Early Warning for 11 December 2018

Good morning. Here’s your Early Warning for Tuesday, 11 December 2018.

 

InFocus: Yesterday afternoon I watched a wide-ranging interview with billionaire investor Paul Tudor Jones on CNBC. Jones drops a few bombs, and I’ll outline a major one here along with my commentary. (The rest will appear in this week’s National Intelligence Bulletin.) Jones criticizes the Federal Reserve, which he says makes policy decisions “by looking in the rear view mirror” instead of by extrapolation into the future. Furthermore, he says: “It’s different this time… [The Federal Reserve] could be hiking [interest rates] at exactly the same point you should be cutting [interest rates].”

Jones is talking about economic weakness going into the future, and that the Federal Reserve could be contributing to that economic weakness by hiking interest rates instead of cutting them. After pointing out that the Federal Reserve “hiked us right into a recession” in 1974, and hiked rates again in 1997 going into the 1998 financial crisis, and then raised rates in 2015, which put the economy “on pause for years”; Jones says, “There’s a high probability that this hike will be… the last one for a long time.” Out of the last 14 rate hike cycles (we’re in 15 now), 11 of them have resulted in recession. Jones is making this case.

Analyst Comment: If this plays out like it’s looking, then we could see another period similar to the 2008 recession, complete with its long term effects. The Millennial generation is years behind their parents at the same age (some say 20 percent behind) because weak economic conditions diminished Millennials’ ability to get good paying jobs, save money, invest, and all the other positive benefits a strong economy brings. Lots of data show that Millennials will be chronically worse-off because of the lasting effects of the recession: their lifelong earnings will be lower, their savings will be lower, their investments will be lower. We’re seeing a disruption of financial health due to the several years that slowed the development of their financial well-being.

Here’s the compounded problem: We’re likely looking at another iteration of economic setbacks for Generation Z, which would make two successive generations at a distinct economic disadvantage as compared with previous generations. And that’s probably why very prominent financial elites have warned about social instability — because they know that two successive generations will find it much more difficult to be financially independent over the course of their lives, as compared with their parents’ and grandparent’s generations. This is likely to be a huge driver not just of social instability, but also of political change. In Homer’s Odyssey, the Sirens’ Song lured sailors to their demise:

“If any one unwarily draws in too close and hears the singing of the Sirens, his wife and children will never welcome him home again, for the Sirens sit in a green field and warble him to death with the sweetness of their song. There is a great heap of dead men’s bones lying all around, with the flesh still rotting off them. Therefore pass these Sirens by, and stop your men’s ears with wax that none of them may hear…”

These drivers are why I’m gravely concerned about the contemporary version the Sirens’ Song, which today is the lure of democratic socialism. Left wing economic policies, whether they’re populist or not, obviously present a grave threat to America as we know it. Within the next several years, we’re likely to see conditions that could set the stage for a rapid political shift towards the burgeoning democratic socialist movement.

 

Fault Line: Over the weekend, a progressive group called Demand Justice hosted an event to discuss a way forward for the Democratic Party that includes packing the Supreme Court. No where in the Constitution does it outline just how many Supreme Court justices are required, and the court has had between six to ten justices throughout its history. (Under the New Deal, FDR pushed the Congress to appoint 15 Supreme Court justices.) The plan for Demand Justice is to have the next Democratic president push progressive justices into the court by expanding its size. Seems outlandish, but DNC chairman Tom Perez was in attendance for the summit. Perez didn’t comment specifically on that plan, but he also didn’t push back when the subject came up during the summit. Since a conservative majority on the Supreme Court is a recognized hurdle for the Democratic Party, and because there’s no sea change in sight, this has been one option floated repeatedly by progressives pushing for permanent change.

 

White House

The President is scheduled to meet with “Chuck and Nancy” to discuss funding for the border wall and avoiding a partial government shutdown. Rep. Nancy Pelosi (D-CA) is expected to become House Speaker again. Sen. Chuck Schumer will remain the Senate minority leader.


 

State Department

Secretary Pompeo has no publicly scheduled events.


 

Defense Department

Defense Secretary Mattis has no publicly scheduled events.

 

These are the last publicly reported locations of these ships. Conflict requiring an aircraft carrier/carrier strike group does not appear imminent.

The Carl Vinson (CVN-70) was last reported as having returned to port in San Diego.

The Abraham Lincoln (CVN-72) was last reported as being in the west Atlantic.

The John Stennis (CVN-74) was last reported as being in the Indian Ocean.

* The Harry Truman (CVN-75) was last reported as returning to home port, but currently in the Atlantic Ocean.

The Ronald Reagan (CVN-76) was last reported as being in waters south of Japan, and is scheduled to make a port call in Hong Kong. (Analyst Comment: Earlier this year, the Chinese government denied a port call to another American ship.)

The George H. W. Bush (CVN-77) was last reported as being in the west Atlantic.

 

Bold indicates significant changes to last reported location or other amplifying information.


 

Congress

Significant House Activity:

  • Nothing significant to report.

Significant Senate Activity:

  • The Armed Services Subcommittee on Sea Power is expected to host a closed door briefing on Chinese and Russian navy operations.

* Only events pertinent to national security are listed. Significant reporting will appear in this week’s Strategic and National Intelligence reports.


 

Economy/Finance

A couple weeks ago, I reported that both Germany and Japan had negative economic growth in the last quarter. Japan’s latest Q3 numbers were recently revised down to -2.5% growth [source], and Germany’s initial reports showed a -0.2 percent growth rate. These downturns, however, could be temporary. But upon looking into this further, it’s more than just Germany and Japan whose economies are contracting. Italy’s dispute with the European Union could send it two straight quarters of economic contraction [source], and Switzerland posted -0.2 percent growth versus an expected 0.4 positive growth in Q3. [source]

While the International Monetary Fund’s chief economist isn’t predicting a global recession, he does say that “The slowdown outside the U.S., to the extent we’re seeing signs of that, seems to be more dramatic [than in the U.S.].” Maurice Obstfeld, who will soon retire, warns that a global economic slowdown is also likely to affect the United States. “For the rest of the world there seems to be some air coming out of the balloon and that, I think, will come back and also affect the U.S.” [source]

Meanwhile, rising interest rates are taking a toll on house flippers. The number of home loans with a three year term or less is down 11 percent from the same July to September period last year. The end of the housing boom is near.


 

What I’m Looking at this Morning

History ended in 1945

President’s National Infrastructure Advisory Council: Surviving a Catastrophic Power Outage

Japanese military sees record spending


 

Notable Quotable

“My concern is that if impeachment is moved forward on the evidence that we have now, at least a third of the country would think it was just political revenge and a coup against the president. That wouldn’t serve us well at all. The best way to solve a problem like this to me is elections.” – Sen. Angus King (I-ME)

Samuel Culper is a former military intelligence NCO and contract Intelligence analyst. He spent three years in Iraq and Afghanistan and is now the intelligence and warfare researcher at Forward Observer.

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