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A Wealth-X report from earlier this month found that the U.S. has the largest population of ultra-high-net-worth individuals (UHNWIs) worldwide. Defined as being worth $30 million or more, the U.S. has 80,000 such individuals (31 percent of the global population), higher than Japan, China, Germany, Canada and France combined.

However, as Statista’s Niall McCarthy notes, even though the U.S. is the dominant country for the super rich, it lags behind in UHNWI population growth.

You will find more infographics at Statista

An economic boom in Asia has seen the region churn out increasing numbers of billionaires in recent years.

For example, China saw its UHNWI population grow 19 percent between 2016 and 2017, twice the growth rate of North America. Over the past five years, another and unlikely Asian nation has been leading the world in super rich population growth.

According to Wealth-X, Bangladesh saw its ultra-rich club expand by 17.3 percent between 2012 and 2017. During the same period, China’s UHNWI population grew 13.4 percent while Vietnam’s increased 12.7 percent. The U.S. came tenth for UHNWI population growth with 8.1 percent.

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Authored by James Dorsey via Mid East Soccer blog,

Desperate for funding to fend off a financial crisis fuelled in part by mounting debt to China, Pakistan is playing a complicated game of poker that could hand Saudi Arabia a strategic victory in its bitter feud with Iran at the People’s Republic’s expense.

The Pakistani moves threaten a key leg of the USD60 billion plus Chinese investment in the China Pakistan Economic Corridor (CPEC), a crown jewel of Chinese President Xi Jinping’s Belt and Road initiative.

They also could jeopardize Chinese hopes to create a second overland route to Iran, a key node in China’s transportation links to Europe. Finally, they grant Saudi Arabia a prominent place in the Chinese-funded port of Gwadar that would significantly weaken Iran’s ability to compete with its Indian-backed seaport of Chabahar.

Taken together, the moves risk dragging not only Pakistan but also China into the all but open war between Saudi Arabia and Iran.

Pakistan’s first move became evident in early September with the government’s failure to authorise disbursements for road projects, already hit by delays in Chinese approvals, that are part of CPEC’s Western route, linking the province of Balochistan with the troubled region of Xinjiang in north-western China.

In doing so, Pakistan implicitly targeted a key Chinese driver for CPEC: the pacification of Xinjiang’s Turkic Muslim population through a combination of economic development enhanced by trade and economic activity flowing through CPEC as well as brutal repression and mass re-education.

The combination of Pakistani and Chinese delays “has virtually brought progress work on the Western route to a standstill,” a Western diplomat in the Pakistani capital of Islamabad said.

Pakistani Railways Minister Sheikh Rashid, in a further bid to bring Pakistani government expenditure under control that at current rates could force the country to seek a $US 12 billion bailout from the International Monetary Fund (IMF), has cut $2 billion dollars from the US$8.2 billion budget to upgrade and expand Pakistan’s railway network, a key pillar of CPEC. Mr. Rashid plans to slash a further two billion dollars.

“Pakistan is a poor country that cannot afford (the) huge burden of the loans…. CPEC is like the backbone for Pakistan, but our eyes and ears are open,” Mr. Rashid said.

The budget cuts came on the back of Prime Minister Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party projecting CPEC prior to the July 25 election that swept him to power to as a modern-day equivalent of the British East India Company, which dominated the Indian subcontinent in the 19th century.

PTI criticism included denouncing Chinese-funded mass transit projects in three cities in Punjab as a squandering of funds that could have better been invested in social spending. PTI activists suggested that the projects had involved corrupt practices.

Pakistan’s final move was to invite Saudi Arabia to build a refinery in Gwadar and invest in Balochistan mining. Chinese questioning of Pakistan’s move was evident when the Pakistani government backed off suggestions that Saudi Arabia would become part of CPEC.

Senior Saudi officials this week visited Islamabad and Gwadar to discuss the deal that would also involve deferred payments on Saudi oil supplies to Pakistan and create a strategic oil reserve close to Iran’s border.

“The incumbent government is bringing Saudi Arabia closer to Gwadar. In other words, the hardline Sunni-Wahhabi state would be closer than ever to the Iranian border. This is likely to infuriate Tehran,” said Baloch politician and former Pakistani ports and shipping minister Mir Hasil Khan Bizenjo.

Pakistan’s game of poker amounts to a risky gamble that serves Pakistani and Saudi purposes, puts China whose prestige and treasure are on the line in a difficult spot, could perilously spark tension along the Pakistan-Iran border, and is likely to provoke Iranian counter moves. It also risks putting Pakistan, Saudi Arabia and Iran, who depend on China economically in different ways, in an awkward position.

The Saudi engagement promises up to US$10 billion in investments as well as balance of payments relief. It potentially could ease US concerns that a possible IMF bailout would help Pakistan service debt to China.

A refinery and strategic oil reserve in Gwadar would serve Saudi Arabia’s goal of preventing Chabahar, the Indian-backed Iranian port, from emerging as a powerful Arabian Sea hub at a time that the United States is imposing sanctions designed to choke off Iranian oil exports.

A Saudi think tank, the International Institute for Iranian Studies, previously known as the Arabian Gulf Centre for Iranian Studies (AGCIS) that is believed to be backed by Saudi Crown Prince Mohammed bin Salman, argued last year in a study that Chabahar posed “a direct threat to the Arab Gulf states” that called for “immediate counter measures.”

Written by Mohammed Hassan Husseinbor, an Iranian political researcher of Baloch origin, the study warned that Chabahar would enable Iran to increase its oil market share in India at the expense of Saudi Arabia, raise foreign investment in the Islamic republic, increase government revenues, and allow Iran to project power in the Gulf and the Indian Ocean.

Mr. Husseinbor suggested that Saudi support for a low-level Baloch insurgency in Iran could serve as a countermeasure. “Saudis could persuade Pakistan to soften its opposition to any potential Saudi support for the Iranian Baluch… The Arab-Baluch alliance is deeply rooted in the history of the Gulf region and their opposition to Persian domination,” Mr. Husseinbor said.

Noting the vast expanses of Iran’s Sistan and Baluchestan Province, Mr. Husseinbor went on to say that “it would be a formidable challenge, if not impossible, for the Iranian government to protect such long distances and secure Chabahar in the face of widespread Baluch opposition, particularly if this opposition is supported by Iran’s regional adversaries and world powers.”

Saudi militants reported at the time the study was published that funds from the kingdom were flowing into anti-Shiite, anti-Iranian Sunni Muslim ultra-conservative madrassas or religious seminaries in Balochistan.

US President Donald J. Trump’s national security advisor, John Bolton, last year before assuming office, drafted at the request of Mr. Trump’s then strategic advisor, Steve Bannon, a plan that envisioned US support “for the democratic Iranian opposition,” including in Balochistan and Iran’s Sistan and Balochistan province.

All of this does not bode well for CPEC. China may be able to accommodate Pakistan by improving commercial terms for CPEC-related projects and Pakistani debt as well as easing Pakistani access to the Chinese market. China, however, is likely to find it far more difficult to prevent the Saudi-Iranian rivalry from spinning out of control in its backyard.

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The market took Friday’s jobs print pretty hard, with interest rates resuming their surge and hitting stocks. But the hurricane-affected data had a few highlights – namely the unemployment figure, which slid to 3.7%, below consensus estimates and on par with the Fed’s year-end forecast. That level also happened to be the lowest unemployment print in 48 years.

In short, the American economy, which is strengthening thanks to the combination of Trump’s tax cuts and his expanded deficit spending, is booming. That means for students who graduated in the spring, or are preparing to graduate next spring, should have options when it comes to finding a job. While thousands of students dream of moving to New York City, San Francisco or Washington, DC, contrary to popular belief, job markets in these hubs aren’t as robust as many believe.

In an analysis of regional BLS data, CNBC showed that the bulk of America’s tightest job markets aren’t found in coastal regions. Of the 20 top metro areas where unemployment rates are roughly half the national average or less, only five are situated along the coasts, according to the Bureau of Labor Statistics. Ames, Iowa boasted the lowest unemployment rate with just 1.7%. Four other metro areas on the list are in Iowa, while three are in Idaho.

Still, eight of the metro areas on the top 20 list were in California, which has an unemployment rate of 4.2%, slightly higher than the national rate.

The city with the highest unemployment rate is Yuma, Arizona, with 22%.

But the low unemployment rates might not last much longer. Given the importance of manufacturing and farming to the midwestern economy, President Trump’s tariffs could kill thousands, if not hundreds of thousands, of jobs.

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Authored by Alan Dershowitz via The Gatestone Institute,

• So why did the American Civil Liberties Union oppose a Republican nominee to the Supreme Court and argue for a presumption of guilt regarding sexual allegations directed against that judicial nominee? The answer is as clear as it is simple. It is all about pleasing the donors. The ACLU used to be cash poor but principle-rich. Now, ironically, after Trump taking office, the ACLU has never become so cash-rich, yet principle-poor.

• The problem is that most of the money is not coming from civil libertarians who care about free speech, due process, the rights of the accused and defending the unpopular. It is coming from radical leftists in Hollywood, Silicon Valley and other areas not known for a deep commitment to civil liberties.

• The old ACLU would never have been silent when Michael Cohen’s office was raided by the FBI and his clients’ files seized; it would have yelled foul when students accused of sexual misconduct were tried by kangaroo courts; and it surely would have argued against a presumption of guilt regarding sexual allegations directed against a judicial nominee.

• When the ACLU’s national political director and former Democratic Party operative Faiz Shakir was asked why the ACLU got involved in the Kavanaugh confirmation fight, he freely admitted, “People have funded us and I think they expect a return.”

President Trump greeting Brett Kavanaugh and his family. Why did the American Civil Liberties Union oppose a Republican nominee to the Supreme Court and argue for a presumption of guilt regarding sexual allegations directed against him? (Photo: Wikimedia Commons)

Now that Brett Kavanaugh has been confirmed, it is appropriate to look at the damage caused by the highly partisan confirmation process. Among the casualties has been an organization I have long admired.

After Politico reported that the American Civil Liberties Union (ACLU) was spending more than $1 million to oppose Judge Kavanaugh’s confirmation to the Supreme Court, I checked the ACLU website to see if its core mission had changed — if the ACLU had now officially abandoned its non-partisan nature and become yet another Democratic super PAC. But no, the ACLU still claims it is “non-partisan.”

So why did the ACLU oppose a Republican nominee to the Supreme Court and argue for a presumption of guilt regarding sexual allegations directed against that judicial nominee?

The answer is as clear as it is simple. It is all about pleasing the donors. The ACLU used to be cash poor but principle-rich. Now, ironically, after Trump taking office, the ACLU has never become so cash-rich, yet principle-poor. Before Donald Trump was elected President, the ACLU had an annual operating budget of $60 million dollars.[1] When I was on the ACLU National Board, it was a fraction of that amount. Today it is flush with cash, with net assets of over $450 million dollars. As the ACLU itself admitted in its annual report ending 2017, it received “unprecedented donations” after President Trump’s election. Unprecedented” it truly has been: the ACLU received $120 million dollars from online donations alone (up from $3-5 million during the Obama years).

The problem is that most of the money is not coming from civil libertarians who care about free speech, due process, the rights of the accused and defending the unpopular. It is coming from radical leftists in Hollywood, Silicon Valley and other areas not known for a deep commitment to civil liberties. To its everlasting disgrace, the ACLU is abandoning its mission in order to follow the money. It now spends millions of dollars on TV ads that are indistinguishable from left wing organizations, such as MoveOn, the Democratic National Committee and other partisan groups.

As the New Yorker reported on the ACLU’s “reinvention in the Trump era,”

“In this midterm year…as progressive groups have mushroomed and grown more active, and as liberal billionaires such as Howard Schultz and Tom Steyer have begun to imagine themselves as political heroes and eye Presidential runs, the A.C.L.U., itself newly flush, has begun to an active role in elections. The group has plans to spend more than twenty-five million dollars on races and ballot initiatives by [Midterm] Election Day, in November. Anthony Romero, the group’s executive director, told me, ‘It used to be that, when I had a referendum I really cared about, I could spend fifty thousand dollars.'”

This new strategy can be seen in many of the ACLU’s actions, which would have been inconceivable just a few years ago. The old ACLU would never have been silent when Michael Cohen’s office was raided by the FBI and his clients’ files seized; it would have yelled foul when students accused of sexual misconduct were tried by kangaroo courts; and it surely would have argued against a presumption of guilt regarding sexual allegations directed against a judicial nominee.

Everything the ACLU does today seems to be a function of its fundraising. To be sure, it must occasionally defend a Nazi, a white supremacist, or even a mainstream conservative. But that is not its priority these days, either financially or emotionally. Its heart and soul are in its wallet and checkbook. It is getting rich while civil liberties are suffering.

There appears to be a direct correlation between the ACLU’s fundraising and its priorities. When the ACLU’s national political director and former Democratic Party operative Faiz Shakir was asked why the ACLU got involved in the Kavanaugh confirmation fight, he freely admitted, “People have funded us and I think they expect a return.” Its funders applaud the result because many of these mega donors could not care less about genuine civil liberties or due process. What they care about are political results: more left-wing Democrats in Congress, fewer conservative justices on the Supreme Court and more money in the ACLU coffers.

When I served both on the National and Massachusetts Boards of the American Civil Liberties Union, board members included conservative Republicans, old line Brahmans, religious ministers, schoolteachers, labor union leaders and a range of ordinary folks who cared deeply about core civil liberties. The discussions were never partisan. They always focused on the Bill of Rights. There were considerable disagreements about whether various amendments covered the conduct at issue. But no one ever introduced the question of whether taking a position would help the Democrats or Republicans, liberals or conservatives, Jews or Catholics or any other identifiable group. We cared about applying the constitution fairly to everyone, without regard to the political consequences.

As the New Yorker described these more innocent times: the ACLU “… has been fastidiously nonpartisan, so prudish about any alliance with political power that its leadership, in the nineteen-eighties and nineties, declined even to give awards to like-minded legislators for fear that it might give the wrong impression.”

Those days are now gone. Instead we have a variant on the question my immigrant grandmother asked when I told her the Brooklyn Dodgers won the World Series in 1955: “Yeah, but, vuz it good or bad for the Jews?” My Grandmother was a strong advocate of identity politics: all she cared about was the Jews. That was 63 years ago. The questions being asked today by ACLU board members is: is it good or bad for the left, is it good or bad for Democrats, is it good or bad for women, is it good or bad for people of color, is it good or bad for gays?

These are reasonable questions to be asked by groups dedicated to the welfare of these groups but not by a group purportedly dedicated to civil liberties for all. A true civil libertarian transcends identity politics and cares about the civil liberties of one’s political enemies because he or she recognizes that this is the only way that civil liberties for everyone will be preserved.

Today, too few people are asking: Is it good or bad for civil liberties?

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Top defense officials said last week that the Pentagon intends to invest in domestic manufacturing to reduce it over-reliance on Chinese and other foreign-made parts in American weapons.

The Pentagon’s reliance on China is a major topic discussed in a new report about the overall status of the defense industrial base that President Trump is scheduled to release. Some other areas include “accelerating workforce development efforts to grow domestic science, technology, engineering, mathematics, and critical trade skills,” said Defense One.

“This assessment recognizes the global nature of our supply chain and really addresses the need for strengthening alliances and partnerships so that we can jointly address industrial base risk,” Ellon Lord, undersecretary for acquisition and sustainment, said Thursday evening during a press briefing at the Pentagon.

Pentagon officials are expected to ask Congress for additional funding for mitigating efforts in its fiscal 2020 budget request to Congress early next year.

“We already have existing industrial-base mitigation tools,” said Eric Chewning, the deputy assistant defense secretary for industrial policy, said during the briefing. “There’s already money available to address some of these challenges.”

According to Defense One, the new report says China is the only manufacturer of various chemicals needed in missiles and bombs, Europe and Japan are the only supplies of certain carbon fibers used in missiles, satellites, and rockets; Germany is the sole supplier of high-tech vacuum tubes for night vision goggles.

China is a major focal point in the report, mentioned more than 200 times, it seems US government agencies are rushing to halt weapon parts from the country. Some of the report’s findings and recommendations on reworking supply chains are considered classified because they describe vulnerabilities in US supply chains.

“I wouldn’t think of this just as an additional ask for money,” Chewning said. “We also need to be spending what we do more wisely. This isn’t just an investment fix. There’s legislative fixes, there’s policy fixes, there’s regulatory fixes. We need to be able to hit all of those levers.”

It is not that the Pentagon has not been investing in domestic manufacturing, he said. “Sometimes we’re just not spending money in the right way.”

Lord said the US defense industry supports roughly 2.4 million jobs and accounts for $865 billion “in annual industry output” and $143 billion in exports.

She said the report’s timing “is really excellent because it provides a site picture on industrial-base issues just as receive the [2019] budget that really allows us to address many of those issues.”

Hawk, Carlisle, president and CEO of the National Defense Industrial Association (NDIA), said the report indicates a “sobering picture” of the defense industrial base. NDIA was one of the trade groups that helped the Trump administration develop the report.

“Reliance on single producers within the supply chain, dependence on unstable or unfriendly foreign suppliers for critical components, and misplaced presumption of continued preeminence of American military superiority are examples of findings that should be immediately addressed,” Carlisle said in a statement.

The Aerospace Industries Association, another trade group that participated in the review, said: “Ultimately, while it is essential that the Administration focus on addressing the specific challenges facing the industrial base, none of the advancements in acquisition policy, key capabilities or workforce will matter without adequate DOD budgets.”

There are two bottlenecks that arise from the Pentagon wanting to rework their global supply chain network: first, it is costly, and second, it could lead to global trade disruptions.

Government officials have stated that DOD budgets would have to increase to rework supply chains to produce more domestic parts for weapons.

The need for more defense spending comes as the Trump administration has set a record for military expenditures in 2018.

Defense spending plus tax cuts have pushed the US budget deficit over the $1 trillion mark for next year. Already, the net supply of Treasury securities have doubled this year, to over $900 billion, and could rise to nearly $1.2 trillion in 2019.

Treasury auctions are now having difficulty digesting the new supply, as the 10-year yield has hit a seven-year high. More military spending to rework supply chains could add further Treasury supply and continue pushing yields higher. Record military spending with out of control deficit spending via the Trump administration could strangle the real economy with borrowing costs on the rise.

Reworking the Pentagon’s supply chains also come at a time when global openness has peaked, and the old economic order from a post World War II recovery to hyper-globalization has ended. As a result, supply chain disruptions tend to trigger a slowdown in global growth momentum.

The Pentagon is not alone in the attempt of reworking their supply chains. Many multinationals are digesting President Trump’s trade war that is causing much uncertainty and rewriting trade routes from country to country, due to tariffs.

The only reason the Pentagon would want to rewrite their supply chains and become less reliant on the rest of the world is that they see a war on the horizon. War tends to disrupt global trade, the US government is now preparing for conflict by securing its supply chains.

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Authored by David Dayen via The New Republic,

He could have been banished for securities fraud, but the government feared the consequences for Tesla’s shareholders…

Last Wednesday, Tesla CEO and chairman Elon Musk rejected a settlement with the Securities and Exchange Commission over claims he lied on Twitter about having “secured” funding to take the automaker private at $420 a share. Under the settlement, Musk and Tesla would’ve paid fines of tens of millions of dollars, Tesla would’ve added a couple of independent board members, Musk wouldn’t have had to admit guilt, and he would’ve lost his chairmanship for two years.

Three days later, Musk agreed to a settlement on mostly the same terms, only he’ll have to step down as chair for three years.

In between those 72 hours, the SEC filed a thoroughly detailed lawsuit against Musk showing that funding for a takeover offer was in no way secured. Musk “had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a ‘special purpose fund,’ and had not confirmed support of Tesla’s investors for a potential going-private transaction,” according to the suit.

The SEC determined that Musk made materially false statements, leading to significant run-ups in the stock price, which subsequently crashed when Musk backtracked. This is securities fraud, and the lawsuit sought a heavy penalty, prohibiting Musk from acting as a director or officer of any public company, permanently. But days later, the SEC reverted to nearly the same settlement Musk had turned down, with a slap-on-the-wrist fine, a little adult supervision from the board, and prescribed monitoring of his tweets (seriously).

If you have a CEO this dead to rights on securities fraud, why let him continue as CEO? According to the SEC, Musk was indispensable. In a statement, SEC Chair Jay Clayton said “holding individuals accountable is important and an effective means of deterrence,” but that he must take the interests of investors into account, and “the skills and support of certain individuals may be important to the future success of a company.”

This is mistaken and counter-productive – even dangerous. No one man or woman is or should be so vital to a company’s existence that they cannot be punished for wrongdoing. This is essentially the principle of too big to fail, brought into every corporate boardroom. If you have a reckless CEO who can’t be fired because it would hurt the company, then you don’t really have a company; you have a cult.

You could say that removing Musk’s chairmanship and giving him a boss represents some deterrent. But the SEC’s own actions are a hint to whoever becomes Tesla’s chair that Musk cannot be held fully accountable because he is too important to the company and its shareholders. The agency has tied the hands of the chairman – which, with enough support from the board of directors, could oust him – before the position is even filled.

How did we get to this cult of the CEO? It has grown in tandem with the shareholder value theory, the idea that companies operate solely to maximize stock returns. Shareholders are not the only ones with a stake in a company’s success: workers, communities, and the government all play a role. But if investors are the only stakeholders recognized, any disruption to a company, even if it might improve long-term performance, cannot be abided if it would drop the stock price. That means punishing a CEO for fraud is disallowed; or at least, the punishment must be balanced by an interest in keeping the stock stable, as in the SEC’s conception.

Then you have the media’s treatment of CEOs as masters of the universe who are singularly responsible for making companies grow. Steve Jobs was treated as such, but engineers built the iPod and iPhone, designers created its look, and marketers made it attractive to consumers. Thousands of people contributed to those products, not one guy in a turtleneck. Apple hasn’t shrunk into irrelevance after Jobs’s death because a successful company relies on more than a charismatic CEO and ineffable qualities like “leadership.”

The valorization of CEOs creates several distortions. First and perhaps most important, it fuels their obscene pay packages, which are 361 times the pay of the average worker at companies in the S&P 500. Second, it ascribes brilliance to their decision-making even when it’s lacking, and increases the potential for con artistry; the cult of the CEO is how we ended up with Theranos’ Elizabeth Holmes.

In the case of Musk, he’s now been given license to continue his recklessness. “Naughty by Nature,” he tweeted early Monday, after reaching the deal with the SEC on Saturday. Tesla’s stock jumped 17 percent on Monday.

Effectively immunizing risk-taking CEOs can hurt investors far more than it helps them. Under Musk, Tesla violated labor law by threatening worker stock options if they unionized. It has a mountain of debt as it burns through cash to reach production goals. To achieve this, Tesla built thousands of cars under a tent in the parking lot of its factory, with questionable quality control. Tesla’s drive to produce enough cars has led to unendurable parts and service delays; it can take weeks to get one of its cars fixed.

All these actions, potentially fatal to Tesla over the long term, are by-products of a single-minded, irresponsible CEO who views the law and product quality as a trifling interference on the road to profitability. It’s not good for investors to have someone with this mentality in charge. But Musk has inspired such a celebrity following that he’s inextricably linked with Tesla in the public consciousness, such that dislodging him for fraud was never seriously considered, it seems.

Extrapolate that out, and there are time-bomb CEOs scattered throughout the economy. This builds hubris into the corporate class and further severs the justice system in two, with one arrangement for the powerful and another for everyone else. It doesn’t create better products and stronger companies, just more entitled CEOs willing to set money on fire, harm workers and consumers, and laugh in the aftermath. Plus, it can make corporations fragile and introduce unnecessary risk. Losing a CEO should not create a panic, but when the CEO is a cult leader, it surely does. And that makes the stock market an incredibly hazardous place to invest money.

Regulators should hold corporate officers to the same set of rules as everyone else. This wouldn’t harm stock investments but strengthen them, forcing companies to focus on institutional capacity and selling good products and services at a fair price. The way to end the cult of the CEO is to treat workers and managers as equal contributors in corporations’ economic success.

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Associate Supreme Court Justice Elena Kagan said that the highest court in the land risks losing legitimacy without a centrist swing-vote, reports Bloomberg. 

In Friday comments made just hours after the US Senate cleared the way for USSC nominee Brett Kavanaugh’s confirmation, Kagan said that the court benefitted from having centrist Justices Sandra Day O’Connor and Anthony Kennedy over the past 30-plus years. 

The presence of O’Connor and Kennedy “enabled the court to look as though it was not owned by one side or another and was indeed impartial and neutral and fair,” Kagan said to an audience at Princeton University. “And it’s not so clear that, you know, I think going forward that sort of middle position — you know, it’s not so clear whether we’ll have it.”

She added: “All of us need to be aware of that, every single one of us and to realize how precious the court’s legitimacy is.” –Bloomberg

Of course, accusing a Supreme Court nominee of orchestrating a high school gang-rape scheme with zero evidence may also wear on the court’s legitimacy, but we digress. 

Kavanaugh’s ascension to the USSC will give the court a five-justice conservative bloc, led by Chief Justice John Roberts who will set the pace for how quickly the court will move on various matters. 

Without mentioning Kavanaugh by name, Kagan appeared with fellow Obama-appointed Justice Sonia Sotomayor – both Princeton graduates – where they sought to distance themselves from the political circus that has dominated Washington over Kavanaugh’s nomination. 

“We have to rise above partisanship in our personal relationships,” Sotomayor said. “We have to treat each other with respect and dignity and with a sense of amicability that the rest of the world doesn’t often share.“

Justice Elena Kagan: “In the last, really 30 years, starting with Justice O’Connor and continuing with Justice Kennedy, there has been a person who found the center or people couldn’t predict in that sort of way.” pic.twitter.com/7Yr78M3cke

— The Hill (@thehill) October 6, 2018

Kagan expanded on that, saying: “This is a really divided time, and part of the court’s strength and part of the court’s legitimacy depends on people not seeing the court in the way that people see the rest of the governing structures of this country.”

Kagan said the court needs to protect its institutional reputation by staying “somehow above the fray, even if not always and in every case. It’s an incredibly important thing for the court to guard.”

She said the justices can’t afford to hold grudges because they would lose the ability to persuade their colleagues in future cases. –Bloomberg

 “We live in this world where it’s just the nine of us,” Kagan added. “We are the consummate repeat players.“

Yes, we’re sure Kavanaugh won’t hold a grudge after his entire life’s work was reduced to unfounded and refuted claims of sexual assault 36 years ago. 

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At roughly the same time that China announced its latest 1% RRR cut, whose net liquidity injection would be roughly 750BN yuan, the PBOC reported that FX reserves decreased by US$23bn in September to $3.087Tn from $3.110TN after an $8bn drop in August. With consensus expecting a far more modest drop of only $500MM to $3.105TN, this was the biggest drop in Chinese reserves since February; to find a greater outflow one would need to go back all the way to December 2016.

Unlike in recent months when the value of the Yuan declined sharply, in September the currency valuation effect was quite modest, and according to Goldman calculations amounted to only -$2bn suggesting that capital outflows have returned, if at a modest pace for the time being.

Additionally the rise in US Treasury yields during the month might also have contributed to the reserves’ decline: In the official statement, SAFE said the rise in global yields was one factor for the decline in reserves. Based on historical observations, though, it is not clear to what extent reported FX reserve readings take into account asset price changes. As a reminder, the PBOC’s FX reserve report is viewed somewhat skeptically by the analyst community, and subsequently released – and more exhaustive – PBOC and SAFE flow data will give further information to gauge the underlying FX flow.

China’s reserve holdings, the world’s biggest, have so far exhibited modest fluctuations as capital controls remain in place and policy makers have taken measures to stabilize the falling currency. That said, amid a worsening trade-war outlook, negative sentiment around China’s economy and a surging U.S. dollar could yet test the nation’s defenses.

“China’s foreign-exchange reserves should decline given a stronger dollar and increasing depreciation pressures on the yuan, which could prompt the PBOC to intervene,” said Mizuho FX strategist Ken Cheung. “Also, capital outflows should be increasing due to mounting risks on China-U.S. trade war risks.”

And speaking of the depreciation pressure on the yuan, which today just increased again after the abovementioned required reserve ratio cut, with China returning form a week-long holiday its currency is bracing for renewed trade war – and rate shock – impact, and weakened in offshore trading to a new 7-week low as traders prepared for mainland markets to reopen.

The offshore yuan dropped as low at 6.9152, down -0.3%, after falling another 0.3% last week, and was approaching the lowest level since August 16 when it tumbled as low as 6.95 before recouping some losses.

As a reminder, the further the yuan drops the greater the offset to US import tariffs, and the more likely that the Trump administration will impose even greater sanctions in the future as it sees Chinese monetary policy as specifically targeted to undermine the impact of Trump’s trade war including manipulating its currency.

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Authored by Dani Grant and Nick Grossman via Union Square Ventures,

A common narrative in the Web 3.0 community is that we are in an infrastructure phase and the right thing to be working on right now is building out that infrastructure: better base chains, better interchain interoperability, better clients, wallets and browsers. The rationale is: first we need tools that make it easy to build and use apps that run on blockchains, and once we have those tools, then we can get started building those apps.

But when we talk to founders who are building infrastructure, we keep hearing that the biggest challenge for them is to get developers to build apps on top. Now if we are really in an infrastructure phase, why would that be?

Our hypothesis is that this is not actually how things play out. We are not in an infrastructure phase, but rather in another turn of the apps-infrastructure cycle. And in fact, the history of new technologies shows that apps beget infrastructure, not the other way around. It’s not that first we build all the infrastructure, and once we have the infrastructure we need, we begin to build apps. It’s exactly the opposite.

A big part of why this is even a topic of conversation is that everyone now knows that “platforms” are often the largest value opportunities (true for Facebook, Amazon/AWS, Twilio, etc.) — so there is naturally a rush to build a major platform that captures value.  This may be even more true in the distributed web where value often — but not always — accrues in the protocol layer rather than the applications that sit on top.

But, as we will see: platforms evolve from an iterative cycle of apps=>infrastructure=>apps=>infrastructure and are rarely built in an outside vacuum.

First, apps inspire infrastructure. Then that infrastructure enables new apps.

What we see in the sequence of events of major platform shifts is that first there is a breakout app, and then that breakout app inspires a phase where we build infrastructure that makes it easier to build similar apps, and infrastructure that allows the broad consumer adoption of those apps. Kind of like this:

Apps and infrastructure evolve in responsive cycles, not distinct, separate phases.

For example, light bulbs (the app) were invented before there was an electric grid (the infrastructure). You don’t need the electric grid to have light bulbs. But to have the broad consumer adoption of light bulbs, you do need the electric grid, so the breakout app that is the light bulb came first in 1879, and then was followed by the electric grid starting 1882. (The USV team book club is now reading The Last Days Of Night about the invention of the light bulb).

Another example: Planes (the app) were invented before there were airports (the infrastructure). You don’t need airports to have planes. But to have the broad consumer adoption of planes, you do need airports, so the breakout app that is an airplane came first in 1903, and inspired a phase where people built airlines in 1919, airports in 1928 and air traffic control in 1930 only after there were planes.

Sometimes all the infrastructure you need is a beach and some spare parts.

The same pattern follows with the internet. We start with the first apps: messaging (1970) and email (1972), which then inspire infrastructure that makes it easier to have broad consumer adoption of messaging and email: Ethernet (1973), TCP/IP (1973), and Internet Service Providers (1974). Then there is the next wave of apps, which are web portals (Prodigy in 1990, AOL in 1991), and web portals inspire us to build infrastructure (search engines and web browsers in the early 1990’s). Then there is the next wave of apps, which are early sites like Amazon.com in 1994, which leads to a phase where we build infrastructure like programming languages (PHP in 1994, Javascript and Java in 1995) that make it easier to build websites. Then there is the next wave of more complicated apps like Napster (1999), Pandora (2000), Gmail (2004) and Facebook (2004) which leads to infrastructure that makes it easier to build more complex apps (NGINX and Ruby on Rails in 2004, AWS in 2006). And the cycle continues.

We also see this pattern with our most recent iteration of mobile apps: first we had a suite of popular mobile apps that relied heavily on streaming video: Snapchat (2011), Periscope (2014), Meerkat (2015), and Instagram Stories (2016). And now, we are seeing companies building infrastructure that makes it easy for mobile apps to add video: Ziggeo (2014), Agora.io (2014), Mux (2017), Twilio Video API (2017), Cloudflare Stream (2018).

This cycle also correctly explains the sequence of events in Web 3.0. We start with the first breakout app: BTC (2008), on top of the Bitcoin network (as the first infrastructure), followed closely by Silk Road (2011) as the most infamous early crypto app. This inspires new infrastructure like Sidechains and Drivechain (2015), Ethereum Smart Contracts and ERC20 (2015), Lightning (2015) that make it easy to build new apps, and infrastructure like Coinbase (2012) and Metamask (2016) that enable consumer adoption of these new apps. This new infrastructure then enables the next wave of apps: tokens/ICOs (2017) and early dapps (Rouleth and vDice in 2016, CryptoKitties in 2017), which inspire new infrastructure: Infura (2016) and Web3js and Zeppelin (2017). We’re now waiting for the next big apps that will help guide the next wave of infrastructure.

The Adjacent Possible

The common theme in the development of each major platform (electricity, cars, planes, the web, mobile, etc.) is that we build what we can given the tools available to us at the moment.  In Where Do Good Ideas Come From, Steven Johnson refers to this as The Adjacent Possible.  In other words, you can open the door to the next room, but you can’t really skip steps and open the back door from the front porch.  It is hard to successfully build infrastructure that is too far ahead of the apps market.

Each time the apps => infrastructure cycle repeats, new apps are made possible because of the infrastructure that was built in the cycles before. For example, YouTube could be built in 2005 but not in 1995 because YouTube only makes sense after the deployment of infrastructure like broadband in the early 2000’s, which happened in the infrastructure phase following the first hit dot com sites like eBay, Amazon, AskJeeves and my favorite, Neopets.

Chris Dixon and Fred Wilson talk about this concept in a recent episode of the a16z podcast. Chris has a board game from the dot com era called Dot Bomb that makes fun of the silly dot coms of the late 1990’s. And what he points out is that all the ‘silly’ ideas of the dot com era are now the billion dollar unicorns. What is now possible several app => infrastructure cycles into the internet made no sense just one or two apps => infrastructure cycles in.

That is the crux of what we mean by the myth of the infrastructure phase — if we think about an “infrastructure phase” divorced from the apps that will use it, we run the risk of building too far ahead, in a speculative vacuum.  We need the cycle of apps=>infrastructure=>apps=>infrastructure to keep us honest.

As there are more and more cycles in each new platform it gets cheaper to build and use those apps. Building usv.com in 1995 would have cost us many orders of magnitude more than it would cost to build today, and creating Web 3.0 apps costs more in cash, effort and time today than it will 15 years from now.

Development Frameworks Versus Investing Frameworks

Putting our investor hats on for a second, it’s important to distinguish between technological frameworks that explain when something can be built, and investment frameworks that explain when something can be a good investment.

The apps=>infrastructure=>apps=>infrastructure cycle explains when apps or infrastructure can be built, but doesn’t necessarily explain when to invest in apps versus when when to invest in infrastructure.

Take light bulbs for example. Yes, they were invented before the grid, but looking at it from an investor perspective, no one sold a lot of lightbulbs until the grid was in place.

Wrapping Up

One question we had is: why is it that apps come first in the cycle, and not infrastructure first? One reason is that it doesn’t make sense to create infrastructure until there are apps asking you to solve their infrastructure problems. How do you know that the infrastructure you are building solves a real problem until you have app teams that you are solving for? It will be a challenge to build crypto infrastructure now until there is a breakout crypto app that other developers want to emulate and need better dev tools and infrastructure to do so.

There is a narrative in the crypto space that first we need to build great tools, and once we have the tools, then we can build apps. But what we hope to have shown is that in other platform shifts, we are able to build the first few apps before there are great tools (though it is more cash and time intensive), and then those early apps inspire us to build tools.  And the cycle repeats.

Happy building. 

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Update (10/5/18):  This post has gotten a lot of attention, has generated some great discussion, and has produced some useful feedback. 

First: duly noted that we spent most of our time here looking backwards at historical precedent, and thus that our diagram on the decentralized web / web3 / crypto was a) admittedly thin, and b) really just focused on the ETH ecosystem.  We have updated that diagram to be a little more clear, and to include important concepts from the BTC ecosystem.  Thanks to Dennis Porteaux for the excellent analysis on this.

Second: our favorite piece of feedback is that crytpo networks, in fact, really blur the line between apps an infrastructure, due their open and interopable nature. That is one of our favorite aspects of them.  So, for instance, an “app” (like CryptoKitties, or any smart contract, or Bitcoin itself) can be infrastructure if someone builds on it.  Of course, there are components of these networks that are **only** infrastructure (Lightning, Zeppelin, etc), but the line is blurred.  Whereas in the past a platform (like Amazon or Facebook) had to make a conscious decision to open up APIs and become a platform, crypto apps are generally open and interoperable from day 1.  This only makes the apps=>infrastructure=>apps=>infrastructure cycle tighter.  Thanks to Denis Nazarov and Jutta Steiner for really articulating this.

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It’s that time in the quarter again: starting next Friday, the big money center banks will report Q3 earnings, launching third quarter earnings season, which for the third consecutive quarter is expected to be stellar.

According to consensus, S&P 500 3Q EPS will grow by 21% Y/Y, which while a slight deceleration from the 24% and 26% earnings growth registered during 1Q and 2Q, will still be enough to extinguish fears for an imminent reversal in record corporate profitability.

Of note: both sales growth and tax reform contributed equally to first half EPS growth as revenues during the first two quarters rose by more than 10%, led by Energy (+108%) and Materials (+45%), according to Goldman. Meanwhile, Trump’s tax reform and the lower corporate tax rate accounted for 10% of earnings growth (excluding lower tax rates, EPS growth would have been 15% in 1Q and 17% in 2Q, still the fastest pace since 2011).

Commenting on what to expect during Q3 earnings season in his latest Weekly Kickstart note, Goldman’s David Kostin writes that the recent trend of double-digit revenue growth will continue with 11% sales growth in 3Q 2018.

Consensus expects that Energy (+31%) and Health Care (+19%) will provide the fastest sales growth at the sector level. Energy sales directly benefit from the rally in crude. WTI averaged $69 per barrel in 3Q, up 44% vs. last year. Information Technology is expected to grow 3Q revenues by a more modest 12% primarily due to the reclassification of GOOGL (consensus sales growth +23%) and FB (+34%) into Communications Services.

While Kostin notes that a key catalyst behind the upside surprise in first half earnings was the 200bps impact on EPS which was underestimated by Wall Street (and could represent a source of positive EPS surprise in 3Q), he notes that the ultimate driver of corporate sales growth is underlying economic activity.

As Fed Chair Powell stated in his speech this week to the National Association for Business Economics (NABE), the outlook is “remarkably positive.” In fact, the unemployment rate released this morning fell to 3.7%, the lowest level in 50 years. The National Federation of Independent Businesses (NFIB) survey stands at 108.8, the highest reading since the survey began 44 years ago. ISM non-manufacturing survey hit 61.6 this week, the highest level since the measure started in 1997.

And yet, as we gradually anniversary the base effect of tax cuts by the end of the year – at which point they will provide no new upside to earnings growth – a trio of new threats is emerging, all of which threaten to pull down profit margins in the coming year.

Kostin first previewed this danger last week, when he warned that the boost from tax reform will fade some time over the next 2 quarters, which will ratchet up pressure on corporate margins and most companies will suffer margin erosion as trade war ramps up. Meanwhile, firms with the ability to maintain or expand profit margins will become increasingly scarce and will likely be rewarded by investors. This is why Kostin introduced a list of 33 Russell 1000 companies with high and stable gross margins, which the Goldman strategist said would provide resilient to margin contraction as trade war escalated:

Fast forward to today, when Kostin doubles down on what he sees as the main threat to the bottom line, explaining that the primary investor concern going forward relates to downward pressure on profit margins from three sources:

1. tariffs,
2. wage inflation, and
3. interest rates.

And while Kostin believes that investors will be dissecting 3Q earnings calls for insights about how firms will address these issues, he makes the following three observations about the three big risks to corporate profitability:

1. “Tariffs will have minimal impact on 3Q results for most companies given the bulk of the levies were not imposed until late in the quarter.”

Still, affected firms will likely address concerns on their earnings calls. In fact, some firms have already discussed the potential impacts. For instance, MU reported that gross margins for upcoming quarters will be pressured by the imposition of the 10% tariff. Furthermore, the aggregate impact of tariffs on S&P 500 profits will depend on the specific rate and scope of products covered. Specifically, as Kostin explained last week, if a 25% tariff is placed on all imports from China, our estimate of 2019 S&P 500 EPS, currently $170, could fall as low as $159, eliminating all of Goldman’s expected earnings growth.

Here, firms with high and stable gross margins will be best positioned to withstand input cost inflation regardless of the cause.

2. “Labor costs will continue to rise and put downward pressure on the margins of many companies”

Kostin writes that while he was reflecting on the tight labor market, the head of one S&P 500 firm asked him, “how does one grow a company without labor?” The simple answer: firms will need to boost worker pay in order to fill positions. This is why the Goldman Sachs economics’ Wage Survey Leading Indicator currently stands at 3.3%, the highest level this cycle. Meanwhile, Kostin also writes that AMZN’s announcement of a $15 minimum wage for all US employees has spurred discussion of economy-wide wage inflation. And while this change will not impact the 3Q results of the S&P 500’s 2nd largest employer, “investors will be observing the responses from other firms.” Another risk: tight labor market will start weighing on small businesses; in the latest NFIB survey, one-third of respondents reported labor cost or labor quality as the single most important problem affecting their business.

To address client concerns about rising labor costs, Goldman has updated its list of firms with the highest (GSTHHLAB) and lowest (GSTHLLAB) implied labor cost as a share of revenue. “The intuition underlying our analysis is that companies with low labor cost exposure will have less risk from labor inflation, which would compress margins, lead to negative EPS revisions, and weigh on share prices.”

3. Higher interest rates will weigh on margins for many companies.

The final concern expressed by Goldman clients is that rising rates will add to further downside on profit margins. Sure enough, the topic of last week was the sharp spike in US rates when the ten-year US Treasury yields jumped to 3.24% stands at the highest level in seven years. As we reported last week, the 36 bp backup in rates during the past month represents a roughly 2 standard deviation move, a shift that Goldman’s research shows is typically associated with negative equity returns.

And despite the biggest two-day drop in equities since May, the S&P 500 index remains resilient and even though it slipped by 1% this week, it trades at virtually the same level today (2880) as one month ago (2888). Incidentally, Goldman’s year-end 2018 target remains 2850 and its year-end 2019 target is still 3000.

Not everyone will cross unharmed: rising yields will weigh on firms with the heaviest debt load, as higher rates flow through to higher interest costs. Here, Goldman recommends investors focus on stocks with the strongest balance sheets: “Relative to Weak Balance Sheet companies (GSTHWBAL), our Strong Balance Sheet basket (GSTHSBAL) offers faster sales growth, albeit at a higher P/E premium (22x vs. 15x).“

* * *

In conclusion, despite the mounting margin threats, Goldman remains sanguine, and its top-down earnings model forecasts S&P 500 net margins “will hover near current levels until 2020.”

We project margins will equal 11.0% in 2018 and 11.2% in 2019. In contrast, bottom-up consensus analyst estimates suggest margins will rise from 11.5% to 12.0%. The 80 bp gap in 2019 margin forecasts explains the $8 per share difference in our top-down EPS forecast of $170 and the bottom-up estimate of $178

While to some this baseline forecast may appear optimistic, there are numerous loopholes, the biggest of which is that should Trump place a 25% tariff on all Chinese imports – something which in light of recent trade, geopolitical and technological escalations appears to be inevitable – S&P profit growth will stall, and remain unchanged one year from today. As for how the market will respond, it may depend on China: should Beijing find itself it needs to sell more US-denominated reserves in order to support the Yuan, whether bonds or stocks as trade war intensifies, it is possible that a repeat of the near-bear market that took place in late 2016 will also be inevitable.

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