Shipping Chaos Gives Top Importers “Massive Competitive Edge”
By Greg Miller of FreightWaves,
The Asia-U.S. container market is now in a class by itself, with the trans-Pacific eastbound trade pricing differently than any other route in the world.
The largest importers are paying far lower freight rates than smaller importers, the playing field is becoming increasingly uneven, and foreign ocean carriers are in position to pick the American import sector’s winners and losers.
“We’re seeing a price differential of $15,000 [per forty-foot equivalent unit or FEU] between the lowest short-term price in the [trans-Pacific] market and the top price,” said Erik Devetak, chief product and data officer of Xeneta, a Norwegian company that analyzes freight rates, during a press conference on Thursday.
“That implies a huge competitive advantage for established players, which has consequences across the economy and for everyday life, and also, from a point of view of lowering competition and increasing barriers to entry for future competitors.”
Patrik Berglund, CEO of Xeneta, added, “Everybody’s seeing price increases but … being really big is really a massive competitive edge in this market.”
Berglund warned, “When I think about the smaller mom-and-pop importers and exporters, I’m really concerned that if this lasts, the big players can eat even more market share simply because the infrastructure now is so tilted in favor of the big players.”
Origins and destinations matter a lot more
According to Devetak and Berglund, the trans-Pacific is no longer a single shipping market with a single “right price.” Rather, the vast spread between the high and low price has allowed carriers to splinter the trans-Pacific into multiple market layers. This explains why different container indexes are showing vastly different spot rates for the trans-Pacific.
“There is a whole series of different markets now for different situations and different import parameters,” explained Devetak.
Port of origin has become one key parameter. “Historically, when we think of a single trans-Pacific market, if you go back a year, or a year and a half to pre-corona, the price differential between shipments originating in China, Taiwan, Japan or Singapore [to the west coast] was small — $100, $150, $250 [per FEU] max — on the order of 5-10% of the market rate,” said Devetak.
“Right now, we’re seeing the prices from China [to the U.S.] can be $2,500 lower than the prices one can achieve in Taiwan or Japan and $3,000 lower than Singapore. It can cost 40% more to ship from Busan [South Korea than from China]. That’s a striking price differential.
“There seems to be a strong preference [among carriers] to have a major port in China as the origin port and it seems like every other origin is indirectly being punished, probably because by concentrating on the main ports in China, one can deliver more goods and therefore have the highest profits.”
There are also trans-Pacific price disparities on the destination side. “Basically, anything that isn’t Los Angeles is preferred because you’re going to get stuck waiting for a berth in Los Angeles,” said Devetak. Short-term rates into Los Angeles/Long Beach can now be $1,000 per FEU higher than rates into Vancouver.
There is much less “geographic dependency” for pricing in the Asia-Europe trade lane compared to the trans-Pacific, Devetak noted.
Attractive vs. unattractive customers
Xeneta also found price differentiation regardless of origin and destination. It looked at short-term rates for cargoes from China to Los Angeles and found “huge developments in the market spread between the best performers and the worst performers,” said Devetak.
The differential between the high and low China-Los Angeles rates was $150 last year, or 5% of the market rate. It’s now $1,200, or 20% of the market rate. The spread has widened only recently, in the past few months.
“This is the price difference between what is an attractive customer to the carrier and what is a less attractive customer to the carrier,” he continued.
An attractive customer is generally one with large volumes, a strong preexisting relationship with the carrier, accurately predicted flows, a long-term contract being supplemented with short-term deals, and, in the case of a beneficial cargo owner (BCO), a direct relationship with the carrier as opposed to one using a freight forwarder middleman.
The rise of trans-Pacific premiums
By far the most important price differentiator in today’s market is the premium paid to guarantee a cargo is loaded on a ship.
This is the biggest change since last year and the biggest differentiator of the trans-Pacific versus the rest of the world. Premiums are also being charged in the Asia-Europe trade lane, but not to the magnitude seen in the trans-Pacific.
“Shipping guarantees are not a new phenomenon, but the amount you used to have to pay to guarantee a spot on a ship was $100,” said Devetak. “Now, when we look at CMA CGM or Matson or ONE, we see premiums in the region of $2,500 or even more. If you look back to May, the premium you were seeing from MSC was less than $2,000. Now MSC is charging almost $4,000.
Carrier preferences for certain customers come into play when charging premiums, meaning that this too creates a more uneven playing field for importers.
According to Devetak, “The more attractive customers see both prices [the basic rate and the rate plus premium]. But a lot of the customers that are less attractive to the carriers — the small freight forwarders, the small BCOs — only have visibility on the rate with the extra charge. A lot of the market, at this point, has no availability of the non-premium offering.”
In other words, for many U.S. importers, it’s either pay the higher rate including the premium or find another carrier.
Same customer, same carrier, same contract … different price
Highlighting just how much the trans-Pacific has changed in recent months, Xeneta provided a specific case of prices paid by one freight forwarder over time. The payments were all under the same contract to the same carrier.
Between April and early July, pricing was clustered in the $4,000-$6,000 per FEU range. By mid-July the spread had widened and ranged from $4,000 to $8,000. By early August, it had dramatically increased, with some prices under $6,000 and some as high as $18,000.
“We saw one market in the trans-Pacific in the beginning of April. But now we clearly see a market that has fragmented,” said Devetak.
“If you add all this up, you can conclude that if the origin is China, the destination is Canada, you’re an attractive customer, you go direct with the carrier and you ship next month, you end up paying $5,000 [in the short-term market].
“But if your origin is not China, your destination is Los Angeles, you are not an attractive customer, you go via freight forwarder and you need to ship as soon as possible, then all of a sudden, your rate is $20,000.
“To put this price differential of $15,000 into context, last year, it was $500.”
“The Unthinkable Has Become Possible” – Germany Faces A Political Revolution In 4 Weeks
In a scenario that nobody could have predicted one year ago, Germany is facing a political revolution in less than a month, on September 26, when the country holds its Federal Elections and where the dynastic CDU/CSU appears on the edge of not just losing, but suffering its worst ever election result.
But first, let’s back up one week to August 21, which was supposed to be the turning point for Germany’s ruling Christian Democrats – the day Angela Merkel threw her weight behind the beleaguered party leader Armin Laschet and turned around his flagging electoral fortunes. Instead, as the Financial Times notes, “it was a day of reckoning.”
A poll that Saturday evening showed that support for the party had slumped to 22%, level with the left-of-centre Social Democrats. Data released earlier today from INSA, suggests the SPD had even pulled ahead significantly, rising to 25% while the CDU/CSU has collapsed to just 20%. This means that if its luck doesn’t turn before polling day on September 26, the CDU could be heading for the worst election result in its history.
So fast forward to today when with less than a month of campaigning to go, the FT reports of a sense of panic spreading through CDU ranks. “The mood is just abysmal,” says one conservative backbencher. “Are we all going to lose our seats now?”
‘All’ maybe not… but many, yes because a party that has ruled Germany for 50 of the past 70 years and began to see the chancellery as its natural birthright is now facing the real prospect of being booted out of power. It would, as the FT puts, it, “be a crushing humiliation for one of Europe’s most successful conservative parties.”
The reason for the party’s dismal plight, according to CDU MPs, advisers and strategists, is clear – its candidate for chancellor, and Angela Merkel’s handpicked successor, Armin Laschet. His approval ratings, never high to begin with, suffered a big drop in July when he was caught laughing on camera while visiting areas devastated by floods. They have never recovered.
Indeed, critics wonder aloud how the CDU, a party with “an unerring instinct for power and a reputation for iron discipline,” could have fielded such a weak candidate in the first place. “CDU people in my constituency say whatever you do, don’t send us any posters with Laschet’s face on them,” said another backbencher. “The fact is he’s a liability, rather than an asset, to our campaign.”
Some believe it was a fatal mistake to nominate Laschet ahead of his rival Markus Söder, leader of the CDU’s Bavarian sister party, the Christian Social Union, a much more popular politician. “The majority of CDU voters . . . did not want Laschet as chancellor-candidate,” Manfred Güllner, head of pollster Forsa, told the FT.
But there is another view: that the CDU’s decline has less to do with Laschet than with the end of the Merkel era. “All the time Merkel was in charge, the CDU was defined by its leader, not its policies,” says Jens Zimmermann, an SPD MP. “And now that she’s finally going, there’s this vacuum it just can’t fill — a void where the policies should be. People just don’t know why they should vote Christian Democrat.”
But one doesn’t have to go back a year to observe the dramatic shift in sentiment: just a few weeks ago, the common wisdom in Berlin was that the CDU/CSU would win the election and form a coalition with the Greens — the first such “black-green” alliance in German history. But the latest polls point to a much messier outcome according to many: an inconclusive election result with no clear winner and a plethora of different potential coalitions. “We will never have had so many government options in Germany’s postwar history,” says Güllner.
The mess is boosting the chances of a new, left-leaning alliance emerging, under a Social Democrat chancellor — the current finance minister Olaf Scholz. A party that has, for the past eight years served as junior partner in a Merkel-led “grand coalition” may be on the point of capturing the chancellery for the first time in 16 years.
“In the past, people used to smile indulgently when Scholz said he would be Germany’s next chancellor,” Niels Annen, a senior SPD MP and close Scholz ally, told the FT. “But an SPD-led government is no longer a fantasy. It’s a realistic proposition.”
What would such a political avalanche mean in practice? Analysts are confused by the inherent cross-currents in the various platforms – the SPD and Greens want to introduce a wealth tax and massively increase state investments, but they would probably need a third party in their coalition – the pro-business Free Democrats, who want tax cuts and balanced budgets. Such a “traffic light” coalition – as it is called due to the green, yellow, red colors of the constituent parties – could just end up cancelling each other out, and achieving little according to the FT.
No matter the final outcome, it will signal the end of an era. “The idea that the CDU might not win the most seats and not form the next government used to be unthinkable,” says Andreas Rödder, a historian at Mainz University. “Now the unthinkable has suddenly become possible”, a possibility made explicit by the latest Insa poll for Bild which showed extending support for the SPD which blimed one percentage point to 25%, pulling further ahead of Merkel’s conservative bloc which loses one point and falls to 20%; the Green party lost 0.5 points to 16.5%, the business-friendly FDP rose +0.5 points at 13.5%, while the far-right AfD was unchanged at 11% and the Left Party gained one point to 7%.
* * *
Even before the latest polls, it was clear that this would be an election like no other. Merkel said as much at the CDU/CSU event in Berlin’s Tempodrom, when she endorsed Laschet: for the first time in Germany’s postwar history, an incumbent chancellor was not running for re-election. “The cards are being reshuffled,” she said.
That has meant more scrutiny of the three individuals running to succeed her than of their policies or manifestos. As the FT details, “mone of them are as instantly recognizable and widely admired as Merkel herself. And for two of them, the media spotlight has been particularly harsh: Annalena Baerbock, the 40-year-old Green leader, spent weeks fighting off accusations of plagiarism and of embellishing her CV: meanwhile Laschet, prime minister of the large industrial state of North Rhine-Westphalia, has found himself attacked and ridiculed at every turn.”
Frequently, he has only himself to blame. At a recent campaign appearance in the western city of Wiesbaden, he repeatedly referred to the local CDU MP as Ingbert Jung. A murmur went through the crowd. “His name’s Ingmar,” one person shouted.
“It’s sheer sloppiness — just atrocious,” says a CDU politician who witnessed the incident. “Jung probably wanted to die of shame.”
Sometimes, the criticism seemed gratuitous. He has been ripped apart on social media for not wearing rubber boots on trips to flood-affected areas, eating an ice cream on the campaign trail and daring to mention hydrogen technology in a chat with Elon Musk. “Laschet is in this negative spiral now, where everything he does is just slammed,” says Rödder. “And once you’re in it, it’s very hard to get out.”
In contrast, Scholz, who as deputy chancellor steered Germany’s public finances deftly through the pandemic, has not put a foot wrong. “It seems as if voters have already made up their minds about the three candidates,” says one person close to the CDU. “They see Laschet as embarrassing, Baerbock as a fraud and Scholz as the only serious, solid one.”
Scholz’s message to voters has been simple: he is the natural successor to Merkel, a politician who continues to enjoy sky-high approval ratings even after 16 years in power. It is a bold claim: he is, after all, from a rival party. But it is one that SPD strategists have been quietly pushing for months, and the latest polls suggest it is working.
The similarities are, indeed, striking. Like Merkel, Scholz is dispassionate, pragmatic and no great orator: his delivery is so robotic he’s been nicknamed the “Scholz-o-mat”. Asked in a recent interview if he lacked emotion he replied that he was “running for the job of chancellor, not circus director”. Yet like Merkel he is widely seen as dependable and trustworthy.
So transfixed is the potential future premier with piggybacking on Merkel’s halo that Scholz himself shamelessly underscored the similarities by appearing on the cover of the Süddeutsche Zeitung magazine this month with his fingers and thumbs touching to form the Merkel “diamond”, the chancellor’s signature gesture.
“It was sensational, because it finally put the cliché to bed that he doesn’t have a sense of humour,” says Zimmermann.
In a recent FT interview, Scholz tacitly acknowledged that he was trying to target Merkel voters. “A lot of people would see me as the best bet, because I have more government experience than any of the other candidates,” he said. “But it’s much more than that: I also have a clear idea of how to ensure Germany’s prosperity and also more respect in society,” he added.
As the FT explains, the theme of “respect” is at the heart of the SPD campaign, which is built on a battery of simple messages: a €12 per hour minimum wage, more affordable housing and stable pensions.
The party has been unusually united, avoiding the open bickering between left-wingers and centrists that blighted previous campaigns. And because it nominated its candidate for chancellor much earlier than its rivals — more than a year ago — “we were able to create a customized campaign exactly tailored to Scholz”, says Zimmermann.
Still, it’s not all smooth sailing, and things could still turn against Scholz, however. Uncomfortable questions have been raised over his role in the two big financial scandals that have rocked Germany in recent years — the fall of digital payments company Wirecard and the cum-ex tax fraud, a controversial set of share trades that robbed the German exchequer of billions of euros in revenue.
Separately, the Financial Times also notes that SPD critics also increasingly ask whether Scholz really represents his party. A centrist, he lost the 2019 contest for the leadership of the SPD to a pair of leftwingers, Saskia Esken and Norbert Walter-Borjans, who have kept quiet during the campaign but still have a massive fan base in the party.
“People don’t really know Scholz at all — he’s just a blank canvas they’re projecting all their wishes and desires on to,” says Manuel Hagel, a senior CDU official. “But it’s only a matter of time before he’s subjected to exactly the same scrutiny that Baerbock and Laschet have had to endure.”
For the moment, however, the polls are clearly going Scholz’s way, and the nervousness in the conservatives’ camp is growing. That was clear when Söder followed Merkel on to the stage of the Tempodrom earlier this month. The CDU/CSU is, he said, facing its hardest election campaign since 1998, the year veteran chancellor Helmut Kohl was kicked out of office by the SPD and Greens.
“Let’s be honest for a moment — it’s tight,” he said. The Christian Democrats had for months been speculating about which parties they could form coalitions with. “But the question now isn’t how we should govern, but whether we will govern at all,” he added.
It’s been a painful campaign for Söder. He saw his poll ratings soar during the pandemic, when he emerged as one of Germany’s most effective and decisive crisis managers. Laschet, in contrast, was seen as a poor communicator, unsure what line to take. “His zigzag course really depressed his approval ratings,” says Forsa’s Güllner. Yet in the end, the CDU chose Laschet, the candidate of the party hierarchy, rather than Söder, the favorite of MPs and the party base.
From the start, Laschet’s campaign for chancellor was faulted for its incoherence and its lack of eye-catching policies. He started off promising voters a “decade of modernisation”. “But then people said — well why didn’t you use your past 16 years in power to modernize the country?” says the person close to the CDU. In recent days the slogan has been quietly dropped.
That encapsulates Laschet’s problem: he needs to be Merkel’s natural heir while also signalling a fresh start. “He can’t portray himself as some kind of superhero who will save everyone from the government — because the government is the CDU,” says one person close to him.
Laschet could still save the day by setting out clearly what parts of the Merkel legacy he would preserve and what he would do differently. Some think he could also improve the CDU’s chances by unveiling his dream team — the members of a putative Laschet-led cabinet. “If your top candidate is not performing, you should show the full spectrum of the party,” says the backbencher. “He isn’t doing that.”
Critics, however, say the CDU/CSU’s problem is its fundamental lack of new ideas. “It’s a Potemkin village,” says Oliver Krischer, a senior Green MP. “There’s nothing left behind the facade.”
As the concerns grow, some Christian Democrats are pushing for increasingly desperate measures. In a poll published on August 25, 70% of CDU/CSU voters said they wanted Laschet to step aside in favor of Söder, who remains highly popular among the CDU’s rank and file: “A lot of members are still really peeved about the way Söder was sidelined,” says one CDU MP. He says some local party volunteers had warned him at the time that they would not campaign for Laschet if he was chosen as candidate — “and they have kept their word”.
Then there is history: CDU officials say it would be wrong to underestimate Laschet, a politician renowned for his resilience. “Four weeks before the 2017 elections in North Rhine-Westphalia, the CDU was six points behind the SPD, but we still won,” says Hagel. “It shows you can win when you really fight.”
Further adding to his chances of a last-minute miracle, is that many German voters remain undecided. And CDU strategists point to polls that show 30% of the German voting public is essentially conservative — a constituency that could swing the CDU’s way on polling day. “We can still turn things around,” says Hagel. “All elections are decided in the last three weeks of campaigning.” But privately, other Christian Democrats are less optimistic. “The fact is, we weren’t able to come up with a candidate who could really convince voters,” says one backbencher. “And now we’re being punished for it.”
* * *
Laschet’s chances for a rebound took a turn lower on Sunday night when in the first of three TV debates in the campaign leading up to Germany’s federal election on 26 September, Olaf Scholz scored what may be a devastating victory in his race to succeed Angela Markel.
While all three debate participants – Laschet, Scholz and Baerbock – essentially delivered, there was only one clear winner according to the New Stateman: Scholz, who triumphed in a snap poll by Forsa. To the question “Who do you tend to trust to lead the country?” fully 47% named the SPD candidate, with 24% for Laschet and 20% for Baerbock. The question of who won the debate itself was slightly narrower but still clear: 36% called it for Scholz, 30% for Baerbock and just 25% for Laschet. Narrowest was the question of which seemed most sympathetic: here Scholz (38%) was only just ahead of Baerbock (37%), with Laschet trailing far behind on a dismal 22%.
Today’s Bild, a conservative tabloid traditionally close to the CDU/CSU and Germany’s most-read newspaper, is emphatic: “Clear victory for Scholz in TV” runs its front-page headline.
A lie is still a lie even if it is often repeated. And claiming the Nordic countries are socialist economies with high taxes for wealth and businesses is a big lie.
Nordic countries are not socialist. They rank at the top in the Heritage Foundation’s Economic Freedom Index 2020 (Denmark,10, Finland, 17, Sweden, 21, Norway, 28). They also rank at the top in the World Bank’s Ease of Doing Business Index 2020 (Denmark, 4, Norway, 9, Sweden, 10, Finland, 20), with simple and limited business regulation and strong support for entrepreneurship.
They also rank at the highest levels in labor market flexibility. Denmark, 7, and Norway, 15, have some of the most flexible labor markets according to the Employment Flexibility Index 2020, while Finland and Sweden rank in the Top 40 above Luxembourg or Korea.
The public sector does not dictate the growth pattern or the way in which the economy should be run, this is generated from the private sector, which finances more than 60% of research and development, and government applies private-sector best practices of efficiency and transparency in the management of public services. In addition, public officials do not have a life-long position. The opposite of the political control that populists defend.
Nordic countries have carried out continued successful privatizations of state-owned sectors, from telecommunications to electricity generation and distribution. Even the postal service in Sweden was placed in a corporate structure and partially privatized.
In these countries, private education is encouraged through school vouchers, not forced state-run schools.
Government bureaucracy is extremely limited and civil servants do not have a lifetime job. In fact, the size of the public sector relative to GDP and compared to total public expenditure is very similar to the global and European average, according to the World Bank Bureaucracy Indicators.
Nordic countries also rank among the highest in Wealth Inequality according to the Credit Suisse Global Wealth Databook 2018, showing that in Sweden, for example, 74.9% of the wealth is owned by the Top 10% and 36.7% to the Top 1%, very similar levels to the United States. In Finland, the Top 1% hold also 36.7% of the total wealth while the Top 10 hold 65.9%
Yes, Nordic countries do have higher taxes and high public spending, but it does not entail bigger government, more bureaucracy or more state control, as interventionists want. Furthermore, the reason why they have higher taxes is not because of elevated wedges for businesses and capital, but due to a very high VAT (value-added tax, a tax on sales).
All Nordic countries’ corporate tax rates are lower than the average European Union and United States’ rates. In 2020, with Denmark and Norway at 22%, Finland at 20%, and Sweden at 21.4%. The U.S. tax rate on corporations is slightly higher at 25.8% (federal and state combined).
Capital gains and dividend taxes are also in line with the rest of the European Union and the United States.
Norway’s top personal tax rate of 38.2% is lower than the United States’ 43.7%. However, Scandinavian countries tend to impose the top personal income tax rates on up and middle-class earners, not just high-income taxpayers.
Nordic “high taxes” come mostly from high VAT & social security taxes, not business or capital taxation, which is lower than in many developed economies.
As the study “Insights into the Tax Systems of Scandinavian Countries” by Elke Asen points:
“If the U.S. were to raise taxes in a way that mirrors Scandinavian countries, taxes—especially on the middle class—would increase through a new VAT and higher social security contributions. Business and capital taxes would not necessarily need to be increased if policymakers were following the Scandinavian model”.
Billionaire investor George Soros is no stranger to controversy. He has a history of openly criticizing a number of influential Republicans, including former presidents like George W. Bush and Donald Trump. At the same time, Soros has heaped praise on the Chinese regime.
A decade on, does Mr. Soros still feel the same way?
The answer appears to be no.
The recipe for good comedy, we’re told, is tragedy + time. The very same recipe can be applied to China-related commentary, it seems. In a recent op-ed for the Wall Street Journal, Soros called Xi Jinping “the most dangerous enemy of open societies in the world.” According to the 91-year-old philanthropist, the Chinese people are innocent victims, needlessly suffering at the hands of Xi.
Soros, clearly disturbed by China’s social credit system, is worried that other countries might find it an “attractive” option. His concerns are most definitely warranted. From Africa to South America, the Chinese regime’s surveillance system has many admirers.
People walk by the New York Stock Exchange (NYSE) in an empty Financial District in New York City on June 15, 2020. (Spencer Platt/Getty Images)
Xi’s “intensely nationalistic” mindset, writes Soros, has seen the Chinese Communist Party morph into “a Leninist party,” with the leader willing to use both political and military power to “impose” his will. Now, according to Soros, Xi’s dictatorial-metamorphosis is fully complete. In modern-day China, with Xi at the helm, “intimidation,” writes Soros, reigns supreme.
I reached out to the Open Society Foundations, founded by Soros, for comment; none were offered. Nevertheless, the op-ed makes for a refreshing read.
Remember, this is George Soros we are talking about, a man who once called the United States the “main obstacle to a stable and just world.” Now, though, China appears to be national security threat number one. However, all is far from rosy in Beijing; the Chinese regime is not without problems of its own. Whether or not it manages to overcome them remains to be seen.
Crouching Tiger, Dying Dragon
In the words of British statesman Benjamin Disraeli, “courage is fire, and bullying is smoke.” Having lived in the country for an extensive period of time, I speak from experience when I say the following: Although China projects a strong image, underneath all the chest-thumping and harsh rhetoric lies a lot of smoke.
On an individual level, we are all familiar with the concept of impression management. Humans carefully curate their image, doing everything in their power to project a very specific message. Countries also engage in impression management; some, as you are no doubt aware, are better at it than others.
In China, the effects of the heavily filtered image are starting to wear off. As the researcher Ryan Hass writes, China is not 10 feet tall. In fact, it’s much smaller than it first appears. Authoritarian regimes, obsessed by the concept of impression management, “excel at showcasing their strengths and concealing their weaknesses.” Hass encourages policymakers in Washington “to distinguish between the image Beijing presents and the realities it confronts.” Don’t be fooled by the wolf warrior-inspired bravado; China, writes Hass, “is at risk of growing old before it grows rich.” It is fast “becoming a graying society with degrading economic fundamentals that impede growth.” By 2050, the country “will go from having eight workers per retiree now to two workers per retiree.” The decline is rapid, and no filter in the world can hide this cold, hard fact. That crouching dragon is crouching for a reason—it’s injured, weak, and in desperate need of assistance.
The academic Yi Fuxian goes one step further than Hass. He believes China’s “demographic structure is actually much worse than the authorities would have us believe.” An extensive analysis of the country’s “age structure” suggests that China has considerably fewer citizens than is currently being reported. In fact, China’s population might be as low as “1.28 billion,” which would make India the most populous country in the world. What we view as “a fire-breathing dragon,” writes Fuxian, is little more than a “really a sick lizard.”
With a shrinking, rapidly aging population, the Chinese regime appears to be doing everything in its power to hide its gaping wounds. But the charade can’t go on forever. Although the propaganda machine roars on, the world is starting to see China for what it really is. Behind all the five-year plans, huge investments in infrastructure, and bombastic rhetoric lies problems that are existential in nature.
Dragons are, after all, a thing of fantasy, much like the Chinese regime’s dreams of world domination.
“Absolute Shocker”: China’s Service Economy Unexpectedly Implodes With 2nd Worst Non-Mfg PMI Print On Record
Three months ago when observing the reversal of China’s all-important credit impulse to negative, its first red print in over a year, we warned that China was set to unleash a deflationary wave across the world…
… but first it would be China’s own economy that is impacted.
And sure enough, the country which first emerged from the covid pandemic it created courtesy of a tidal wave of new debt creation which however collapsed right on schedule in July, when China’s Total Social Financing aggregate printed at the lowest level since February 2020…
… has just seen its service sector contract sharply, because moments ago China’s official Services (non-manucaturing) PMI Index unexpectedly collapsed from a healthy 53.3 to a contractionary47.5 – the second lowest print on record with just the Feb 2020 peak covid print lower,badly missing the 52.0 Bloomberg consensus, and the largest one-month drop (-5.8)outside of the covid recessionary plunge in February 2020.
While China’s service economy is clearly disintegrating, the silver lining was that the Mfg PMI printed just barely in expansion territory, although at 50.1, not only did it miss expectations of a 50.2 number, but dropped from 50.4 in July, and was the lowest print in this data series since Covid. At this rate, China’s manufacturing sector will also be in recession next month.
The PMIs – and especially the Non-mfg print – were bad. So bad that Bloomberg’s Simon Flint wrote after the number was released that it may “increase concern about the health of the global economic recovery, and slightly dampen risk sentiment” (no worry there, Eminis are actually higher on the news because in this idiot market, the worse things get, the better for the 1%).
Although the data bode ill for the yuan, the historical read-across has been very mild. Non-manufacturing was an absolute shocker at 47.5. This is more than 5 standard deviations below Bloomberg consensus, outside the entire forecast range, and the first sub-50 reading since the first Covid wave. Factory PMI came in at 50.1, just a fraction below forecast. This amplifies a run of generally worse-than-expected data from the PMIs.
Over April-July, the average shortfall was 0.3 points for the manufacturing index, and 0.7 for non-manufacturing. That said, PMIs tend to be taken less seriously than the hard data. It’s also possible that the market will look through them given that the slowdown is most likely related to the Covid-19 shock, and the market has a fair degree of confidence in China’s ability to manage the virus.
Here will just add that the “market” will not give a rat’s ass about the China PMI because the only thing that matters for stonks is how many billions in liquidity will Uncle Jerome inject today.
As for China, many are scratching their heads why Beijing is taking so long to address the sharp slowdown in its economy. But while the latest China credit – and now PMI – data is flashing a bright red alarm light that the global reflationary wave is not only over but is going into reverse, the good news is that anyone harboring any expectation that the PBOC may tighten to frontrun the Fed’s tapering or hiking, is now crushed.
The New York branch of the facility has been the subject of much scrutiny after Jeffrey Epstein’s death.
Notable recent inmates included socialite and alleged sex trafficker Ghislaine Maxwell, musician R. Kelly and former Trump lawyer Michael Cohen.
The 233 people currently held at the facility will be transferred.
Even though this specific detention center is rather small, the US still leads the world when it comes to prison population per 100,000 residents as Statista’s Florian Zandt shows in the chart below.
An approximate ratio of 639 of 100,000 US residents are currently spending time behind bars according to data provided by Institute for Crime & Justice Policy Research at the University of London. With El Salvador and Panama, two other countries of the American continent make the top ten at places two and nine respectively.
The UK’s overseas territories are also represented with two entries, the Virgin Islands and Grenada.
The latter rounds off the list of the ten countries with the highest prison population rates with a value of 413 inmates per 100,000 residents.
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“The Pervasiveness of Over-Optimism”
An Afghan General blames defense contractors for the collapse of the Afghan army. A government inspector blames the “the pervasiveness of overoptimism” by U.S. generals. It’s all that, and more.
In 2017, Netflix put out a satirical movie on the conflict in Afghanistan. It was titled War Machine, and it starred Brad Pitt as an exuberant and deluded U.S. General named Glen McMahon. A fitness fanatic nicknamed ‘the Glanimal’ by his crew of adoring frathouse henchmen, McMahon is modeled on the real-life military leader Stanley McChrystal, who ran the surge in Afghanistan before being fired for saying disparaging things about Obama administration officials (including then VP Biden) on the record to Rolling Stone magazine.
In War Machine, McMahan comes to Afghanistan with a spirited can do attitude and a frat house of hard-partying yes-men, after having ‘kicked Al Qaeda in the sack’ running special operations in Iraq. He is obsessed with inspirational speeches and weird bureaucratic box-ticking, under the amorphous concept of leadership. This kind of leadership, though, isn’t actually working with wisdom and foresight, but is more like management consulting. Prior to arriving in Afghanistan, for instance, McMahan created a system, with the acronym SNORPP to coordinate military assets. At night, he cozies down to read books on management excellence, the kind that Harvard Business Review publishes as sort of Chicken Soup for the Executive’s Soul. He is also the author of a fictional book with the amazing title, “One Leg At a Time: Just Like Everybody Else.”
And yet his mission is unwinnable, which everyone seems to understand except him and his small team. McMahan constantly makes awkward speeches that make no sense, with the tone used by untrusted executives at corporate retreats. “We are here to build, to protect, to support the civilian population,” he told his troops. “To that end, we must avoid killing it at all costs. We cannot help them and kill them at the same time, it just ain’t humanly possible.” His character reflects what the actual government watchdog charged with overseeing the war in Afghanistan called one of the central problems with the U.S. effort, “the pervasiveness of over-optimism:”
If McMahan himself is a naive fool, he is surrounded by cynical bureaucratic opponents. As he seeks support for his new strategy of putting troops in Taliban-held provinces, he is gently ignored by the President of Afghanistan, who is a drug-addicted hypochondriac, and mocked by State Department and national security apparatchiks, who are striving cynics urging McMahon to just falsify numbers to make the war look a little better and not embarrass President Obama. Troops on the ground are demoralized and confused. No one actually believes in the mission, but dammit, McMahon is gonna get it done, whatever ‘it’ is. When McMahon tries to give an inspirational speech to ordinary Afghanis in Taliban-controlled territory about how the U.S. is going to bring them jobs and schools, one responds by saying he like jobs and schools, but please go away so the Taliban won’t retaliate. “The longer you are here the worse for us. Please go.”
It’s a hilarious, and extraordinarily dark movie. It also rang true, because it was based on the work of no-bullshit journalist Michael Hastings, who was perhaps the most honest reporter about the military establishment. And, as life is true to fiction, McChrystal, the general who Hastings profiled in Rolling Stone with an embarrassing story that led to his resignation, is now a management consultant (and board member of defense contractors). He runs inspirational ‘leadership training’ at the McChrystal Group, which is McKinsey with military branding.
In fact, McChrystal and much of our military leadership is tight with consultants like McKinsey, and that whole diseased culture from Harvard Business School of pervasive over-optimism and finance-venture capital monopoly bro-a-thons. McKinsey itself had involvement in Afghanistan, with at least one $18.6 million contract to help the Defense Department define its “strategic focus,” though government watchdogs found that the “only output [they] could find” was a 50-page report about strategic economic development potential in Herat, a province in western Afghanistan.” It turns out that ‘strategic focus’ means an $18.6 million PowerPoint. (There was reporting on this contract because Pete Buttigieg worked on it as a junior analyst at McKinsey, and he has failed upward to run the Transportation Department.)
I bring War Machine up because of today’s debate over Afghanistan. While there is a lot of back and forth about whether intelligence agencies knew that the Taliban would take over, or what would happen if we left, or whether the withdrawal could be done more competently, all you had to do to know that this war was a shitshow based on deception and idiocy at all levels was to turn on Netflix and watch this movie. Or you could read any number of inspector general reports, leaked documents, articles, talk to any number of veterans, or use common sense, which, polling showed, most Americans did. (Marine vet Lucas Kunce gives a nice rundown of the problem in this interview). I mean, it’s not like a major international media outlet printed a multi-part expose, which became a handy book, detailing the fact that everyone running the show knew it was an unwinnable mess nearly a decade ago. Oh, wait
In other words, the war in Afghanistan is like seeing management consultants come to your badly managed software company where everyone knows the problem is the boss’s indecisiveness and cowardice, except it’s violent and people die.
I mean, U.S. military leaders, like bad consultants or executives, lied about Afghanistan to the point it was routine. Here are just a few quotes from generals and DOD spokesmen over the years on the strength of the Afghan military, which collapsed almost instantly after the U.S. left.
In 2011, General David Petraeus stated, “Investments in leader development, literacy, marksmanship and institutions have yielded significant dividends. In fact, in the hard fighting west of Kandahar in late 2010, Afghan forces comprised some 60% of the overall force and they fought with skill and courage.”
In 2015, General John Campbell said that the the Afghan Army had “proven themselves to be increasingly capable,” that they had “grown and matured in less than a decade into a modern, professional force,” and, further, that they had “proven that they can and will take the tactical fight from here.”
In 2017, General John Nicholson stated that Afghan security forces had “prevailed in combat against an externally enabled enemy,” and that the army’s “ability to face simultaneity and complexity on the battlefield signals growth in capability.”
On July 11, 2021, Pentagon press secretary John Kirby said that the Afghan army has “much more capacity than they’ve ever had before, much more capability,” and asserted, “they know how to defend their country.”
Basically, look at this photo below, imagine them in camouflage, and that’s the U.S. military leadership.
The Withdrawal Anger Is *Embarrassment*
There are significant recriminations over the embarrassing media stories on the withdrawal from Afghanistan, tremendous anger that political leaders like Trump and Biden made significant mistakes in how they withdrew U.S. forces. Many of these critiques, coming from Europeans as much as American elites, are in bad faith.
Nonetheless, rather than weighing in on the merits of these arguments, I think it’s better to look at how the establishment observed a stark portrait of Afghanistan before the withdrawal, to show that the current critiques have nothing to do with operational choices.
To that end, let’s look at a review of War Machine in Foreign Policy magazine, written by one of McChrystal’s aides, Whitney Kassel, who now works at private intelligence firm The Arkin Group. In this review, Kassel noted the movie made her so upset that she started cursing, because, while there were of course mistakes, the film was totally unfair to McChrystal and demeaned the entire mission of building a safe Afghanistan. Kassel, like most of these elites, didn’t get the joke, because she is the joke.
I see the discourse on the withdrawal as a super-sized version of this Kassel’s review. The ‘Blob,’ that loose network of diplomats, ex-diplomats, generals, lobbyists, defense contractors, fancy lawyers, famous journalists, and insiders see the obvious desire for withdrawal as similar to how Kassel saw the truth-telling of Hastings and the Netflix movie. They are angry and embarrassed that they can’t hide their failures anymore. Their entire sense of self was bound up in the idea of an illusion of an unbeatable all-powerful America, even when they, like General Glen “the Glanimal” McMahon were the only ones who believed it.
And their embarrassment covers up something even more dangerous. None of these tens of thousands of Ivy league encrusted PR savvy highly credentialed prestigious people actually know how to do anything useful. They can write books on leadership, or do powerpoints, or leak stories, but the hard logistics of actually using resources to achieve something important are foreign to them, masked by unlimited budgets and public relations. It is, as someone told me in 2019 about the consumer goods giant Proctor and Gamble, where “very few white-collar workers at P&G really did anything” except take credit for the work of others.
Defense Monopolies and the Afghan Army
It’s fun to act like it was always thus, that this is how empires behave. But in fact, that’s not true. The current Blob is relatively new. And believe it or not, Western forces used to be able to actually win wars.
Going back to the last significant victory, the allies won World War II in large part for two reasons. First, the Soviet Union sacrificed 27 million people defeating the Nazis, and second, the U.S. military, government, labor, and business leaders were exceptionally good at logistics. The U.S. military had at least a dozen suppliers for each major weapons system, as well as the ability to produce its own weaponry, the government had exceptional insight into the U.S. economy, and New Dealers had destroyed the power of the Andrew Mellon and J.P. Morgan style short-term oriented financiers and monopolists who had controlled the industrial sinews of the country.
Today, this short-termism has taken over everything, including the military, which is now dominated by McKinsey-ified glory hounds without wisdom and defense contractors with market power. And this leadership class hasn’t just eroded our strategic capacity, but the very ability to conduct operations. Two days ago, Afghan General Sami Sadat published a piece in the New York Times describing why his army fell apart so quickly. He went through several important political reasons, but there was an interesting subtext about the operational capacity of a military that is so dependent on contractors for sustainment and repairs. In particular, these lines stuck out.
Contractors maintained our bombers and our attack and transport aircraft throughout the war. By July, most of the 17,000 support contractors had left. A technical issue now meant that aircraft — a Black Hawk helicopter, a C-130 transport, a surveillance drone — would be grounded.
The contractors also took proprietary software and weapons systems with them. They physically removed our helicopter missile-defense system. Access to the software that we relied on to track our vehicles, weapons and personnel also disappeared.
It’s just remarkable that contractors removed software and weapons systems from the Afghan army as they left. Remember, U.S. generals constantly talked about the strength of the Afghan forces, but analysts knew that its air force – on which it depended – would fall apart without contractors. The generals probably hadn’t really thought about the logistical problems of what dependence on contracting means. It’s just stunning that NATO forces would be trying to stand up an independent Afghan army, even as NATO contractors disarmed that army due to contracting arrangements.
I suspect the problem isn’t simply related to Afghanistan, because these kinds of problems are not isolated to the Afghan army. Last month, I noted that American soldiers are constantly complaining that bad contracting terms prevent them from fixing and using their own equipment, just as Apple stops consumers from repairing or tinkering with their iPhones. In 2019, Marine Elle Ekman noted that these problems are pervasive in the U.S. military.
Besides the broken generator in South Korea, I remembered working at a maintenance unit in Okinawa, Japan, watching as engines were packed up and shipped back to contractors in the United States for repairs because “that’s what the contract says.” The process took months.
With every engine sent back, Marines lost the opportunity to practice the skills they might need one day on the battlefield, where contractor support is inordinately expensive, unreliable or nonexistent…
While a broken generator or tactical vehicle may seem like small issues, the implications are much larger when a combat ship or a fighter jet needs to be fixed. What happens when those systems break somewhere with limited communications or transportation? Will the Department of Defense get stuck in the mud because of a warranty?
No one is invading the U.S., so these problems aren’t immediately obvious to most of us. Yet, with the collapse of the Afghan army, now we see an example of what happens when a military is too dependent on contractors, and that support system is removed (which adversaries could do to the U.S. military if they pursue certain strategies.) It turns out that the cost of not being able to repair your own equipment is losing wars.
More fundamentally, the people who are in charge of the governing institutions in our society are simply divorced from the underlying logistics of what makes them work. Everything, from the Boeing 737 Max to the opioid epidemic to the waste inside most big corporations to war, has been McKinsey-ified. And it’s all covered up with moral outrage, partisanship and culture warring, public relations, and management wisdom bullshit.
I’ll finish on a note of optimism. This loss in Afghanistan, while hugely embarrassing, could serve as a wake-up call. After the loss in Vietnam, a group of military officers, led by John Boyd, one of the greatest American military strategists in U.S. history, created a military reform movement, to change the way the Pentagon developed and used weapons, and they made enormous progress in restructuring key parts of the defense establishment. (One of the members of Boyd’s “Fighter Mafia,” Pierre Sprey, the man responsible for the remarkable A-10 Warthog, just passed away.) Similarly, the British, after losing the American Revolution, radically reformed their corrupt and antiquated systems of governance. Losing wars is a great spur to reform. It means that we as a society get to look at ourselves honestly. We may choose not to act on what we see, but we do in fact have the opportunity. And that’s not nothing.
UPDATE: I’d like to apologize to Whitney Kessel. She is no longer at the Arkin Group. After a stint at Palantir, she ended up at Morgan Stanley, where she is now the Head of Cyber Event Management for North America, which is not at all a highly paid fake job full of make work.
Starting Sept 1 China Will Require Foreign Vessels To Report In Its “Territorial Waters”
China barely wasted any time after Biden’s botched evacuation of Afghanistan to telegraph to the world that things will be a little different going forward: in a move that could have ramifications for the free passage of both military and commercial vessels in the South China Sea, Chinese authorities said on Sunday they will require a range of vessels “to report their information” when passing through what China sees as its “territorial waters”, starting from September 1, The Hindu reported.
Over $5 trillion trade passes through the South China Sea, and numerous US naval vessels cross through contested waters, much to China’s anger. Beijing claims under a so-called “nine dash line” on its maps most of the South China Sea’s waters, which are disputed by several other countries, including the Philippines, Vietnam, Malaysia and Indonesia.
While it remains unclear how, whether, and where China plans to enforce this new regulation starting Wednesday, the Maritime Safety Administration said in a notice “operators of submersibles, nuclear vessels, ships carrying radioactive materials and ships carrying bulk oil, chemicals, liquefied gas and other toxic and harmful substances are required to report their detailed information upon their visits to Chinese territorial waters,” the Communist Party-run Global Times reported. The newspaper quoted observers as saying “such a rollout of maritime regulations are a sign of stepped-up efforts to safeguard China’s national security at sea by implementing strict rules to boost maritime identification capability.”
That China’s escalation to claim contested waters happens with US international credibility and reputation – even among allies – in tatters, is hardly a coincidence.
The notice said in addition to those vessels, any vessel deemed to “endanger the maritime traffic safety of China” will also be required to report its information, which would include their name, call sign, current position next port of call, and estimated time of arrival. The vessels will also have to submit information on the nature of goods and cargo dead weight. “After entering the Chinese territorial sea, a follow-up report is not required if the vessel’s automatic identification system is in good condition. But if the automatic identification system does not work properly, the vessel should report every two hours until it leaves the territorial sea,” the notice said.
The Global Times noted the Maritime Safety Administration “has the power to dispel or reject a vessel’s entry to Chinese waters if the vessel is found to pose threat to China’s national security.”
How China will enforce these rules remains to be seen, and in which waters of the sea. Indian commercial vessels as well as ships of the Indian Navy regularly traverse the waters of the South China Sea, through which pass key international sea lanes. While China claims most of its waters, marked by the “nine dash line” on its maps, Indian officials say Beijing has generally only sought to enforce its claims in response to the passage of foreign military vessels not in the entire sea but in the territorial waters around the islands, reefs and other features, some artificially constructed, that China claims.
China’s “nine dash line” is deemed by most countries as being inconsistent with the United Nations Convention on the Law of the Sea (UNCLOS), which only gives states the right to establish a territorial sea up to 12 nautical miles. The requirements of the latest notice will also be seen as being inconsistent with UNCLOS, which states that ships of all countries “enjoy the right of innocent passage through the territorial sea”.
The MEA told Parliament in 2017 in response to a question on India’s trade in the South China Sea that over US$ 5 trillion global trade passes through its sea lanes and “over 55% of India’s trade passes through South China Sea and Malacca Straits.” “Peace and stability in the region is of great significance to India. India undertakes various activities, including cooperation in oil and gas sector, with littoral states of South China Sea,” the MEA said.
Former Food and Drug Administration Commissioner Scott Gottlieb, who is a Pfizer board member, noted that “natural immunity” gained from a prior COVID-19 infection needs to be included in discussions about policies and mandates.
“The balance of the evidence demonstrates that natural immunity confers a durable protection,” Gottlieb said during a Monday morning TV interview, referring to a landmark new preprint Israeli study that found prior COVID-19 infection confers much more protection against the virus than any vaccine.
“It’s fair to conclude that,” he said.
Although Gottlieb said he would “be careful” about concluding whether natural immunity provides better protection against transmitting the virus, officials “should start assimilating that into our policy discussions.”
“Natural infection confers robust and durable immunity,” he said, citing the Israeli study and others.
However, whether natural immunity or vaccines are better than one another “isn’t that material” when it comes to policy discussions, Gottlieb added.
Last week, researchers from Maccabi Healthcare and Tel Aviv University said that individuals who recovered from COVID-19 had superior protection against the Delta variant of the CCP (Chinese Communist Party) virus than those who received the Pfizer mRNA vaccine, the most commonly used shot in Israel.
“This analysis demonstrated that natural immunity affords longer-lasting and stronger protection against infection, symptomatic disease, and hospitalization due to the Delta variant,” the study concluded, noting their findings came from the “largest real-world observational study” in the world. Their study, which hasn’t yet been peer-reviewed, noted outcomes for a period between June 1 and Aug. 14 of this year.
When researchers compared cases of prior infection that occurred between March 2020 and February 2021 with vaccinations between January and February 2021, they found that the vaccinated cohort was 5.96 times more likely to contract the Delta variant and 7.13 times more at risk for symptomatic disease compared to those previously infected.
The results suggest that natural immunity gained from having survived a previous infection of COVID-19 may wane over time against the Delta variant, the authors wrote.
Those vaccinated were at a greater risk of COVID-19-related hospitalizations compared to those who were previously infected, the authors noted. They said that being 60 years of age or older increased the risk of infection and hospitalization.
The authors of the research paper said they only observed protection against the Delta variant and not other strains. Meanwhile, they only observed the Pfizer vaccine and didn’t look at other vaccines or the effects of a booster shot.
Apprehensions of undocumented immigrants at the Southern U.S. border in 2021 have reached levels last seen in 2001, despite two months still to go in the current fiscal year…
The inflow of undocumented immigrants from Central America drove numbers up significantly, but, as Statista’s Katharina Buchholz notes, immigration from Mexico has also increased again for the fourth year in a row – together creating another exceptional year at the Southern border that has already surpassed the records set in 2019. The number of individuals apprehended with their families also rose again in 2021, as Central American migrants tend to leave their countries out of fear of violence, often taking their families with them.
Historically, immigrants from Mexico made up the largest share of undocumented arrivals to the United States. The arrivals were mostly classified as work migrants, i.e. men arriving without their families at least initially. In the year 2000, Customs and Border Protection records show that more than 1.6 million Mexicans were arrested at the border. This number reached a low of 128,000 in FY2017, before rising again to 500,000 in 2021.
Immigration from Mexico started to decrease during the Great Recession as work was in short supply. Reasons for this include the economy in Mexico doing better while the country shifts towards an aging population, which causes workers to be more sought after. While this development already flipped again in 2018, the coronavirus pandemic seems to have accelerated the shift as more single adults attempt to leave Mexico for the United States once more.
