Good morning. Here’s your Early Warning for Monday, 01 April 2019.
Airlines: Multiple airlines experienced a “system-wide outage” and some planes were grounded at numerous airports this morning. Last week, airlines and travelers experienced a similar outage. Delta, Southwest, JetBlue, United, and Alaska Air were affected. Whether or not these two events were caused by cyber exploitation, it’s a good reminder that the country is highly vulnerable to systems disruption.
Border crisis: On Friday, President Trump threatened to shut down the U.S.-Mexico border unless Mexico took swift action to stem the flow of migrants funneling across the border. Customs and Border Patrol previously reported that they were on track to take in 100,000 migrants in March alone. Then President Trump announced that he was cutting funding to El Salvador, Guatemala, and Honduras, although the administration hasn’t released details on that. The Democratic House would have some say in what programs will continue to receive funding and which won’t. Don’t bet on the House cutting funding.
Appearing on CNN yesterday, White House Chief of Staff Mick Mulvaney said, “If we’re going to give these countries hundreds of millions of dollars, we would like them to do more. We could prevent a lot of what’s happening on the southern border by preventing people from moving into Mexico in the first place.”
One migrant quoted by Reuters said, “There is no work [in El Salvador] and we want to improve [our lives], to get ahead for our families, for our children. I don’t give a damn [what Trump says], I’m determined.” [source]
Last week, DHS Secretary Kirsjen Nielsen announced a cooperation agreement with the Northern Triangle countries that would purportedly curb outward migration. That followed a $5.8 billion investment package for Central America announced by the Trump administration in December 2018. That package was for overall economic development, which officials hoped would provide job opportunities and give potential migrants a reason to stay. Despite President Trump’s pledge to cut funding, there continues to be some progress made, but clearly not enough. President Trump is likely using the threat of funding cuts to spur a sense of urgency from government officials in Central America.
Politics & Governance
Two Democrats are going to reintroduce “Medicare X” next week. The proposed plan would offer a public option — government-backed medical insurance plans — which is seen as not as socialist as the Medicare for All plan currently being fielded. “[Centers for Medicaid and Medicare Services] needn’t collect a profit, they don’t have to return to shareholders. The cost of this nonprofit insurance policy would be dramatically less than for-profit insurance,” said Sen. Tim Kaine (D-VA), one of the plan’s proponents.
The Democrat civil war continues. A few weeks ago, I wrote about how House Speaker Nancy Pelosi, in an attempt to limit the influence of Rep. Alexandria Ocasio-Cortez (AOC), warned against insurgent Leftist candidates challenging established Democratic representatives during the upcoming primaries. Then the Democratic Congressional Campaign Committee (DCCC) warned strategists and vendors not to contribute or work for campaigns primarying from the Left, and that they’d be cut off from work for the Democratic establishment if they did. Over the weekend, however, AOC announced a drive to fund the re-election campaigns of Leftist members of Congress and “swing seats” targeted by the GOP. AOC tweeted: “The
@DCCC’s new rule to blacklist+boycott anyone who does business w/ primary challengers is extremely divisive & harmful to the party. My recommendation, if you’re a small-dollar donor: pause your donations to DCCC & give directly to swing candidates instead.” AOC has little power but she remains very influential, bolstered by her own CNN townhall interview last week. She and others will continue to back Far Left candidates with the goal of transforming the Democratic Party from the bottom up.
Far Left Daily
#YellowVests in France are the perfect example of what happens when you don’t address economic & social justice in the same sweep as climate policy.” – Rep. Alexandria Ocasio-Cortez
“This extraordinary, unprecedented concentration of wealth and power and privilege must be broken apart, and opportunity must be shared with all.” – Robert Francis “Beto” O’Rourke, Democratic presidential candidate
“I’m not sure that anything we do [in the Democratic House] is going to reach the floor of the [Republican] Senate. That’s the reality.” – Rep. John Yarmuth (D-KY)
Last month, the 10-year and 3-month yield spread inverted, with the 10-year dipping below the 3-month. That suggests more uncertainty in the long term than the short term, which is a good indicator of a recession. Since 1969, this inversion precedes a recession by an average of 10 months. Since 1990, however, the average lag time is over 16 months. Of course, a recession could occur sooner or later than 16 months, but the average puts us in a recession by late summer 2020. Also, I want to add that basing our expectations of the future off one or two indicators is risky.
The 10-year and 2-year spread is on a razor’s edge at .16, which is down from .47 a year ago and 1.13 two years ago. An inversion, on average since 1969, occurs 12 months before a recession. Since 1990, that number is over 16 months.
On Friday, White House economic advisor Larry Kudlow said he wanted the Federal Reserve to cut interest rates by half a percent, which would make borrowing money cheaper and spur economic growth. “Looking at some of the indicators — I mean the economy looks fundamentally quite healthy, we just don’t want that threat [of lower growth or recession]. There’s no inflation out there, so I think the Fed’s actions were probably overdone.”
But Minneapolis Fed chairman Neel Kashkari says that cutting rates isn’t prudent… yet. “Some of the risks have shifted to the downside, so pausing to get more information, to see if this really is an economic slowdown or if it’s just a blip, I think that’s the right move,” Kashkari said.
President Trump maintains that lower interest rates are preferable, going so far as to criticize the Fed for repeatedly raising rates after he took office. That suggests that economic growth may have been stronger in 2018 than it was, but it would also have risked higher inflation. And Kudlow’s desire for a rate cut is concerning because he’s acknowledging that higher interest rates could lead to a recession, even as the Federal Reserve had expected two more rate hikes in 2019. There’s plenty of Fed-bashing to go around, and there are legitimate reasons for the Fed-bashing. Investors reacted negatively to the last rate hike, and because reported inflation remains below the Fed’s target of two percent, many believe that the Federal Reserve was being a too hawkish.
My bottom line: Federal Reserve policy is reactive. Even Kashkari admits that the Fed is waiting to see what the data looks like from the previous quarter before resuming normal policy for the future. The danger here is that Federal Reserve misreads economic data — which they’ve often done before — and continues to hike interest rates right into a recession, which they’ve also done before.
Strategic/Defense Situational Awareness
The USS Abraham Lincoln Carrier Strike Gorup embarks today on a deployment that will end with its re-basing in San Diego, California. The deployment and re-basing is a part of the Navy’s new dynamic force employment strategy.
An analyst at the Chinese-backed National Institute for South China Sea Studies is calling for greater Chinese deterrence measures. “Tension in the South China Sea will rise in the coming year so we must deploy some defensive facilities that are able to overawe American warships entering nearby waters,” says analyst Wu Shicun. “The Americans would have to think twice before going too far, that we might take counteraction that could threaten their vessels.” [source]
“Has anyone noticed that the Federal Reserve is solvent again? Unlikely, as few realized that it was technically insolvent. At the Sept. 30  reporting date, cumulative unrealized losses in the system’s open market account totaled $66.4 billion, almost twice the $39.1 billion of capital available to absorb that hypothetical loss.” – Jim Grant