Early Warning for 12 December 2018

Good morning. Here’s your Early Warning for Wednesday, 12 December 2018.

 

Fault Line: On Monday night, former Fed chair Janet Yellen warned of the potential for another financial crisis. “I think things have improved, but then I think there are gigantic holes in the system. The tools that are available to deal with emerging problems are not great in the United States.” After citing overleveraged loans, Yellen said, “I’m not sure we’re working on those things in the way we should, and then there remain holes, and then there’s regulatory pushback. So I do worry that we could have another financial crisis.” Yellen also pointed out that “Interest rates are low [and are] likely to remain lower than they’ve been in past decades.” [source] (Analyst Comment: Just a year and a half ago, Yellen said she didn’t foresee another financial crisis “in our lifetimes,” which was met with considerable derision by financial watchers. Yellen also pointed out that the Federal Reserve typically has to cut interest rates by five percent to deal with a recession; which “means there’s much less scope to cut short-term rates than there’s been historically in the United States.” What she’s describing is a Federal Reserve that will potentially be pushed to take extreme actions to solve the kind of systemic risk that multiple bubbles, like overleveraged loans, present.)

Personal note: Look, I know it can get old reading these warnings every day. For me, however, they’ve spurred some important changes, including an upcoming move away from the city of Austin and a higher pace of preparedness at the family ranch. I’m not quite to the point that I’m buying the “total collapse scenario” that many are describing, but I’m to the point of believing that the next recession and financial crisis will be as bad as, if not worse than, 2008. There are some areas where it could be worse because we see just how far real estate bubbles have re-inflated since 2008’s lesson. I’m also concerned because I’m seeing a high likelihood that the next round will cause long term effects that will be difficult to solve. Specifically, we’re not dealing with just financial and economic fall out, but now substantial social and political fallout, too. These issues are likely to be deeply entrenched and psychological, affecting generations for their lifetimes, similar to how many Americans were psychologically affected by the Great Depression. I’m not a psychologist, so I can only speculate about how Millennials will respond to back to back recessions within a decade, knowing that both will negatively affect their lifetime earning potential, savings, investments, and the other things I mentioned yesterday. Either way, we’re looking at more government intervention, more government solutions, and more government authority to prevent the problems their own policies created.

 

White House

The President is scheduled to sign an Executive Order establishing the White House Opportunity and Revitalization Council. The EO is expected to direct federal spending and bolster investment towards “opportunity zones”. These zones are identified by state governors as economically depressed areas, and in theory these investments in infrastructure, business, and real estate would help alleviate poverty in return for federal tax credits.


 

State Department

Secretary Pompeo is scheduled to attend a UN Security Council meeting on Iran. In a speech, Secretary Pompeo will “address the Iranian regime’s threats to international peace and security through their continued development and proliferation of ballistic missiles in defiance of United Nations Security Council Resolutions.”


 

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 conducting carrier qualifications off the coast of California.

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 north Arabian Sea.

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

*The Ronald Reagan (CVN-76) was last reported as having returned to home port in Yokosuka, Japan.

*The George H. W. Bush (CVN-77) was last reported as conducting carrier qualifications off the coast of Florida.

 

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


 

Congress

Significant House Activity:

  • The Committee on Foreign Affairs holds a hearing on promoting U.S. interests in Africa. [source]

Significant Senate Activity:

  • The Armed Services Subcommittee on Sea Power holds a hearing on Navy and Marine Corps readiness. [source]
  • The Armed Services Subcommittee on Emerging Threats holds a hearing on the implications of Chinese presence in Africa. [source]
  • The Armed Services Subcommittee on Readiness holds a hearing on U.S. Force Posture in the Indo-Pacific. [source]
  • The Judiciary Committee holds a hearing to examine China’s non-traditional espionage against the United States. [source]
  • The Judiciary Committee holds a hearing on Transnational Cartels and Border Security. [source]

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


 

Economy/Finance

Kenneth Rogoff, an economics professor at Harvard and formerly the International Monetary Fund’s chief economist, warned in an op-ed last month (I just read it this morning) that China’s coming recession is likely to coincide with a financial crisis of its own, and is likely to affect the United States. Rogoff’s conclusion: “A recession in China, amplified by a financial crisis, would constitute the third leg of the debt super-cycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.” [source] (Analyst Comment: I’ve previously pointed out that China has trillions in off-the-books loans and an out of control shadow banking industry, which are leading to its own version of our 2008 crisis and what’s increasingly looking like a global recession.)


 

What I’m Looking at this Morning

Kelly’s exit only a part of looming White House staff remake

Sen. Warner: Russia and China are accelerating cyber, disinformation capabilities

Nearly half of U.S. chief financial officers believe a recession will hit in 2019


 

Notable Quotable

“The fact is that the G.O.P., as currently constituted, is willing to do whatever it takes to seize and hold power. And as long as that remains true, and Republicans remain politically competitive, we will be one election away from losing democracy in America.” – Economist Paul Krugman, New York Times column [source]

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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