Good morning. Here’s your Early Warning for Tuesday, 07 May 2019.
Politics & Governance
As of late last night, Rep. Jerry Nadler (D-CA) and the House Judiciary Committee still plan on holding Attorney General Bill Barr in contempt of Congress on Wednesday. The continued stonewalling of Congress by the Trump administration remains the largest source of political instability and “constitutional crisis” hand-wringing by Democrats. Justice Department officials are sitting down with Nadler today to negotiate a way forward on Congressional subpoenas.
Another avenue of the stonewalling is Treasury Secretary Steve Mnuchin’s refusal to give up Trump’s tax returns to Congress. Mnuchin wrote in a letter yesterday that the tax returns have no legislative value, which is a requirement set forth by a Supreme Court ruling, and therefore the tax return request is unreasonable. Next steps: Add Mnuchin to the list of officials Congress is going to hold in contempt, and then sue the Treasury Department for the tax returns.
On Monday, President Trump dimmed the hopes of a trade deal with China, saying that he’d raise the current 10% tariff on $200 billion worth of goods to 25% on Friday. U.S. officials are accusing China of “reneging” on some of their commitments in the talks. “Over the course of the last week or so, we’ve seen an erosion in commitments by China, I would say retreating from commitments that have already been made, in our judgment,” said U.S. Trade Representative Robert Lighthizer. Chinese officials are traveling to the U.S. this week to continue talks. (AC: China is underperforming their strong GDP numbers as they face both economic headwinds and a potential financial crisis of their own. Trump is turning the screws on his previous promise to raise tariffs if substantial progress isn’t made with Chinese negotiators. While it may be the least palatable option for Chinese president Xi Jinping, he may be best served by striking a deal seen as a win for Trump now, and then shuffling his feet on actually following through. Enforcement of this deal — especially enforcing an end to industrial and economic espionage against America — is the real key, and that’s a short lever for Trump. If the trade deal doesn’t include an espionage clause, then it’s meaningless. The potential course of action being overlooked is what China does after Trump, when they can simply reset all their commitments and pretend like the Trump trade deal never happened. Striking a deal now when China is weaker seems the prudent thing to do, so they can renegotiate years later when China is stronger.)
The Federal Reserve flagged the sale of risky corporate debt as the top vulnerability to the financial system. Leveraged loans are a $1.1 trillion market that grew by 20 percent in 2018 as loan standards were eased. “Borrowing by businesses is historically high… with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards.” The Fed warned that global events combined with “the rapid growth of less-regulated private credit and a weakening of underwriting standards for leveraged loans” could lead to a crisis. (AC: It’s easy to look at public and private debt in America and come to the conclusion that a substantial part of our economic growth is debt-fueled and has been since the end of the 2008 recession. The $9 trillion corporate debt market, for instance, is likely in bubble territory. That’s not to say that it will necessarily burst. The Fed’s warning could spur action to slowly deflate the bubble, as opposed to a sudden burst. If the Fed is warning about it, they’re trying to deflate it for a reason.)
Global/Defense Situational Awareness
“The [Chinese Communist Party] has been waging economic war against industrial democracies ever since China joined the World Trade Organization (WTO) in 2001, and now China has emerged as the greatest economic and national security threat the United States has ever faced.” – Steve Bannon in a Washington Post op-ed [source]