National Intelligence Bulletin for 21 December 2018

The National Intelligence Bulletin is a weekly look at domestic systems disruption, and threats to social, political, economic, and financial stability in the United States. This report is available each week for Intelligence subscribers.


 

In this National Intelligence Bulletin

  • Democrats launched Russia-style disinformation campaign in Alabama Senate race
  • RBG has surgery; Democrats have a SCOTUS solution
  • Warren: “Change the rules”
  • Fault Lines commentary
  • A very real and likely SHTF scenario
  • Paul: We could be facing a worse scenario than 1929
  • Economic/Financial Watch commentary

 

 

Early Warning Index: I didn’t publish any structural changes to the Early Warning Index this week, but I did have a few questions about how this system works. Answer: There are 16 sectors of what I consider to be core parts of a functioning society (as we know it). Each sector has indicators, which are assigned number scores according to the threat level: No/Negligible, Emerging, Persistent, or Severe.

For example, this week I added two points to P2: State Losing Capacity, indicator “Inability to effectively govern”, in light of the potential for a government shutdown and promises of gridlock from both President Trump and House and Senate Democrats. Additionally, I added one point to E2: Consumer Health, indicator “Increasing youth unemployment rate” because prime age workforce participation remains lower than normal (and lower even than in 2008). Next month, I’ll have all the appropriate baselines worked out, and we’ll have a much better picture of the overall security and health of the country.

Each week, I’ll use this section of the report to address significant changes to the Early Warning Index scores. Over time, this tool will allow us gauge what sectors of social stability are being affected, which will allow us to begin drawing out some conclusions about second- and third-order effects in the future. Final caveat: This tool is not intended to be precise, especially not with the amount of granularity required to be precise. What it does instead is reflects the general health/stability of each sector and allows us to be more accurate than an intuitive, non-structured approach. – S.C.

 


Priority Intelligence Requirements

PIR1: What are the new significant indicators of disruptive political, social, or cultural conditions or events?

PIR2: What are the new significant indicators of threats to economic or financial stability?


 

PIR1: What are the new significant indicators of disruptive political, social, or cultural conditions or events?

Major Trends:

  • Ongoing political instability due to high stakes political warfare
  • Removal of political guardrails increases risk of reaction
  • Polarization risks future election integrity
  • Simmering social grievances based on race, class, and political ideology contributing to sporadic violence
  • Ongoing culture war features information operations and economic warfare

 

Uncovered: Democrats launched Russia-style disinformation campaign in Alabama Senate race

This week, reporters for the New York Times discovered a secret project carried out on Facebook and Twitter that sought to undermine Republican candidate Roy Moore and bolster Democrat Doug Jones. The reporters were quick to point out that the project was “likely too small to have a significant effect on the race,” which was decided by 21,000 votes in Jones’ favor in 2017. According to a report obtained by Times reporters, the project “experimented with many of the [Russian] tactics now understood to have influenced the 2016 elections.” From the article:

“The project’s operators created a Facebook page on which they posed as conservative Alabamians, using it to try to divide Republicans and even to endorse a write-in candidate to draw votes from Mr. Moore.”

According to the report, the goal was to “enrage and energize Democrats” and “depress [Republican] turnout” in the December 2017 special election. Says one central figure involved: “The [$100,000] research project was intended to help us understand how these kind of campaigns operated. We thought it was useful to work in the context of a real election but design it to have almost no impact.” [source]

Analyst Comment: This genie is out of the bottle. Not just the story — the proof of concept that domestically-planned and executed disinformation operations can be run at scale on social media to effect the outcome of elections. Even if this particular operation didn’t run at any appreciable scale, its organizers proved that it could work, which adds further legitimacy to the argument that technology is a persistent threat to social stability. Others have pointed out that social friction often occurs when technology advances faster than the rate we can adapt to it. This is a prime example. What’s more is that political actors acting unilaterally when running these campaigns would preclude candidates and staffs from having to be involved. The risk we run is a higher likelihood of questionable election results if these types of campaigns are found to have influenced close races. Jones edged out Moore by 1.5 percent, or 21,000 votes. Could a social media disinformation campaign sway tens of thousand of voters before these activities are discovered to be “coordinated inauthentic behavior”? That may matter a lot less than the perception that widespread manipulation was involved. If 2000, 2016, and 2018 taught us anything, it’s that the outcome of elections can be questioned, causing a substantial part of the electorate to believe that an election was stolen and to view those elected as illegitimate. And this is a possibility that could lead to political violence.

RBG has surgery; Democrats have a SCOTUS solution

Justice Ruth Bader Ginsburg had surgery this week, according to an announcement from the Supreme Court. The 85-year old had two “malignant nodules” removed from her left lung, indicating to one physician that she had stage one lung cancer. [source] Ginsberg has previously said that she’s not retiring, implying that she’ll die on the bench. The potential of her passing has been a focus of political debate on the Left, specifically regarding their response to Trump appointing another justice, which would give conservatives a very safe majority on the Supreme Court. In an opinion piece published in the left wing Democracy Journal, progressive Ian Millhiser, justice editor at Think Progress, suggests that court packing, which he later euphemistically referred to as “court re-balancing,” is the “least-bad option” to counter a conservative court. The plan would first require Democrats to take over both the House and Senate, and then through legislation expand the size of the Supreme Court from nine seats to a larger number, allowing a Democratic president to nominate additional justices to cover the new vacancies. Millhiser does draw out some conclusions in this scenario; namely that “Red-state governors will refuse to obey Supreme Court decisions they disagree with, forcing the [Democratic] President to send federal marshals or even federal troops to enforce such decisions. Overzealous use of marshals and soldiers could easily trigger civil unrest.” [source: https://democracyjournal.org/magazine/51/lets-think-about-court-packing-2/] (Analyst Comment: Millhiser is the far left part of the Democratic Party, but that wing is also the future of the party. While this scenario may not be the most likely, we do have to consider that a sea change in politics back to a Democratic government is inevitable, if not likely within the next few election cycles. Knowing that this nuclear option for taking back the Supreme Court is at least on the table, conservatives shouldn’t rest too safely in the belief that the Supreme Court will retain a conservative majority for decades to come.)

Warren: “Change the rules”

Sen. Elizabeth Warren (D-MA) recently told black students during a commencement ceremony that they’ll need to change the rules if they want to succeed. “I’m here with a bolder message: It’s time to change the rules. Let me say that again for those in the back. Change. The. Rules…. [There are] two sets of rules: one for white families. And one for everybody else. That’s how a rigged system works. And that’s what we need to change.” [source] (Analyst Comment: There’s no doubt that Warren is trying to curry favor in the black community ahead of her presidential run. Maybe the rhetoric is aimed at gaining key support; maybe she even believes it. Not exclusive to Elizabeth Warren; this is likely to be a campaign plank for the next Democratic presidential nominee. And if so, then Americans should be concerned about just what rules are changed, and how they will change. There’s a major social divergence in the definition of fairness, and it straddles the line between equality of opportunity and equality of outcome. Equality of outcome destroys merit and rewards incompetence, which is likely to drive further social unrest.)

 

PIR2: What are the new significant indicators of threats to economic or financial stability?

Major Trends:

  • Trade war with China poses risk to U.S. farmers and manufacturers, emerging markets
  • Slow in global economic growth poses risk to emerging and developed economies
  • Unsustainable national debt to increase due to trillion dollar budget deficits in 2019+
  • High potential for an economic recession around 2020 that causes significant financial disruption
  • Rising interest rates are moderating economic growth, housing strength

 

A very real and likely SHTF scenario

This week, the House Financial Services Committee (FSC) held a hearing on the national security threat of the national debt, which currently sits at $21.8 trillion. FSC chairman Jeb Hensarling (R-TX) admitted that he was regretful that he couldn’t enlist more help from his fellow Republicans in addressing the issue of our unsustainable national debt. He then spoke about what occurred in Greece during their sovereign debt crisis. After pointing out that the Greek economy ground to a halt as factories closed, Hensarling said, “The face of a fiscal crisis is also riots in the streets” as he showed a photo of Greek rioters throwing Molotov cocktails. He went on to say that he doesn’t believe that America will become Greece, but that “[I don’t] know it for a fact, and I wonder if we could take the risk”. He continued: “[A]n unaddressed national debt is an existential crisis to the America that we know… I understand that the problem may manifest itself long after we have left Congress. How convenient. But one day, history will judge us.” [source]

One of the hearing witnesses, Dr. Douglas Holtz-Eakin of the American Action Forum, commented: “The outlook is dire and it will have consequences… The Social Security program, under current law, will impose a 25 percent across the board cut in retirement benefits to people in a little over a decade… Similar stories can be told about Medicare, Medicaid, and other entitlement programs.” In addition, Dr. Holtz-Eakin points out that the growth of costs of these programs “are outstripping our ability to finance them”. He continues: “I do not believe the American public understands the scale of the problem that faces them.”

In addition, other witnesses pointed out that the Congressional Budget Office forecasts budget deficits to reach a trillion dollars in each of the next four years, at least. On the current track, if interest rates rise back to levels in the 1990s, the budget deficit will reach three trillion dollars in ten years. Over the next 30 years, the CBO forecasts a combined $84 trillion in budget deficits and an overall cash shortfall of $100 trillion for Social Security and Medicare. “That’s the rosy scenario,” said one witness who previously described the situation as an “avalanche”.

In the Committee Memorandum published this week, the FSC warned: “Continuing with large and growing deficits will, before too long, require sharp tax increases. But trying to solve the problem by increasing taxes comes with an incredibly high cost – that is, by effectively cutting take-home pay, tax increases weaken work-incentives and shrink economic opportunity.” [source]

Analyst Comment: The incoming House Financial Services chairman is Rep. Maxine Waters (D-CA), who seemed more interested in criticizing Trump’s tax cuts (which have led to increased tax revenues) than about addressing what is, in all seriousness, a catastrophe in the making. I don’t know exactly how the federal government is going to correct this course, or if they can even effectively manage it. They thus far haven’t been serious about addressing the problem. Obvious solutions are increasing taxes, cutting benefits to entitlements, and cutting associated costs, because that’s the largest part of the budget deficit. To put this into some perspective, the Budget Control Act of 2011 was designed to save the government $2.1 trillion. If this problem gets solved, Congress is going to have to come up with a solution to cover at least $84 trillion dollars over 30 years. (This is at currently low interest rates. Rising interest rates make new debt more expensive.) If resolved, it’s going to require serious action that many will find economically and fiscally painful.

What’s outlined above doesn’t take into account what would happen during a sovereign debt crisis, which would necessitate a more extreme and immediate response. As more Americans are set to retire, either scenario is going to have significant political consequences, and it’s why I’m concerned that more Americans will see left wing populist policies, including democratic socialism, as a politically palatable response. Otherwise, we will absolutely run the risk of civil unrest, protests, and riots against austerity measures, similar to what Greece experienced.

Paul: We could be facing a worse scenario than 1929

Former U.S. Representative and perma-bear Ron Paul was on CNBC last week, again warning of fiscal catastrophe. “Once this volatility shows that we’re not going to resume the bull market, then people are going to rush for the exits. It could be worse than 1929.” Paul criticized the Fed’s easy money policies which led to the 2008 crisis, and said that a continuation of those policies has led to the “biggest bubble in the history of mankind”. [source]

Analyst Comment: My usual caveat that “The more extreme the prediction, the less likely it is to come true” applies. Ron Paul is among many — Jim Rogers, Marc Faber, Jim Rickards, David Stockman, Gerald Celente, and many, many others — who have consistently predicted near-collapse conditions or worse. And many of them have been very publicly wrong, which is why I discontinued reporting on their incessant and imminent doom and gloom warnings.

This isn’t to say they’ll never be right, but if their calls are ever correct, the United States is going to go through some very tough times. For some parity in this discussion, however, I’ve been tracking “conventional wisdom” from financial elites (banking and hedge fund figures) and “alternative wisdom” from alternative economists (like the aforementioned group). Right now, the conventional wisdom crowd isn’t warning of anything worse than 2008; in fact, many of them believe, or at least express to believe, that the next recession won’t rival 2008. (There are some in the financial industry who disagree.) And here we are with another major divergence in outlook. In this case, I think irreparable damage could be done if financial elites “miss” this catastrophe in waiting again like they did in 2008. I will continue to read their letters to investors and shareholders for any signs or warnings that they expect something worse than 2001 or 2008.

I understand where the “alternative wisdom” crowd is coming from, as they expect that multiple bubbles will pop simultaneously, which will lead us into this doomsday scenario they’ve been predicting. So far, the warnings from financial elites seem to focus more on longer term effects, like social unrest resulting from wealth inequality, income inequality, and a permanent economic underclass. I take heed of those warnings, and have piled on with my own thoughts about successive generations’ inability to save and invest. Like Millennials, Generation Z are likely to experience a bottleneck in their formative economic years that will negatively impact their lifetime earnings, which will lower their lifetime savings and investments. We’ve seen the data on Millennials’ economic setbacks due to the 2008 financial crisis, and Generation Z could very well experience those effects themselves. Nearly a decade of near-zero interest rates and middling economic strength (until recently) have lead to lower rates of savings and asset ownership than in previous generations. The average Millennial has orders of magnitude more debt than savings or assets. (One estimate puts the average debt held by Millennials aged 25-34 at $42,000. Compare that with the results of a survey showing that a majority of Millennials have less than $1,000 in savings. [source] and [source]) That’s forming a long term trend likely to affect the social and political landscape for decades, although that warning is not quite as sharp as those concerning a Great Depression Redux or economic collapse.

Bottom line: I’ll continue to look for examples of financial elites warning of catastrophe or impending financial doom, and report them when I find them. I can understand why major banks and financial institutions might mute their warnings, but there are hedge fund managers and others who have a vested interest in being public with their calls of financial collapse, if one were to occur. I do expect those indications and warnings to precede a major financial crisis like Ron Paul is describing. We should take the warnings from Dr. Paul and others seriously. I do. But I also believe that we should consider the alternatives: it’s very likely that we undergo some level of financial, economic, and social turbulence, although something worse than 1929 is unlikely. I’m entirely open to modifying my outlook when presented with new evidence. Right now, I expect a 2020-2021 version of something on the level of 2008. Anything worse is less likely, but still possible.

 

Economic/Financial Watch

Blue Chip consensus and the Atlanta Fed’s GDPNow both forecast Q4 growth to come in between 2.5 and 3.0 percent. Heading into 2019, Deutsche Bank published their global growth outlook. For what it’s worth, those analysts report that global economic growth will continue to slow next year. They forecast that 2019 economic growth for the U.S. will be 2.7 percent on the year. In other words, they aren’t forecasting a recession. [21 Dec]

That said: Clinton-era Treasury Secretary Larry Summers recently wrote: “The odds of a U.S. recession beginning by the end of 2020 now exceed 50 percent.” He also criticized the Federal Reserve for raising interest rates on Wednesday. [21 Dec]

Former hedge fund manager and investing icon Stanley Druckenmiller was on Bloomberg this week warning that “The highest probability [for the U.S.] is we struggle going forward.” He continued: “It’s just a time for caution. You want this bubble to unwind slowly now, because if you don’t… you may have to do a lot more crazy monetary stuff and actually it’ll be more of a problem.” (AC: Druckenmiller is explaining that the Fed is going to have to resort to extreme measures if bubbles in the U.S. economy begin to burst.) “The air can be let out of this balloon without causing another financial crisis. I think it’s possible, but it’s hard to believe markets will not have struggling returns the next three to five years,” adding that he expects the S&P 500 to return between zero and five percent annually for the foreseeable future. [source] [20 Dec]

The House Financial Services committee is scheduled to hold a hearing today entitled “The Peril of an Ignored National Debt”. Here’s an excerpt from the memo: “America’s debt has grown faster than that of Greece, Italy, or Japan since 2000, and our nation cannot sustain rapidly increasing deficits. Today, Social Security and Medicare account for more than 40 percent of federal expenditures, and this outsized share of government spending will grow much bigger still as cost increases outpace U.S. economic growth through the mid-2030s. Continuing with large and growing deficits will, before too long, require sharp tax increases. But trying to solve the problem by increasing taxes comes with an incredibly high cost – that is, by effectively cutting take-home pay, tax increases weaken work-incentives and shrink economic opportunity.” [source] [20 Dec]

It’s decision day for the Federal Reserve, as they decide whether or not to raise interest rates. Some analysts expect a “dovish hike” of 25 basis points, which would put interest rates in line with Fed chairman Jerome Powell’s range of acceptability, but not threaten economic growth as much as a higher rate hike. Other analyst say there’s a possibility of no rate hike. After all the pressure from President Trump, it’s difficult to believe that the Fed governors wouldn’t raise rates and risk being seen as influenced by the president’s politicking. [19 Dec]

Back in October, I was in attendance at Toyota Center in Houston, Texas, where President Trump said he was pushing for another 10% tax cut for the middle class. The arena erupted and it was a major thing in the media for 15 minutes. In a recent Bloomberg interview, Treasury Secretary Steve Mnuchin refused to comment on whether that was still on the agenda, saying instead that he was focusing on fixing some provisions of the last tax cut. Meanwhile, Democrats are reportedly looking at raising the corporate tax rate in the 2019 session. [source] [19 Dec]

Lastly, some retailers are adding “Super Saturday” — the last Saturday before Christmas — to Black Friday and Cyber Monday as the major shopping days of the year. In fact, they say Super Saturday has become the “biggest single shopping day of the year”. [source] [19 Dec]

According to Marcelo Ebrard, the Mexican foreign relations secretary, the $4.8 billion aid package announced by the State Department — more than double current foreign aid to the country — “is good news, very good news for Mexico”. Mexico’s new president Andres Manuel Lopez Obrador (AMLO) in a news conference said the package would go to develop jobs in the region. “I have a dream that I want to see become a reality … that nobody will want to go work in the United States anymore,” AMLO said. [19 Dec]

History generally shows that the stronger the economy in the two years leading up to a re-election bid, the more likely a president is to be re-elected. In previous reports, I’ve written about the potential for a recession beginning 2019 or 2020, which would severely hamper President Trump’s re-election. Between fallout from the Mueller investigation; the 85 House investigations into President Trump, his family and associates; a recession; and his failure to deliver on key campaign promises — a balanced budget, a border wall, an end to funding Planned Parenthood, etc. — President Trump stands a good chance of being in real trouble regarding his 2020 re-election bid, even if he escapes impeachment by a Democratic majority House. [19 Dec]

The Federal Reserve begins a two-day meeting to determine whether or not interest rates should be hiked. You’ve probably seen the news that the stock market’s had the worst December performance since the Great Depression, and some of that’s because the markets have already priced in another rate hike tomorrow. If rates are hiked, we can expect President Trump to again be livid that the Fed is tempering economic growth. Additionally, several well-known financial elites are warning that another Federal Reserve hike would be a mistake that leads to further tightened financial conditions and economic weakness. Billionaire investor Paul Tudor Jones warned last week that the Fed was hiking us into another recession. [18 Dec]

Ouch. Since January’s highs, global markets have shed $15 trillion in value this year as the U.S. is dangerously close to joining other world stock markets that will have overall negative returns this year. Especially hit were Chinese markets, which are down about 20 percent this year. All is not doom and gloom, though. Analysts say that the economy is still strong, despite some small cracks. The Atlanta Fed’s GDPNow tracker predicts Q4 economic growth will be around 3.0 percent (although it’s likely to change again) and the Blue Chip consensus average predicts 2.5 percent. It’s likely that holiday sales numbers will be positive, and that could very well indicate some clear skies before the talk of recession picks up again. [17 Dec]

There are four days until a partial government shutdown, unless President Trump and Democrats can come to an agreement on border wall funding. Outgoing House Republicans have reportedly been moved to cubicles to make way for representatives-elect, and House Republican leadership doesn’t know if they’ll have the votes to pass a spending bill. A bill that includes border wall funding doesn’t look like an automatic pass in the Senate, either. On Sunday, White House advisor Stephen Miller reiterated a willingness to allow the government to partially shut down if the President doesn’t get his border wall funding. That battle now appears to be over whose fault the shutdown will be. [17 Dec]

These economic/financial briefs appear each morning in the Early Warning intelligence report. You can sign up for this email on your My Account page.

 

// END REPORT

S.C.

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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