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…
- InFocus: The American realignment could be within sight
- The unending parade of migrant caravans
- Mueller report fallout
- Holder continues to push redistricting campaign
- Far Left Roll-Up
- Latest recession outlook
- Economic Financial Watch
InFocus: Since last week’s report, I’ve been thinking a lot about the “American realignment.” The theory goes that there’s always some generational change and that there are eventual large cultural and political shifts as a result. One left wing commentator suggested that the American realignment was here. At some point in the next decade, he may end up being right.
This week, universal basic income proponent and Democratic presidential candidate Andrew Yang posted a video of self-help guru Tony Robbins taking about the potential need for a universal basic income. In the video, Robbins says, “I personally think that we’re probably going to need to do something of this nature.” Robbins points out that the trucking industry along with taxis and Uber/Lyft drivers represent five million jobs that will be lost due to automation. “Whether it’s in three, five, or ten years, that’s five million jobs. If you look at what’s happening with satellites, with farming, it’s going to eliminate another four or five million jobs,” Robbins says.
Yang also appeared on the Joe Rogan Experience, one of the largest podcasts in the U.S., to discuss UBI. Yang says, “There are three and a half million truck drivers in this country right now. It’s the most common job in 29 states. And the average trucker is a 49-year-old guy…” Yang goes on to point out the difficulty in retraining even half a million truck drivers into a new line of work. “We’re terrible at it. According to independent studies, government-funded re-training programs had a success rate of between zero and 15 percent in real life. This is actually what happened to the workers of Michigan, Indiana, and Ohio.” Joe Rogan said that once he began to understand how automation was going to affect the country’s workforce, he did a “180” on UBI and now supports it.
What Yang describes is a future where economic opportunity for most Americans is in serious decline, especially for those who are losing their jobs but aren’t able to retire nor are able to be re-skilled into another industry. That’s going to pose a problem to many areas, especially red states, where workers are in higher supply than there’s available work. By one estimate, some 25 percent of U.S. jobs are at risk of being lost due to artificial intelligence, robotics, and automation. And I’ve seen other studies show that the number will be closer to 30 to 40 percent. Some, like Bernie Sanders, have said even up to 50 percent.
But my real concern is how younger generations are affected, particularly because high youth unemployment is a good indicator of social unrest. The retail and service industries are a boon for low-skilled young people, yet many of these jobs will be replaced, leaving a lack of opportunity to enter into the workforce. Yang’s UBI solution — $1,000 per month for every American over 18 — is meant to offset this difficult economic transition. He says that the increased spending will lead to higher demand for products and services, which will lead to hiring and job growth.
In an intelligence report from September 2016, I asked: “What will millions of Americans — specifically, low skill and low wage earners who have little to no prospect of employment — do to earn a living? It’s far too early to say exactly how far away we are from the universal basic income, but at the rate we’re going, one thing on which I actually agree with Bernie Sanders is that it’s going to be inevitable.” [source]
An expansion of social programs will be inevitable. There are already calls from within the Republican Party to adopt a national healthcare system. By some polling, support for Medicare-for-All is at 71 percent — until you tell respondents that it could lead to healthcare wait times and will also raise taxes. Then support drops to 20-30 percent. Yet Democrats are still campaigning on healthcare utopia because they know the idea is popular.
But if what Yang and others claim is true — that 20 to 30 percent of Americans will be forced out of work and that economic opportunities for younger people will decline — then we’re talking about millions of Americans who will be out of a job and without health insurance. As long as Democrats can get these millions of Americans to the polls to vote for politicians who support social programs like UBI, then, yes, I still believe UBI will be inevitable. Job loss and its effects could very well bring about the next “American realignment.” – 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?
The unending parade of migrant caravans
A new migrant caravan consisting of potentially 20,000 people from Central America has formed and plans on heading north through Mexico, destined for the United States. Reports note that this caravan — being dubbed by Mexico’s interior minister as “the mother of all caravans” — is expected to follow the same path as previous groups.
After criticism from President Trump that Mexico was doing “nothing,” Mexican president Andres Manuel Lopez Obrador said, “We are doing something on this issue. We are going to help in every way we can. We don’t in any way want a confrontation with the United States.” The policies and actions implemented by Mexican authorities, however, is another story.
The bottom line is that without substantially more assistance from Mexico, the U.S. will continue to experience crisis levels of illegal immigration and claims of asylum. Customs and Border Patrol reports that this month alone, they’ll detain 100,000 individuals for illegal entry into the United States. And the harder it gets to claim asylum, the more desperate migrants are to cross illegally — which costs more money, thus feeding Mexican cartel profits.
Meanwhile, reports claimed that rival cartel gunmen used grenade launchers and improvised explosive devices in a battle in the town of Miguel Aleman, Tamaulipas, in recent days. Residents reported that despite the pitched battle, troops from a nearby Mexican Army base “largely ignored” the fighting. Media photos showed burned-out vehicles and the body of one fatigues-wearing gunman.
Escalating disruption in Mexico could push it farther towards failed-state status, which would become a massive national security and border security problem for the United States.
Mueller report fallout
Democrats are zeroing in on Mueller’s (or perhaps AG Barr’s) conclusions that the Mueller report did not exonerate President Trump of potential obstruction of justice. In a joint statement, House Speaker Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY) said, “Given Mr. Barr’s public record of bias against the Special Counsel’s inquiry, he is not a neutral observer and is not in a position to make objective determinations about the report.” Congressional Democrats may independently take up an investigation into obstruction of justice.
The Big Question: Democrats are reportedly saying behind closed doors that putting Mueller’s findings on life support may be politically toxic. Some Democrats have accused the Party of litigating 2016 instead of planning for 2020. But the Mueller report and at least 17 ongoing Congressional investigations into the Trump administration will likely continue to be central to the Democrats’ efforts to harangue President Trump going into 2020.
Holder continues to push redistricting campaign
Appearing in Houston last weekend, former Obama attorney general Eric Holder told a gathering of Democratic activists, “Texas is a critical state… it’s among the most gerrymandered states in the country. To be successful in the efforts we are going to be doing nationwide, we have to be successful here in Texas.” Holder chairs the National Democratic Redistricting Committee and is charged with leading efforts to give Democrats major advantages in the U.S. House and state houses across the country, potentially overturning Republican majorities in key states like Ohio, North Carolina, and Wisconsin. Holder described Barack Obama’s involvement as “the chief political involvement of his post-presidency, this whole effort of the NDRC.” [source]
Far Left Roll-Up
“What makes it particularly exploitative is that Biden couldn’t be bothered to endorse Stacey in the gubernatorial primary. Now he wants her to save his ass. That’s some serious entitlement.” – Stacey Abrams advisor, speaking on a Biden-Abrams 2020 ticket
“Exactly when did you think America was great? … It takes us back to what I think, an American past that never in fact really existed. This notion of greatness.” – Former attorney general Eric Holder
“I think all of a sudden, the 2020 election went from a slam dunk for Democrats to something where we’re going to have trouble beating this guy because he’s going to make Democratic socialism swing to the left, which I don’t think is real, but he’s going to make it into the issue. AOC does not speak for the Democratic party.” – Former Democratic Governor of Pennsylvania Ed Rendell
“You can hurt [Trump] more without impeaching him. If you’re going to go after him, it has to be a kill shot. But otherwise, you can keep cutting him over and over again, and then beat him in 2020.” – Unidentified Democratic aide, as reported by Politico
“There’s a difference between compelling evidence of collusion and whether the special counsel concludes that he can prove beyond a reasonable doubt the criminal charge of conspiracy… But that doesn’t mean, of course, that there isn’t compelling and incriminating evidence that should be shared with the American people.” – Rep. Adam Schiff (D-CA), House Intel chair
“In light of the very concerning discrepancies and final decision making at the Justice Department following the Special Counsel report, where Mueller did not exonerate the President, we will be calling Attorney General Barr in to testify… in the near future.” – Rep. Jerry Nadler (D-NY), Chair of the House Judiciary Committee
“If subpoenas are denied, we will haul people before Congress. And yes, we will prosecute in court as necessary to get this information. We will win that litigation.”- Rep. Adam Schiff (D-CA), speaking about prosecuting AG Barr and the Justice Department if they fail to respond to Congressional subpoenas
“This is not the end of anything! This is the— well, it’s the end of the report and the investigation by Mueller. But those of us who chair these committees have a responsibility to continue with our oversight.” – Rep. Maxine Waters (D-CA)
The Mueller report “exposes some of those early calls [for impeachment] for being premature and not based on the evidence at hand. And I think it sets that back. It doesn’t let [Trump] off the hook, but you cried wolf way too early.” – Rep. Gerry Connolly (D-VA)
“It’s also worth pointing out that an impeachment case still exists. Several of us have argued that the president is surely guilty of at least some ‘light’ obstruction.” – Jonathan Bernstein, New York Times Opinion writer
“It’s an English jurisprudential culture, a white man’s culture. It’s got to change.” – Joe Biden, presidential candidate?
“You can judge a society by the way it treats its children. And one of the greatest expressions of love that a society can give its children is educating those children with the resources they need.” – Sen. Kamala Harris, speaking about her plan to boost teacher pay with federal funding
“We didn’t run on impeachment. We didn’t win the House of Representatives on impeachment. We’re not focused on impeachment.” … “House Democrats are focused on kitchen-table, pocketbook issues.” – Rep. Hakeem Jeffries (D-NY)
“What’s tough is impeachment in principle is something that I openly support, but it’s also just the reality of having votes in the Senate to pursue that.” – Rep. Alexandria Ocasio-Cortez (D-NY)
“Be calm. Take a deep breath. Don’t become like them. We have to handle this professionally, officially, patriotically, strategically.” – House Speaker Nancy Pelosi (D-CA), speaking about the Mueller report
PIR2: What are the new significant indicators of threats to economic or financial stability?
Latest recession outlook
Talk of recession continues to permeate economic and investment circles. I think that’s largely due to the length of this economic expansion and the surprise or terror the thought of recession brings.
We’re nearing the part of 2019 where some early predictions last year expected a recession. It appears way too early, although weak Q1 numbers are likely to fuel speculation that recession is or could be imminent. That could become a self-fulfilling prophecy, however, pending some black swan event, most watchers expect Q2 growth to bounce back in the range of 2-2.5 percent growth.
One recent prediction from Bernard Baumohl, chief global economist for The Economic Outlook Group, is a recession in early 2021. Other investors and economists, like Ray Dalio, are also revising their expectations backwards past 2020. Predictions and expectations are still all over the place, and there are a few economists who believe that we’ll skip the ‘coming’ recession entirely.
One project I’ll begin working on is a chart of prominent investors and economists and their outlook on recession. Plotted on a timeline, I think we’ll be able to get a better picture of where they stand, and that could better inform our expectations, as well.
Last week’s 10-year and 3-month yield curve inversion is a typically reliable signal of recession within 18 months. And there are numerous other leading indicators of recession that we’re watching, as well. Since December’s statement, the Federal Reserve is signaling concern over raising interest rates too quickly, as evidenced by the Fed’s 180-degree reversal on rate hikes for 2019. Not only may there not be additional rate hikes, but some investors actually expect a rate cut.
My take: First, we have to differentiate between a recession and a financial crisis. In 2008, we had both and both were painful. The financial crisis was the result of a real estate bubble, and the recession was more painful than most. The recovery was also more muted than most. Growth after the end of a recession is usually very good. In 1932, the economy contracted by 12.9 percent. Two years later, growth was back up to 10.8 percent annualized. In 1935 and 1936, the economy grew by 8.9 percent and 12.9 percent, respectively. Those were the bounce-back years after the worst part of the Great Depression. As has been well-publicized, the Obama recover was weak — just 2.6 percent in 2010 and 1.6 percent in 2011.
Looking forward to 2020-2021, I do wonder about two major factors. The first is what the Fed’s monetary policies will look like. The second is what the president’s economic policies will look like. It’s impossible — impossible — to have accurate expectations of the next recession without knowing those two things.
Also, there are numerous signs of bubbles forming in the economy. One question that remains is whether or not we’ll see another simultaneous financial crisis (bubble burst) and recession. One argument goes that these bubbles, some or all, could smoothly deflate or not burst at all during the next recession. Anyone who believes that every bubble must pop is making an assumption, and it may be a faulty assumption. The next recession, in addition to potentially being moderate, may not last the average of 11 months, either. Pro-growth policies could mute the effects of the next recession. I’m entirely open to the idea that the next recession occurs without a financial crisis. That would mean another delay to the eventual reckoning.
There is no shortage of voices who are characterizing the next recession as, in the words of Fred Sanford, ‘the big one.’ Those people are speculating, and I think doing a disservice to readers by not considering the alternative here. I think we should consider the alternative and instead of succumbing to confirmation bias — that is, gathering data that supports your expectations at the expense of data that conflicts with your expectations — we should keep an open mind and consider each piece of information, regardless of where it points.
That said, there is the potential that the next recession could be quite bad. This would be another financial crisis coinciding with a recession. There is undoubtedly a corporate debt bubble, as there is likely a municipal bond bubble. Loose money policy means cheap loans, and U.S. corporations have accumulated some $9 trillion in cheap debt. There certainly is an argument that puts some corporations at risk of defaulting on those loans if the next recession is long enough or steep enough. To put this into perspective, the size of U.S. home mortgages in 2007 was around $7 trillion, so the corporate debt bubble today is larger than the housing bubble was in 2007.
Here’s exactly where I stand as of this morning: I’m not an economist (potentially to my credit). I am an observer of investors and economists, and the ‘consensus’ informs part of my rationale. I weigh the opinions of successful investors and economists who have an above average track record more heavily than I do the opinions of professional pundits and doomsday entrepreneurs. I also recognize the human tendency to allow emotion, especially fear, to override rational thought.
Right now, I believe that the major financial and fiscal reckoning is farther away than a year or two. Later in the 2020s and into the 2030s, there are going to be some likely unavoidable hurdles and challenges for which state governments especially are ill-prepared, and for which the federal government is not preparing. There’s a $184 trillion shortfall in federal government spending alone over the next 30 years. For the next couple years, however, I think persistently weak growth is more likely than another Great Recession or Great Depression scenario. And if the next recession avoids any major financial crisis, then pro-business and pro-growth policies could ease an economic downturn. That, however, depends on the decisions of policy makers, and whether their decisions make things better or worse.
Our near- to mid-term economic future is less likely to hit a brick wall than it is to endure a bumpy road. Also, the magnitudes of those bumps are more likely to be regional. States will good balance sheets and growth industries are obviously more likely to fare better than those with high levels of debt. Leaving states with poor financial health would be a prudent step for those concerned about the coming state-level financial crises, which could be persistent and very disruptive (i.e., the public pension crisis). Here’s a great resource from the Mercatus Center to check your state’s fiscal health.
Regardless of where you live, however, we’re likely to see higher tax rates in the future than we do now. The federal government could be forced into some extreme measures to deal with the coming fiscal tsunami, but raising taxes across the boards is going to be the easiest and most politically palatable response. We’re likely to see the same with state-level tax rates, which is going to push a higher number of wealthy residents into lower tax and business friendly states. That’s a shift we’re already seeing (e.g., California and New York), and that problem will become self-reinforcing for states with poor fiscal health.
There’s absolutely no way to tell with any authority or certainty how bad things will be 12-24 months from now, however, a ‘preponderance of the evidence’ leads me to believe that our worst fears are more likely to come after this period, rather than before or during this period.
Energy Department stands up new office to combat cyber attacks against infrastructure
The Energy Department’s new Office of Cybersecurity, Energy Security, and Emergency Response will focus on emerging, substantial threats to the nation’s public and private sector critical infrastructure (CI), according to officials. The agency will lead “the department’s efforts to secure the nation’s energy infrastructure against all hazards, reduce both the risks and impacts of cyber and other disruptive events, and assist in restoration when disruptions do happen—because they inevitably will.” The focus will be on cyber threats that are natural and “manmade.” Energy Secretary Rick Perry stood up the new office in February 2018 and President Trump included $96 million in the FY2019 budget to launch it — both of which signify the importance the administration is placing on the threat of cyberattack on our CI. [SOURCE]
With last week’s news of an inverted yield curve (the 10-year crossed the 3-month), some economists are renewing recession forecasts, potentially within 18 months. (The cross over essentially says that investors see more volatility in the short term than the long term, which typically precedes a recession.) But that’s at odds with Trump administration officials (and some other economists) who still maintain an outlook of 3 percent GDP growth for the next several years. As Q1 comes to a close next week, we can likely expect very low growth once the final numbers are published, but economic growth is widely expected to pick back up for Q2. You’re going to see a lot of news on how low Q1 growth is. The partial government shutdown contributed, but lower Q1 growth is a cyclical pattern (Christmas effect) which typically picks up in Q2.
Speaking this morning in London, Philadelphia Fed President Patrick Harker said, “I still see the outlook as positive, and the economy continues to grow in what is on pace to be the longest economic expansion in our history.” Harker outlined his expectations of one interest rate hike this year and one in 2020.
The Federal Housing Authority (FHA) warned mortgage insurers earlier this month that it would begin flagging risky home loans. FHA regulators are concerned that some lending institutions are extending too many high risk loans which are backed by the federal government. This could be one indicator that regulators are trying to avoid another 2008 housing crisis as they try to decrease the number of high-payment loans to borrowers with lower credit scores.
Lastly, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed to Beijing this week to continue to work towards a trade deal. The Trump administration previously showed they’re willing to walk away from any deal and continue to push for a good deal. My outlook remains the same: I’m hard pressed to believe that a good deal can be made if it doesn’t include the cessation of Chinese economic and industrial espionage. Still, President Trump may want to extend a positive news week with a trade deal later this month.
According to a new report from the Government Accountability Office (GAO), 29 percent of Americans 55 and older had nothing saved in a 401(k) or an IRA. And 23 percent of those had a defined benefits plan but zero retirement savings. [source] This is a demographic that will be increasingly trying to retire during what I believe will be a period of low growth, higher taxes, and intermittent financial instability. Inflation and rising costs, especially in healthcare, are going to pinch many older Americans who aren’t prepared to face this reality. The future will likely demand more socialist or progressive solutions to citizens’ financial needs.
Stephen Moore, Trump’s next pick to sit on the Federal Reserve Board, suggested yesterday that the Fed should cut interest rates by a half percentage point to spur economic growth. It’s the latest salvo coming from the Trump administration aimed at the Federal Reserve’s plan to continue hiking interest rates to prevent inflation and temper economic growth.
U.S. officials are in Beijing this week to resume negotiations for the trade deal, and next week, Chinese officials will be in Washington to continue discussions. But Chinese premier Li Keqiang continued his warnings this week about a Chinese and global slowdown. “The global economy is losing momentum,” Li said during a financial forum. After a $2 trillion dollar tax cut and further quantitative easing, the Chinese economy may be stabilizing, but the global slowdown obviously worries Li with regards to its effect on China.
Get ready for a downgrade. Economists expect the Commerce Department to significantly downgrade Q4 2018 economic growth numbers to as low as 2.2 percent. That’s down from 2.6 percent. As of this morning, the Atlanta Fed’s GDPNow forecasts 1.5 percent growth for Q1 2019.
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.