island’s air defence identification zone. 

In the first half of this month, there were incursions on only four days and a stretch of nine days without any activity at all. 

This compared to a previous pattern of as many as 20 incursions a month.

But on June 15, a day after US president Joe Biden and other Nato leaders issued a statement condemning China’s “stated ambitions and assertive behaviour”, 20 People’s Liberation Army fighter jets, four nuclear-capable bombers and four additional military aircraft entered Taiwan’s ADIZ. 

It was the largest number of planes ever dispatched by the PLA into the zone, with some of them also skirting around the southern tip and east coast of the island before turning back.

One senior Taiwanese government official said Beijing could not restrain itself after the Nato communiqué — and a G7 summit statement issued just days earlier — criticised Beijing’s activities in the Taiwan Strait and its crackdown on Hong Kong’s pro-democracy movement.

“Beijing wanted to prove wrong those in the west whom they accuse of hyping a China threat theory,” the official said, referring to the reduced military activity in May and early June. 

“But of course they could not keep it up. 

Once Taiwan gets a little support, they have to react.”

Chinese analysts said Beijing had no choice but to show its resolve after the Biden administration accelerated its efforts to build a “united front” against China at the G7 and Nato summits — something President Xi Jinping’s administration had long feared but that never materialised when Donald Trump was US president.

“The G7 and Nato have been distorted into anti-China platforms,” said Victor Gao, a former Chinese diplomat now at the Center for China and Globalization, a Beijing-backed think-tank. 

“There are increasingly large forces in China that believe if the US wants to single out China as its fundamental enemy, then let the US have an enemy.”

Beijing also responded to the G7’s criticism of its policies in Hong Kong with a show of force in the territory, where it recently snuffed out the only public commemoration of the 1989 Tiananmen Square massacre on Chinese soil. 

In the early hours of Thursday, police arrested senior staff at the pro-democracy Apple Daily newspaper for alleged “collusion with a foreign country or with external elements to endanger national security”.

A senior officer with the Hong Kong police force’s national security division later said the arrests were related in part to more than 30 articles published in the newspaper.

Police blow out candles lit by activists in Hong Kong on June 4 to mark the 1989 Tiananmen Square massacre


Beijing’s actions around Taiwan and in Hong Kong were matched by scathing rhetoric. 

Zhao Lijian, a foreign ministry spokesperson and one of China’s most outspoken diplomats, said the G7 communiqué “exposed the bad intentions of the US and a few other countries to create antagonism and widen differences with China”.

“The US is sick,” Zhao added. 

“The G7 should take its pulse and prescribe medicine for it.”

Such comments appeared to contradict recent instructions from Xi, who said last month that official propaganda should “set the right tone, be open and confident but also modest, humble and strive to create a credible, loveable and respectable image of China”.

Xi, however, also noted that China was involved in a “public opinion struggle” internationally.

“Powerful anti-China forces in western society want to attack and discredit China,” Lu Shaye, China’s ambassador to Paris, said last week in a state media interview. 

“We must fight back to safeguard our own interests. 

Our sovereign security and development interests are inviolable.”

Yun Sun, a China foreign policy expert at the Stimson Center in Washington, said such rhetoric reflected growing alarm in Xi’s administration.

“There is a real concern in Beijing that a united front is forming [and] includes many elements that China does not wish to see such as Taiwan, maritime security and human rights,” she said. 

“That’s why we are seeing some unusually harsh responses from Beijing on G7 and Nato.”

Shi Yinhong, a professor at Renmin University in Beijing who advises the State Council on foreign policy issues, said: “Germany, France and other EU countries are hesitant to confront China as [openly as] the US . . . but they are now closer to the US when it comes to dealing with China.”

Some Chinese officials and analysts argue that while Beijing will continue to respond forcefully when criticised over Taiwan, Hong Kong or other “core interests”, this does not preclude co-operation with the US on other issues such as climate change or global tax reform.

Fu Ying, a former Chinese ambassador to the UK, said at a recent seminar that the Biden administration wanted to “prevent China from moving forward to replace the US”. 

But, she added, “we hope [technological and economic] competition can be managed to ensure it is on a positive track, pushing each other to seek joint development and improvement”.

Beijing “should stand firm on matters of principle but not be too distracted by anti-China hostility”, Gao said. 

“In the long term, China will have a larger economy than the US — no one can change that. 

Time is on China’s side.”


Additional reporting by Xinning Liu in Beijing

Switzerland’s slow-motion Swexit will still be harmful

The collapse of talks on closer ties with the EU is a blow to the bloc too

The editorial board

     Switzerland enjoys practically full integration in the single market © EPA-EFE


Switzerland’s decision to pull the plug on seven years of painstaking negotiations with Brussels that were meant to forge a closer, more stable trading relationship with the EU has none of the drama of Brexit. 

But it could do long-term harm to the Swiss economy which has benefited enormously from almost full access to the EU’s internal market. 

Inevitably it also underlines the difficulties the EU seems to have regarding living with its neighbours. 

To lose your biggest European trading partner, Britain, may be viewed as a misfortune. 

To lose your second biggest, Switzerland, may look like carelessness.

Swexit is like Brexit in that two ancient democracies, chafing at the price tag and conditions of market access, have chosen a looser, more distant relationship, the costs of which have been grossly underplayed by their political elites. 

Britain banked on commercial interests in other EU countries pushing Brussels to preserve the terms of trade. 

Switzerland has fallen for the same delusion.

There are also differences. 

Switzerland actually wants closer ties with the EU, in energy or health for example. 

British trade with the EU has slumped this year. 

The consequences of Berne’s decision to junk talks with the EU will be a gradual degradation in its market access: a slow-motion Swexit.

In 1992, Swiss voters decided against upgrading their two-decade free trade agreement into full single market membership. 

But in the years since that landmark decision, Switzerland has joined many aspects of the market and other areas of co-operation under a patchwork of bilateral agreements. 

The country enjoys among other things frictionless trade in goods, trade in services, travel free of border checks, the right to live and study across the EU, mutual recognition of professional qualifications and access to EU research and education programmes.

When the EU tired of endless negotiations and haggling by Bern — such as withholding budget contributions as a bargaining chip — it insisted on a framework agreement. 

This would have upgraded and updated Switzerland’s market access agreements while establishing new governance arrangements, requiring Switzerland to align its rules whenever the EU updated its regulations. 

There would have been a mechanism for resolving disputes.

The Swiss government signed this agreement but then failed to sell it back home. 

Critics began to pick it apart, saying it would undermine Switzerland’s immigration policy and wage protections. 

Brussels made some special concessions to meet Swiss concerns, including a 90-day limit on foreign companies providing services to protect Swiss labour markets. 

But Switzerland’s nationalist right and the trade union supporting left in effect joined forces to kill it off.

Some Swiss opponents of the framework agreement claimed the EU’s insistence on dynamic alignment of rules would have overturned Switzerland’s cherished system of local and direct democracy. 

But the country has been an EU rule-taker for decades. 

And unlike the UK, which secured more flexibility in its trade deal with the EU, Switzerland enjoys practically full integration in the single market. 

According to one study, it benefits more from it per capita than any EU country.

Those benefits will now erode as the EU updates its rules and Switzerland loses equivalent status. 

It has already lost it in stock exchanges and medical instruments. 

Swiss companies are resilient. 

A strong currency is probably a bigger headache than regulatory disruption. 

One of the richest countries in the world will become a little less rich. 

That is Switzerland’s sovereign decision. 

But it can no longer expect special treatment.