The National Intelligence Bulletin is a weekly look at threats to social, political, economic, and financial stability in the United States, and provides early warnings and indications of America’s volatile future. This report is available each week for Intelligence subscribers.
In this National Intelligence Bulletin…
- Davos Commentary
- Left’s move to Far Left is a national security issue
- Roger Stone becomes latest Mueller victim
- Federal courts to “run out” of funding on 01 February
- Davos Wrap-Up
- Goldman: 50 percent chance of recession in 2020
- Economic/Financial Watch commentary
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Davos Commentary: You’ll find my long form reporting under PIR2. Here’s the executive summary:
The sentiment at Davos this year was muted as compared to last year. Attendees complained about the gloominess as nearly everyone expects 2019 to be rougher in light of a slowing global economy. But that’s not to say that economies are down and out. There was a range of perspective, but almost no one there expected 2019 to be the year of a U.S. recession. That risk grows higher as we move into 2020, however. Lastly, some attendees certainly saw some much darker days ahead.
“Everybody agrees that there are dark clouds on the horizon, and there are risks,” said UN Secretary General Antonio Guterres. After the economy, the rise of populism, uncertainty over China’s vision for the world, and climate change were the greatest concerns for global political and financial elites.
I paid particularly close attention to Bridgewater’s Greg Jensen, who painted a gloomy picture. (I admit, I’m a huge fan of Ray Dalio and Bridgewater. I do not let my admiration for Dalio unduly weight Bridgewater’s outlook here.) As can be found under his brief in PIR2, Jensen used the word “protracted,” which concerns me greatly. Whether or not gloom turns to doom, he suggested, was how right or wrong the Federal Reserve gets its monetary policy. Given the criticism of hiking rates too fast in 2018, I’m not holding my breath that the Fed will be able to navigate what’s to come in 2020-2030 and beyond.
Bottom line: A “lost decade” scenario, marked by very low economic growth, high unemployment, and extreme actions on monetary policy — i.e., quantitative easing and low or negative real interest rates — is a distinct possibility.
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?
- 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
NOTE: PIR1 reporting this week is on the light side due to so much attention to Davos this week. I’ll be back next week with a full PIR1 section.
Left’s move to Far Left is a national security issue
One of the key trends so far this year is just how far Left the Left is leaning. In the past week alone, potential Democratic contenders floated:
- a “wealth tax”
- a 70 percent income tax
- tuition-free university for four years
- free universal pre-school
- Medicare for all or single-payer universal healthcare
- job guarantee programs
(Analyst Comment: During Martin Luther King Jr. memorial events on Monday, Democratic primary candidates like Elizabeth Warren, Cory Booker, and Bernie Sanders took aim and excoriated white America for continuing the policies of Jim Crow, white supremacy, and institutionalized racism. Even Joe Biden piled on, saying, “Systematic racism that most of us whites don’t even like to acknowledge… [is] built into every aspect of our system.” New York City mayor Mike Bloomberg in a speech this week dredged up the Tulsa race riots of 1921, which was apparently just a vote-getting scheme for of the Democratic primary 99 years later.
This pandering, first to the minority base of the Left, and then to the Democrats’ socialist base, could be part of pre-primary Woke Olympics. (If someone is “woke” then they’re attuned to racial and social injustice, which is obviously institutionalized in all parts of U.S. society, if you ask them.) I’ll play the contrarian for a moment and say that a) few of these candidates actually believe 2019 is anywhere close to Jim Crow, and b) once the victorious candidate wins the primary, the swing to the far left ends and the task of appealing to moderates begins in the remaining four months before the general election.
That may well be the DNC’s playbook after July, but until then we’re going to learn exactly what the New Democrats want in 2020, and what they could be dangerously close to implementing later in the decade. America today is not likely to be ready for such extreme left wing policies, but my concern remains two-fold: First, after a “lost decade” that leaves the lower and middle classes worse off, Americans will be more open to left wing populism. And second, every successive generation is more ethnically diverse and also more consistently liberal, as I pointed out last week.
There may be as many as 30 candidates vying in the Democrat primary, but none of them are as woke as Elizabeth Warren. One of the most diabolical parts of Warren’s “wealth tax” is a one-time penalty for wealthy people who renounce their U.S. citizenship to seek refuge abroad. And that’s only after the IRS gets a funding boost to better enforce the confiscatory taxation. [source]
Two years ago, accusations that the Far Left would turn the United States into Venezuela was described as hyperbole. Today it’s an understatement. Consider this: Four years ago, Bernie Sanders struggled with his Medicare for All platform. Today, I’m aware of only one serious Democrat contender who opposes it (Sen. Warren). When progressives attacked Julian Castro’s call for two years of tuition-free college because it didn’t go far enough, he quickly endorsed a tuition-free plan for all four years. Meanwhile, Sen. Cory Booker’s legislative bill for a pilot program that ensures federally-funded jobs with federal benefits is co-sponsored by Senators Kirsten Gillibrand, Kamala Harris, and Elizabeth Warren — all of whom are running for president.
The United States government (which is to say its taxpayers) is facing a $100 trillion cash shortfall in Social Security, Medicare, and Medicaid funding. Three programs represent a $100 trillion problem that needs to be solved within 30 years. At the current trajectory, the federal government will rack up another $84 trillion in budget deficits over the same period. This is now at least a $184 trillion shortfall over the next 30 years. And we’re going to add universal healthcare, universal daycare, federal jobs programs, and expand other social welfare programs despite this avalanche?
If the Democrats are left to solve this problem the way they’re wanting, then we’re talking about massive, across-the-boards tax increases and some major confiscatory taxation. And that’s another reason why I’m really, really concerned about what happens between 2020-2030 and beyond.
Roger Stone becomes latest Mueller victim
Trump ally Roger Stone was arrested early Friday morning at his Fort Lauderdale home after a grand jury indicted him on seven counts, five of which were making false statements. There was also one count of witness tampering and another count of obstruction. Stone has maintained his innocence and predicted that he would be arrested. (AC: Last year, I had the opportunity to sit down with Roger several times. He would text me when he flew into Austin and we’d meet up for drinks. Roger revels in the nickname “the dirty trickster” of GOP politics. He’s a guy who plays to extremes. He says just about whatever he wants. Unfortunately, I would not be surprised if he’s found guilty of several of these charges.)
Federal courts to “run out” of funding on 01 February
According to the Administrative Office of U.S. Courts, federal court systems across the country are expected to begin running out of funding on 01 February. While some courts have already postponed some civil cases, all courts are expected to run on a mission-critical basis under the Anti-Deficiency Act after the end of this month. Criminal cases will continue to be funded under this Act. [source]
PIR2: What are the new significant indicators of threats to economic or financial stability?
- 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
- High potential for an economic recession around 2020 that causes significant financial disruption
- Rising interest rates are moderating economic growth, housing strength
Davos Wrap-up: Every year I watch the Davos interviews and follow the live blogs for snippets of information of national and strategic intelligence value. These people are the world’s political and financial elites and they can offer insights that help us form reasonable expectations of the future. What follows is the ‘wrap-up’ of of significant views and comments.
Anthony Scaramucci, former Trump communications director (for 11 days): “I think this is what’s happening. People are looking at Washington, thinking it’s so badly broken that they’re going to start doing what the president doesn’t want them to do. They’re going to start conserving capital, slowing down their investments… and start hoarding cash again because you can’t have this level of disfunctionality in the government… So the economy is going to slow down and the Fed is going to raise rates” which will lead to economic turmoil.
James Gorman, CEO of Morgan Stanley: Talking about an interview in which Stanley Druckenmiller accused the Fed of tightening monetary conditions too much (that I reported in the 21 December report), Gorman says, “I think [monetary] easing is a bit premature… When the times are good, push [interest rates] a little bit harder and it gives you monetary flexibility when times are bad. In my view, the Fed did not do that.” Gorman joins others in appearing concerned that the Federal Reserve got monetary policy wrong, which could complicate the next economic downturn. On the topic of economic growth, Gorman says, “The first quarter [of 2019] will definitely be stronger than the fourth quarter of last year.” (AC: The latest Q4 2018 forecast from the Atlanta Fed is 2.8 percent, annualized. If Q1 2019 can top that, then 2019 is looking much safer in terms of overall economic health.)
Scott Minerd, chief investment officer at Guggenheim: Minerd begins by saying that recent staff cuts are an example of financial services companies taking the opportunity right now to tighten their belts and get leaner. Turning to recession risks, “You know what was really amazing to me, was to watch in the wake of that last Fed meeting how crowded and congested the exists got when people started to move in that direction [meaning, the market sell-off]. It’s really a warning sign because when we get to a recession, it’s going to be tough [meaning, the risk of a major and long term market sell-off].” Minerd also talks about the risk of leveraged loan instruments, like collateralized loan obligations (CLOs). “I think it gets even worse. When you look at last year and you see the incremental issuance of leveraged loans… those people, in many cases, have sold the risk away… I think it won’t be, hopefully, nearly as extreme [as 2007 and 2008]… the [CLO] market is much smaller. [Host: “There’s no AIG out there.”] That’s right.” (AC: Minerd is saying that the next leveraged loan/collateralized loan obligation crisis is unlikely to be as bad as the sub-prime mortgage crisis of 2008 because it won’t pose institutional risks, but it could be very painful for institutional and retail investors.)
Greg Jensen, co-investment officer at Bridgewater: “We think that the secular conditions and cyclical conditions are combining to create this situation where you’re going to have this long, protracted weakness in the developed world economies, and whether policy makers can find the way to ease conditions to deal with that will be the big question in the next two years… Right now, our expectation is that while people have certainly diminished their growth expectations, and we’re hearing about it at Davos, we don’t think they’ve done it enough. Earnings expectations, particularly in the U.S., are too high, and that generally the Fed and other policy makers are still expecting stronger growth than we see. So basically what we expect to see is weaker growth and a movement to easing… The struggle in Europe is probably going to click first.” (AC: This is some pretty bad news, but it’s in line with other expected scenarios. By “weaker growth and a movement to easing,” Jensen is describing an economic slowdown, or a recession, so large that the Fed has to begin lowering interest rates and printing money again. Jensen also describes this slowdown as “secular” and “protracted,” meaning that there’s going to be weakness for a long time. My take away is that Bridgewater expects low or no growth for a period of years (which is in line with Stanley Druckenmiller’s thinking about very low growth and zero market return through the 2020s — a lost decade scenario).
Jensen’s partner as chief co-investment officer at Bridgewater is Ray Dalio, who, at Davos last year, warned that he’s concerned over how social and political tensions will develop during the next recession, which he expects in 2020. This year, Dalio said in an interview, “What scares me the most longer term is that we have limitations to monetary policy — which is our most valuable tool — at the same as we have greater political and social antagonism. So, the next downturn in the economy worries me the most.”
Robert Shiller, Yale economics professor: Speaking about Sen. Elizabeth Warren’s plan to implement a 70% income tax on the very wealthy, along with a “wealth tax”; Shiller says, “That’s not my position. I’ve advocated installing a plan that would kick in, in the future, hopefully 10 years in the future, to do that if inequality becomes catastrophic. I can’t see why that should be done now.” Shiller says that America is not yet ready for that kind of confiscatory taxation. “Elizabeth Warren has just harmed her potential by bringing a proposal that’s not going to be popular.” Speaking about a wealth tax, Shiller says that high-tax Connecticut has suffered from population loss. “We don’t see any new houses being built, that’s because the population is going down. There’s a problem with the wealth tax, which is that people leave. They take their business elsewhere.”
Chuck Robbins, Cisco Systems CEO: “ was a good year, so 2018 to 2019 for a lot of companies is just going to be a little tougher… It feels like we’re trying to talk ourselves into something. We’re trying to fabricate some sort of recession or something that’s going on… but there’s still a high degree of optimism among CEOs… My assumption is for the optimism is that many of them haven’t seen [a downward business trend yet].”
Jacob Frenkel, International Chairman, JPMorgan: “I do see clouds, but I don’t see it from the perspective of a crisis. Superficially, it looks like the mood is not extraordinarily glowing, but the situation [right now] is not as bad as some people make it to be.” // END DAVOS
Goldman: 50 percent chance of recession in 2020
Goldman Sachs CEO David Solomon told CNBC this week that he sees a recession as being unlikely this year, but there’s a 50 percent chance of recession in 2020. [Reported by WSJ; no link]
The World Economic Forum begins today at Davos, Switzerland. This year’s theme is “Globalization 4.0”. This is a stark warning, not just for attendees and world governments but for white-collar workers. Previous waves of globalization have focused on outsourcing blue-collar jobs. Now, white-collar jobs are at risk of being out-sourced, and that’s the theme of this year’s meeting. “That’s what the future of globalization will be and that’s what Globalization 4.0 is. It’s the opening of service sectors in rich countries to competition from poor countries with all the pluses and minuses in the service sector that we saw in the manufacturing sector.” [22 Jan]
The latest “official” numbers from China show economic growth for 2018 coming in at 6.6 percent. In truth, real growth may be half of that; either way, China says its the lowest in 28 years. Xinhua News Agency is reporting that, in a special meeting called yesterday, Chinese President Xi Jinping warned officials in the Chinese Communist Party that they need “to prevent and resolve major risks”. President Xi continued: “The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.” [source] Political or economic instability in China will potentially have global effects, especially if it leads to a financial crisis. On a separate but related note, Liu He, Vice Premier of China, is scheduled to hold trade talks in Washington later this month. [22 Jan]
According to new data from real estate brokerage firm Redfin, the affordability of homes for middle-class earners is decreasing, and the availability of those affordable homes is down 86 percent in the largest metro areas. (AC: Housing affordability has been an issue since then-Fed chair Ben Bernanke committed himself and the Fed to re-inflating home prices following the housing bubble. Sustained low interest rates drive home prices up.) [23 Jan]
According to a new report from the World Economic Forum, “re-skilling” workers whose jobs will be lost due to automation may end up costing $34 billion. The report also said that around 250,000 workers will not be economically viable to re-skill, leaving the government on the hook for economic assistance. [23 Jan]
According to new data from Indeed, more federal employees may be on the job website looking at new employment options. The chart below shows a 30 percent increase since mid-December in the share of clicks from TSA, DHS, and IRS workers. [24 Jan]
In a CNN interview, the chairman of the White House Council of Economic Advisors said that the U.S. could end up with zero first quarter growth if the shutdown lasts through March. “It is true that if we get a typically weak first quarter and then have an extended shutdown, that we could end up with a number that’s very, very low,” but added that the economy should make up lost ground once the government re-opens. [24 Jan]
The Left is moving to the Far Left on economic and fiscal policy ahead of Democratic primaries. Sen. Elizabeth Warren wants a “wealth tax” that’s expected to raise $2.75 trillion over a decade. It’s nothing short of confiscatory, which is seemingly the Left’s plan for 2020 and beyond. [25 Jan]
Janney Chief Fixed Income Strategist Guy LeBas asks, “We’ve seen a series of ‘one off’ earnings missed and guidance cuts from high-profile companies in last few weeks… When do these stop being ‘one offs’ and start representing evidence of material economic slowing?” Get ready for the main economic story likely to permeate through 2019: the perils of a global slowdown. [25 Jan]
“The White House will announce a plan by next month to end government control of Fannie Mae and Freddie Mac in a bid to resolve a long debate over the fate of the two companies that dominate the mortgage market, a top regulator said.” – Politico [25 Jan]
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// END REPORT