Category: zerohedge

Two weeks ago, in the aftermath of the February 5 volocaust, we quoted David Hunt, CEO of $1.2 trillion asset manager PGIM, who said ignore the volatility spike, the real financial timebomb was and remains public pensions: “if you were going to look for what’s the possible real crack in the financial architecture for the next crisis, rather than looking in the rearview mirror, pension funds would be on our list.” 

In a brief discussion wondering what municipalities and states will do when local tax revenues decline and unemployment worsens, Hunt said “we’re worried about those pension obligations.”

He is hardly alone: having reported over and over and over (and over, and over) again that public pensions are in deep trouble, two days ago none other than Steve Westly, former California controller and Calpers board member – manager of the largest public pension fund in the US, made an shocking warning:

“The pension crisis is inching closer by the day. CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon.”

The pension crisis is inching closer by the day. @CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon.https://t.co/RjThekwvNB

— Steve Westly (@SteveWestly) February 22, 2018

Westly was referring to an editorial  laying out “the essence” of California’s pension crisis, exposed last week when the $350 billion California Public Employees Retirement System (CalPERS) made a “relatively small change” in its amortization policy.

Specifically, the CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years. While this may not sound like much, the bottom line is that it would require the California state government and thousands of local government agencies and school districts “to ramp up their mandatory contributions to the huge trust fund.”

As author Dan Walters observes, with client agencies – cities, particularly – already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency, the new policy – which kicks in next year – will raise those payments even more.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

CalPERS, however, has no choice because as both Walters and Westly claim, America’s largest public pension fund itself is on the brink, “and the policy change is one of several steps it has taken to avoid a complete meltdown.”

As we have reported previously, the Calpers system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees. And that assumes it will hit an investment earnings target of 7%per year, that many authorities criticize as being too optimistic. 

Last In December we also reported that the increasingly panicked fund, decided to boost its stock allocation to 50% in order to raise its future liability discount rate to 7%, as any reduction in stock allocations would also lead to a lower discount rate which in turn which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. Amusingly, one Calpers board member argued to raise the equity allocation even higher, to 60%, so that the discount rate was greater than the current 7% in order to make the books appears “better.”

Ironically, it was just a decade ago that Calpers’ lofty equity allocation resulted in a staggering losses, and the current dead end. The trust fund lost about $100 billion in the Great Recession and never has fully recovered. In December 2016, Calpers voted to lower its earnings projection to 7.0% – it had been 7.5% – hoping to avoid another disaster were the economy to turn sour; since then it has been taking quiet steps to lever up its equity exposure once again.

Meanwhile, officials fear that were it to experience another big investment loss, it would pass a point of no return and never be able to pay for pension promises.

On the other hand, “protecting” CalPERS means getting more money from its client agencies, which could drive some of them into insolvency, as Hutchings said. This is not a hollow threat: three California cities have already gone bankrupt in recent years, in part because of their ever-increasing pension burdens, and payments have escalated sharply since then.

So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency.

That’s the crisis in a nutshell.

As Walters suggests, one way out would be to modify benefits in some way.

City officials, for instance, have suggested reducing automatic cost-of-living escalators in pensions over a certain mark, such as $100,000 a year.

However, the CalPERS board, dominated by public employee organizations and sympathetic politicians, has spurned such pleas: it is almost as if, once promised generous retirement benefits, public workers would rather take the entire system down, than see their own pensions reduced, even modestly.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

Alas, the options boild down to either taxpayers get the shaft, or public employees see their pensions reduced.

In the end, it will likely be the worst of both worlds, as taxpayers are dragged in to bailout CalPERS and other retirement funds, while retirees see huge cuts to their benefits. 

And the next market crash will likely catalyze it.

Meanwhile, everyone involved is waiting for the California state Supreme Court to rule on pending pension rights cases, and were it to overturn the so-called “California rule” that bars changes in benefits, it would open the door to pension modification.

CalPERS officials are also concerned that should it become insolvent, or pension payments force some cities into bankruptcy court, it would revive long-dormant plans for a statewide pension reform ballot measure.

* * *

As Walters concludes, “This crisis will haunt California for many years to come and will be a big headache for the next governor.”

Unfortunately, that is an optimistic outlook, because when the crisis really hits, it will be all American taxpayers who are on the hook to bail out the country’s insolvent pension funds. It is also then that some of the deepest fissures in US society: between public and private workers, between taxpayers and benefits recipients, between the young and old, all bubble to the surface at the same time, with very violent consequences.

via Zero Hedge http://ift.tt/2EQhCMa Tyler Durden

Metlife, Hertz, Delta, United and a host of other companies are severing their ties with the NRA its refusal to support another assault weapons ban following the shooting at Marjory Stoneman Douglas High School in Parkland, Fla. But in an unprecedented step first reported by Axios, Bank of America said in a statement that it’s reexamining relationships with clients who make AR-15s – the weapon that was used by shooter Nikolas Cruz to murder 16 of his teenage classmates and one adult.

Companies have been bowing to social-media pressure and pulling out of their business partnerships – a trend that started when the First National Bank of Omaha tweeted that it would not be renewing its contract to produce NRA-branded Visa cards. Social media users like Joe Scarborough have been researching which companies have partnerships with the NRA, then tweeting their disapproval, forcing the companies to remove details of their relationship from their websites.

 

Hey @FedEx, I’ve been a fan of your company from the start. Please do the right thing and stop supporting an organization that attacks America’s heroes who protect us from terror attacks. Please support our law enforcement officers so we can keep supporting you. 🇺🇸🇺🇸🇺🇸

— Joe Scarborough (@JoeNBC) February 24, 2018

 

As the Wall Street Journal reports, insurance giants Chubb Ltd. and Metlife, cybersecurity company Symantec Corp. and Enterprise Holdings – owner of the Alamo and National car-rental chains – have said publicly that they will end their partnerships with the NRA.

Companies are reacting partly in response to a social-media movement to pressure or boycott entities with NRA ties, energized by the emotional calls for gun-control action from survivors of the shooting rampage at Marjory Stoneman Douglas High School in Parkland, Fla., and students around the country. On Friday, the hashtag “#BoycottNRA” was among the top trends on Twitter nationally.

 

Many of the companies named above tweeted that they would be ending their business relationships with the NRA…

We have notified the NRA that we are ending the NRA’s rental car discount program with Hertz.

— Hertz (@Hertz) February 23, 2018

 

United is notifying the NRA that we will no longer offer a discounted rate to their annual meeting and we are asking that the NRA remove our information from their website.

— United Airlines (@united) February 24, 2018

 

Delta is reaching out to the NRA to let them know we will be ending their contract for discounted rates through our group travel program. We will be requesting that the NRA remove our information from their website.

— Delta (@Delta) February 24, 2018

 

We value all our customers but have decided to end our discount program with the NRA.

— MetLife (@MetLife) February 23, 2018

 

In the aftermath of the shooting, some gun-control advocates have pushed for financial institutions and credit card companies to take action independent of the Republican-controlled Congress, which has repeatedly balked on passing gun control in the wake of mass shootings. Advocates have called on credit card companies to stop processing purchases from gun shops, and for banks to put pressure on clients who manufacture powerful semiautomatic rifles with military features.

Now, Bank of America appears to be slowly moving in that direction, releasing a statement saying it’s in the process of engaging its gun manufacturer clients to “understand what they can contribute” to stop these mass shootings…

“We are joining other companies in our industry to examine what we can do to help end the tragedy of mass shootings, and an immediate step we’re taking is to engage the limited number of clients we have that manufacture assault weapons for non-military use to understand what they can contribute to this shared responsibility.”

The statement implies that BofA isn’t the only major US bank considering whether it should cut off its relationship with gun manufacturers.

According to Axios’ interpretation of the statement, BofA is evaluating whether these gun manufacturers fit with its responsible growth strategy.

Reading between the lines: This sounds like Bank of America thinks that servicing these manufacturers may not be consistent with its Responsible Growth strategy, which calls for “addressing the challenges of our time.”

Back in 2015, Bank of America and other banks backed away from coal miners because of the damage coal does to the environment.

* * *
Of course, not everybody believes banks should flex their muscles in such a restrictive way. As Mike Krieger pointed out earlier this week, preventing customers from buying guns with their credit cards would be a “deeply misguided” decision…

If we’re looking for some kind of national consensus, it appears to be centered around the view that mental health issues lie at the core of mass shooting events. Any bank CEO foolish enough to start a fight and ban customers from buying what they want to legally purchase could very quickly regret it. Moreover, irrespective of your stance on the issue, it’s dangerous and irresponsible to call for shadow public policy by crooked mega banks.

What do you think? Are these companies overreacting? Or are they doing the responsible thing by listening to their customers and shareholders?

via Zero Hedge http://ift.tt/2FsRxQ7 Tyler Durden

Authored by Patrick Watson via MauldinEconomics.com,

Did the recent 10% drop in the stock market bother you? Let me take a wild guess: it’s because you have money in stocks. No one likes seeing their net worth decline.

You might feel comforted that we’re all in this together. Don’t be… because we’re not. Roughly half of all American households don’t own stocks.

Hence, it’s a mistake to think the stock market’s health says much about the nation’s economic health. The nation is its people, and many had little to celebrate even before the stock market dropped.

Investors ignore that fact at their own peril.

Photo: Getty Images

Zero Exposure

So who does own stocks? It’s a surprisingly tricky question, since we have so many ownership structures and pooled investment vehicles. You have to drill through the layers to find the ultimate owners.

The first surprise: A big slice of the US stock market isn’t American at all. Foreigners own about 35% of US stocks by value—and their ownership grew considerably over the last few decades.

Image: taxnotes.com

Some of these foreign shareholders are wealthy individuals, others are corporations or investment funds. They own far more of our stock market than ordinary Americans do.

About half of US households have zero exposure to the stock market: no stocks, no mutual funds, no 401(k), no IRA, nothing.

According to research by New York University economist Edward Wolff, some 84% of the stocks owned by Americans belong to the wealthiest 10% of households.

Subtract that 10%, and subtract the 50% who own no stocks, the remaining 40% of Americans split about 15% of the stock market. For many, their investment is negligible—maybe a few hundred dollars in an old 401(k). Others have a big part of their net worth tied up in stocks. Maybe you’re in that group.

But a solid majority of the American population feels no direct impact from stock market performance.

The inverse is different. Long-term stock market performance depends heavily on the US population’s economic health. Stocks are businesses that need customers, so how are the customers doing?

Everybody Isn’t Average

Expected wage growth is contributing to the stock market’s recent weakness. People think it signals inflation, which will raise interest rates and make stocks less attractive to yield-seeking investors.

The latest data do indeed show average wages up slightly. But as we’ve seen, “average” is not the same as “everybody.” My friend Michael Lebowitz published some good charts on this and other consumer issues last week.

The government’s average wage growth numbers include both workers and supervisors. Looking at them separately shows a whole different picture since the last recession.

Image: realinvestmentadvice.com

Since 2008, average wage growth for workers, some 80% of the total, has trended lower even as supervisor wage growth trended higher.

That means rising wages haven’t been evenly distributed. The top one-fifth are getting almost all the wage growth while the bottom four-fifths see flat or declining wage growth.

If your business plan depends on more consumers having more money to spend, this is a problem. Yes, some consumers are enjoying wage growth, but most are not.

Where else might people draw spending money? They can take it out of savings if they have any. But that’s getting harder too.

Image: realinvestmentadvice.com

Inflation-adjusted savings as a percentage of disposable income have been dropping since the 1970s. They bounced in the last recession but fell again after it ended. Now savings are near an all-time 2% low.

Note, this data includes wealthy people whose saving ability is much higher than average. So there’s a large group of lower-income people whose savings are already well below 2% of their disposable income.

If you can’t increase your spending with higher wages or pull cash out of savings, the only other option is debt. That usually means credit cards. Here, we finally see some growth.

Image: realinvestmentadvice.com

Americans presently carry about $765 billion in credit card debt. That represents money already spent to buy goods and services.

Comparing that debt to the average disposable personal income, we find the typical American carries credit card balances equal to about 6% of DPI. That number jumped sharply in the last recession but never came back down. It’s kept growing, although at a slower rate.

So the average American’s credit card balance, as a percentage of disposable income, is more than twice as much as his or her savings.

Combined with flat or declining wage growth for most workers, does this look like a population poised to go on a spending spree? I don’t think so.

And it doesn’t seem all that positive for most stocks.

Photo: Getty Images

Balance

We’ve seen tremendous stock market growth in the last decade, but consumer income growth has been much less impressive. Can this continue?

For a while, yes. Just look at China, where a booming stock market has coexisted with a vast, impoverished interior for years.

But even China probably can’t do it indefinitely. On a long enough time horizon, a nation’s stock market reflects its consumer economy. Production and consumption must balance.

The US stock market has grown faster than the economy, by a wide margin. That can’t go on forever. The scale will correct at some point – probably by swinging the other way, with the economy growing faster than stocks for an extended time. That part of the cycle won’t be fun for stock investors.

Are we there yet?

No one knows… but it’s fair to say we are getting closer.

*  *  *

Before I go, I want to mention the current issue of Macro Growth & Income Alert because it sort of ties in with what I just talked about. In it, my colleague Robert Ross and I are discussing a phenomenon related to the Great Recession. The Millennials, many of whom came of age in that period of economic scarcity, have been negatively affecting a certain sector due to their cautious approach.

But that trend is now reversing, and we’re right in there with a recommendation of a company that has maximum exposure to the Millennial market in its sector. I suggest you give our service a risk-free try. You have 90 days to see if it’s right for you—if not, simply cancel and get all your money back.

Click here to get your own free Connecting the Dots subscription. You can also follow me on Twitter: @PatrickW.

via Zero Hedge http://ift.tt/2CFQIR6 Tyler Durden

President Trump confirmed on Friday that he would support stricter firearms regulations, including a proposal to strengthen the federal background check system and raising the minimum age for buying a semi-automatic weapon to 21 – something the powerful National Rifle Association has said it opposes.

Trump also reiterated his support for training members of school staffs to carry concealed weapons:

“A teacher would have shot the hell out of him before he knew what happened,”

But, as Bloomberg reports, The White House is considering the idea of using restraining orders to take firearms away from people considered “dangerous” as part of its response to last week’s massacre at a Florida high school, two people familiar with the matter said.

Under extreme risk protection orders, which are also known as red flag laws or gun violence restraining orders, firearms can be confiscated from people found to be at risk.

As The New Yorks Times reports, it is difficult to measure the effectiveness of red flag laws, in part because it is impossible to count mass shootings, or other tragedies, that were avoided.

That said, the authorities in states with the laws, including Connecticut, Indiana, Oregon and Washington, say they have seen patterns: upticks in the use of such laws after mass shootings in other places.

The measures were also used in situations far different from the mass shooting scenarios they were originally conceived to prevent. Most often, guns were removed from people not seen as threats to large groups or public gatherings, but as risks to themselves or to their families, or suffering from debilitating illnesses such as Alzheimer’s or alcoholism.

Bloomberg confirms that The White House is studying an Indiana version of the law, and is considering other measures as well, according to the people, who requested anonymity to discuss policy deliberations. Four other states also have such laws.

At the White House on Thursday, Florida Attorney General Pam Bondi described to President Donald Trump similar efforts underway in her state to allow law enforcement to seize firearms from someone who is deemed to be a danger to themselves or others.

“Good,” Trump responded.

Which raises yet another troubling question for the many law-abiding citizens of America – who defines “dangerous”?

What happens if – just as The IRS did – Tea-Party followers were deemed dangerous by the government?

What if someone who retweeted (accidentally as a ‘useful idiot’) an anarchy-inducing Russian bot’s propaganda? Would they be dangerous, too?

Or if someone openly threatened – or called for – the death of the president?

“It’s fair to say that everyone, law enforcement included, is learning how this law might work — in the process of using it,” said Garen Wintemute, a professor of emergency medicine and director of the Violence Prevention Research Program at the Sacramento campus of the University of California, Davis.

 

via Zero Hedge http://ift.tt/2oo5846 Tyler Durden

Nigel Farage, the former leader of the UK Independence Party and current MEP for Southeast England, shared some jokes about his purported “Russia connections” with the crowd at CPAC on Friday – confessing that, though rumors of his involvement as a go-between for Vladimir Putin, Donald Trump and Julian Assange are overblown – he has been known to enjoy a swig of Russian vodka from time to time.

Farage, a notoriously heavy drinker, said he’s never been to Russia or Moscow, and has never – to his knowledge, we presume – met a Russian agent, or done any business in Russia.

“I’ve never been to Russia. I’ve never been to Moscow. I’ve never met a Russian operative or agent. I’ve never done business in Russia. I’ve never taken money from Russia….but I may be guilty of drinking the odd Russian vodka,” Farage said.

The reputed father of the Brexit movement was responding reports that he was a “person of interest to the FBI…”

…And marveled at conspiracy theories linking him to the Kremlin and its purported attempts to “sow discord” and “undermine US democracy.”

“I’ve read that actually I’m the center of an international spider’s web,” Farage added. “I’m the one person connecting Trump, Putin and Julian Assange. I’ve been running memory sticks back and forth, from the White House to the Kremlin, to Assange.”

On Thursday, Farage mocked certain “newspapers in America and the UK” who “say I colluded with the Russians” during an interview with Fox News.

 

via Zero Hedge http://ift.tt/2FutTmD Tyler Durden

Last week we reported that as part of a rapidly deteriorating banking crisis in Latvia, which culminated with the detention of central bank head Ilmars Rimsevics on suspicion of accepting a bribe of more than €100,000 (which prompted both the prime minister and president to demand his resignation, something he has so far refused to do), the European Central Bank froze all payments by Latvia’s largest private bank, ABLV, following U.S. accusations the bank laundered billions in illicit funds, including for companies connected to North Korea’s banned ballistic-missile program.

Then overnight the Latvian banking crisis escalated when in a statement released early Saturday, the ECB said ABLV Bank’s liquidity had deteriorated significantly, making it unlikely to pay its debts and declaring it “failing or likely to fail.” As a result, Latvia’s third largest bank will be wound up under local laws after the European Central Bank

Following the ECB’s decision, which also included the bank’s subsidiary in Luxembourg, the WSJ reported that Europe’s banking resolution authority decided the banks didn’t represent a systemic risk for their countries or the region and should be wound up by local authorities rather than be “bailed in” under EU rules.

And so, on Saturday ABLV said it would be liquidated. In four days, the bank claimed, it had raised enough capital to meet all its depositors’ demands and keep functioning, however “Due to political considerations the bank was not given a chance to do it,” it said in a statement.

As we discussed previously, ABLV’s fall follows a move by the U.S. Treasury last week to block its access to U.S. dollars, accusing it of “institutionalized money laundering.” It said most of the bank’s customers were shell companies registered outside Latvia. ABLV said it isn’t guilty of money laundering and has invested heavily in compliance systems. It was not enough.

The speed of ABLV’s collapse has been breathtaking: It started less than two weeks ago, when on February 13 the U.S. Treasury declared the bank’s practices a form of money laundering. Latvia’s third biggest bank had long been a lead player in an industry that has been a boom for the former Soviet state: helping shell companies in and around Russia bring their money into the European Union.

The collapse is bad news for the bank’s larger depositors: Under European bail-in rules, shareholders, creditors and depositors of more than €100,000 would be in line for losses before taxpayers were called to help the bank. Deposits of as much as €100,000 are protected under Latvian and Luxembourg laws.

The resolution authority “concurred with the ECB’s assessment and concluded that there are no available supervisory or private sector measures which could prevent the failure of the banks,” it said in a separate statement.

It is unclear how many depositors will be hurt by the bail-in.

The blitz-collapse has prompted fears of a bank run, amid growing uncertainty if other local banks are also under the US microscope, coupled with the apparent disorganized chaos by local authorities.

On Friday, Latvia’s chief banking regulator tried to assure the country’s depositors that ABLV posed no risk to the system and was on track to receive as much as €480 million in emergency aid from the national central bank.

That did not happen, as the ECB’s statement confirms the bank did not receive the aid. In other words, in hopes of preventing a bank run, the local regulator lied to Latvian depositors who at least had a chance to remove any savings that were above the insured threshold.

They won’t have that option now, and depositors at other banks may decide they don’t want to wait and see if they will suffer a similar fate.

European regulators have repeatedly flagged risks about Latvian banks’ heavy exposure to nonresident account holders. Still, it was the U.S. Treasury that brought the issue into the open.

And now, five years after the Cyprus bail-ins, we look forward to learning which Latvian, Russian and/or Ukrainian oligarchs saw most of their savings vaporize overnight.

via Zero Hedge http://ift.tt/2CF9Crp Tyler Durden

Authored by Peter Cook via RealInvestmentAdvice.com,

“Peter Cook is the author of the‘Is That True?’ series of articles, which help explain the many statements and theories circulating in the mainstream financial media often presented as “truths.” The motives and psychology of market participants, which drives the difference between truth and partial-truth, are explored.”

Summing up the current conventional wisdom:

1. Global GDP growth has bottomed and is accelerating systematically higher,

2. Which will cause the inflation rate to accelerate higher.

3. Bond markets hate higher inflation, so interest rates have bottomed and will move even higher.

4. The stock market, dependent on low rates for high valuations, will fall if rates move higher,

5. Which is why the stock market peaked on January 26, 2018, and then declined dramatically,

6. Ushering in an era of systematically higher volatility

In this article, we will investigate the data behind the first three assertions related to GDP growth, inflation, and the bond market and offer explanations that differ from the conventional wisdom. Next Friday, we will continue this theme with a discussion of the following three assertions.

1. Global GDP Growth Is Accelerating

Unless GDP can be exported from another planet to Earth, the main drivers of global GDP growth are in four large economic zones.  Here are the past 30 years of GDP growth in the U.S……

The past ten years in China……

The past 20 years in Europe…..

and Japan.

In summary, each of the main economic zones are growing at lower rates than they did 10-20 years ago.  While they are each trending slightly higher after bouncing off recent troughs in early 2016, all are well within a range established since the Global Financial Crisis (GFC).

To believe that global GDP growth will move systematically higher in coming years, you need to believe that something fundamental has changed to produce higher economic growth.  You would also need to believe that cures have been found to reverse the two secular constraints that are primarily responsible for the slow-growth, low inflation environment in each of these regions, which are:

• High and increasing indebtedness
• Rapidly-aging populations

The first bullet point was documented in a 2012 study Rinehart and Rogoff, in which they observed an association between government with high debt-to-GDP ratios (90%+) and subsequent period of slower GDP growth.  Most people can grasp the idea that excessive debt constrains their ability to spend in the future. It is no different for a government in the long run.

The second bullet point is intuitive because of declining spending patterns as people age.  The concept is most clearly demonstrated by the economic performance of Japan over the past 20 years, but many other countries (China, US, and many European countries) are on this same path.  But a deep dive into each of these issues is beyond the scope of this article

2. Rising Inflation

Below is the chart of US annual inflation rate since the mid-1990s’ during which time it has fluctuated between 1.0% and 2.4%, and is currently at 1.5%.  Nothing significant seems to have changed here.

Business leaders don’t sense an imminent change in inflation in the next 12 months either.  Their expectations have ranged between 1.7% and 2.1% over the past year.

Consumers don’t seem too worried about a rise in inflation either.  The current expectation is a little below 3%, which is near the average of the past 20 years, in addition to being consistent with the past several years.

Sticking with the theme of the consumer, real income in the US has risen in recent years, and is near the top of the range of -3% to +4% which has existed over the past 20 years.  Could this be inflationary?

It depends.  Consumers aren’t doing anything out of the ordinary compared to the recent or distant past, as the annual growth in retail sales is stuck in the middle of the range of the past few years.

If anything, it is possible that the spike higher in retail sales during Q4 2017 was caused by rebuilding activity after the Florida hurricane and Texas hurricane/flooding events in early September as well as holiday-related spending.  If so, that blip is beginning to reverse, as shown by the most recent retail sales data.

3. Bond Market Reaction

Summing up the data presented so far, neither global GDP growth nor US inflation are systematically higher, and to believe they will rise sharply out of the range of the past 10-20 years, you would have to believe that GDP growth and inflation will overcome the two main constraints on economic growth, which are a high and rising debt burden, and an aging population.

So why would interest rates be moving higher over the past couple of months, and why would there be so much noise about that fact in the financial media?  We can think of two alternative explanations.

The first explanation is behavioral, meaning that it is rooted in how and why humans act and interact in markets, a subject of focus for the authors of the Epsilon Theory articles.  The chart below shows the history of the 10-year Treasury bond yield over the past 140 years.

Source:  multpl.com

Imagine the professional competition to predict the peak in interest rates in the early 1980s.  To win that competition, you would have somehow had to keep quiet (and keep your job) while rates rose from 7% to 15%, and then had to become a very lonely bull among a legion of bears at the precise peak in rates or shortly thereafter.  Today, very few remember the even fewer number of bulls that precisely called the peak in interest rates.

In beautiful symmetry, today the professional competition to predict the bottom in interest rates is fierce.  To accomplish that feat, you could not have previously called a bottom in rates, because you only get one shot to be correct.  A prediction of an inflection point in interest rates won’t arise out of an Ouija board; solid logic and data will be used to justify the prediction.  But ultimately, those reasonable justifications could be hiding a different motivation, which is the fame that would accrue from calling the inflection point after multi-decade bull market in bonds.  Because the inflection points are so rare, most careers come and go without the opportunity to predict a sea change, so it is understandable why some would be tempted.

But it is also extremely important to understand that a prediction, or new theory, may change the mainstream narrative but it does not change underlying reality, a consistent theme in this series of articles.  In this case, forecasts of higher GDP growth and inflation don’t make actual GDP and inflation rise, a lesson that should have been learned over the past decade.  Instead, economic events will happily come and go regardless of who or how many financial market observers call for an inflection point in GDP growth, inflation, and interest rates.

Viewed from this perspective, it is easy to envision a scenario in which rise in rates during the first half of 2018 and is followed by yet another lurch lower in the second half of 2018 when the expected rises in GDP growth and inflation do not materialize. Recent fund flow data supports the potential for a change in view (and price/yield), because a record short position has been amassed in bonds, as shown below.

A second explanation for the recent spurt higher in rates is rooted in fundamental analysis.  It is certainly true that budget deficits are rising.  The argument is that increased supply of government bonds will force interest rates higher.  That was the same argument used in the early 1980s when the Reagan tax cuts took effect, yet interest rates continued to fall.  Similar predictions on the inevitability of rising rates were made in the wake of the Bush tax cuts of 2003, yet interest rates continued to fall.  Obviously, larger forces than a supply/demand imbalance were dominant during those periods.

But there is one crucial difference in the economic environment today that didn’t exist in the early 1980s or 2003, as shown below.

 

In coming months and years, the US government is going to test its ability to issue additional debt in ways it didn’t in the 1980s or 2003, because its debt-to-GDP ratio is greater than 100%, which is 3x what it was in 1980 and roughly 2x what it was in 2003.  Layering even more uncertainty on the supply/demand imbalance is the fact that the Fed is unwinding its massive QE program.  That is, an unparalleled monetary experiment is occurring at the same time as an unprecedented borrowing experiment with a high debt-to-GDP ratio.

So the recent rise in interest rates may not be a market prediction of higher GDP growth and inflation.  Instead, the rise in rates could be a recognition of the unprecedented twin experiments.  If so, we could actually be witnessing the nascent signs of credit risk in the US Treasury market.

Financial textbooks have ruled out the possibility of credit risk embedded into US Treasury yields.  After all, the US Treasury rate is the well-known “risk-free rate” on which all of modern financial theory is grounded.  However, we repeat that the existence of a theory doesn’t change the way the world works in reality.  Sometimes prevailing theories must change, especially when radical changes are afoot, including the existence of the enormous ($50-100 trillion) unfunded liabilities of Medicare and Social Security.  Take another look at the chart of the US debt-to-GDP ratio, and see if the term “credit risk” doesn’t come to mind, even if it will never come to mind while reading a financial textbook.

Further, in another Rinehart and Rogoff study, “This Time Is Different: Eight Centuries of Financial Folly,” sharply rising housing prices and large capital inflows (to finance large trade deficits) tend to occur prior to financial crises.  Those two conditions were present before 2008, and they are present again in 2018.  As the title suggests, the authors also cite the tendency of leading thinkers who fail to learn the lessons of history, and who dismiss serious risks as irrelevant to their era.

Finally, many financial analysts have been perplexed by the anomalies that European sovereign bonds issued by countries such as Portugal, and even European junk bonds, are trading at yields lower than US Treasury bonds.  This is particularly odd given that the US issues bonds denominated in US dollars, the reserve currency, which should require a lower yield.   While it is impossible to state that credit risk is the sole reason for these observed anomalies, these are the types of anomalies you would expect to see if credit risk was beginning to creep into US Treasury prices.

Conclusions

It is possible that the mainstream narrative is correct and that the recent rise in rates is foreshadowing a future of higher GDP growth and inflation.  If so, then markets are discounting a future not yet seen, which is how market sometimes operate.  But sometimes they don’t.  The current levels of GDP growth and inflation are well within their recent ranges, and those recent ranges are lower than they were 10-20 years ago.  More importantly, the underlying problems of high debt levels and aging demographics will continue to constrain the potential for GDP growth and inflation to systematically rise, which are the main reasons that interest rates have persistently declined over the past several decades.  Predicting a regime change to much higher GDP growth, and hence higher inflation, could simply be a case of looking for, and then seeing, something that isn’t there.

Instead, there are two alternative explanations for the recent rise in US Treasury rates.

One is the inevitable temptation of high-profile investors to burnish their professional reputations by “calling the bottom” in rates, which has the power to change the narrative (and prices) in financial markets but it doesn’t have the power to change underlying economic reality.  That is, if high-profile investors put their money where their mouths are, it will affect prices in financial markets, which will affect the perception of other investors, who may tag along with similar strategies.  But there is a short shelf life for that type of process because economic reality will eventually unfold, revealing whether the forecasts of high-profile investors are correct.  As unlikely as it seems now, it is quite possible that they won’t be correct, and that slow GDP growth and low inflation are here to stay awhile longer.  Or, given the length of the tepid economic expansion and high indebtedness, it is even possible that recession arrives prior to the visions of a systematic rise in GDP growth and inflation.  That is one of the implications of the Rinehart and Rogoff study.

Another explanation for rising rates is the emergence of credit risk in US Treasury bonds, the result of the simultaneous and unprecedented experiments of monetary policy (unwind of QE) and fiscal policy (a borrowing binge with a high debt-to-GDP ratio).  The concept of credit risk in US Treasury prices is outlawed in financial theory.  But other aspects of today’s financial landscape, such as negative interest rates or European junk bonds trading at lower yields than US Treasury bonds, also weren’t supposed to occur and cannot be explained by orthodox financial theories.  Theories can change how we observe facts, but they can’t change the facts.

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The Trump administration is coordinating with key Asian allies to crack down on ships suspected of violating sanctions imposed on North Korea, Reuters reports.

The joint effort between the U.S. Coast Guard and regional partners including Japan, South Korea, Australia and Singapore, would go further than ever before to physically block deliveries of banned weapons, components for its nuclear missile program and other prohibited cargo. Suspected violators could be targeted on the high seas or in the territorial waters of countries which cooperate with the coalition. Up to now, suspect ships have been intercepted on a far more limited basis. 

Depending on the scale of the campaign, the U.S. might even devote a portion of air and naval power from the Pacific Command – though the plan would stop short of a full naval blockade according to officials who spoke on condition of anonymity.

While suspect ships have been intercepted before, the emerging strategy would expand the scope of such operations but stop short of imposing a naval blockade on North Korea. Pyongyang has warned it would consider a blockade an act of war. –Reuters

North Korea is suspected of being just a few months away from having an ICBM capable of hitting the U.S. mainland, a program which has continued despite heavy sanctions which have been sidestepped by smuggling and ship-to-ship transfers of banned goods. 

“There is no doubt we all have to do more, short of direct military action, to show (North Korean leader) Kim Jong Un we mean business,” said a senior administration official.

Dozens of countries and vessels linked to North Korean shipping trade were slapped with fresh sanctions by Washington Friday, while the U.S. urged the United Nations to blacklist entities known or believed to be smuggling prohibited cargo in or out of North Korea. 

“Today’s actions will significantly hinder North Korea’s ability to conduct evasive maritime activities that facilitate illicit coal and fuel transports,” Treasury Secretary Steve Mnuchin told reporters on Friday. “And limit the regime’s ability to ship goods through international waters.”

“Those who trade with North Korea do so at their own peril,” added Mnuchin. “The United States will leverage our economic strength to enforce President Trump’s directive that any company that chooses to help fund North Korea’s nuclear and ballistic missile programs will not be allowed to do business with anyone in the United States.”

“While we appreciate the fact that there haven’t been [recent nuclear] tests, that’s not exactly a terrific standard of what we’re applying,” Mnuchin said. “Whether they’re Russian ships, whether they’re Chinese ships, we don’t care whose ships they are. If we have intelligence that people are doing things, we will put sanctions on them.”

That said, some are concerned that the tougher measures may stoke tensions amid a tense period of diplomacy between nations. 

Tighter sanctions plus a more assertive approach at sea could dial up tensions at a time when fragile diplomacy between North and South Korea has gained momentum. It would also stretch U.S. military resources needed elsewhere, possibly incur massive new costs and fuel misgivings among some countries in the region.

Stoking tensions

Concerns have been raised that more aggressive enforcement of sanctions would trigger a military retaliation by North Korea, and a rebuke by U.N. members opposed to the coalition. 

China and Russia, which have blocked U.S. efforts at the United Nations to win approval for use of force in North Korea interdiction operations, are likely to oppose new actions if they see the United States as overstepping. A Chinese official, speaking on condition of anonymity, said such steps should only be taken under United Nations auspices.

Meanwhile, U.S. legal experts are analyzing the best approach to legally initiate the program, citing the most recent U.N. Security Council resolution calling for states to inspect ships on the open seas or in territorial waters. Rules of engagement are also being mapped out to avoid armed confrontation at sea, said officials. Directly boarding ships for inspections has not been ruled out, according to Mnuchin.

QUESTION: Can you rule out the United States boarding and inspecting North Korean ships…

(CROSSTALK)

MNUCHIN: No, I — I cannot rule that out.

U.S. officials, however, have privately said that such actions – especially the use of boarding crews, would be considered with the utmost caution on a case-by-case basis. Others have suggested that the use of less militarily powerful Coast Guard cutters would reduce the chance of military conflict over the use of warships. 

[insert: rId12_image2.jpg ]

In December we reported that Russian tankers were reportedly caught selling oil to North Korea on at least three occasions via transferring cargoes at sea during October and November. 

“The vessels are smuggling Russian fuel from Russian Far Eastern ports to North Korea,” said the first security source, who spoke on condition of anonymity. –Reuters

China, meanwhile, was allegedly caught by U.S. spy satellites selling oil to North Korea in October.

[insert: china ships refueling north korea.jpg ]

A government source said, “We need to focus on the fact that the illicit trade started after a UN Security Council resolution in September drastically capped North Korea’s imports of refined petroleum products.”  Meanwhile, on paper, China’s trade with North Korea virtually collapsed after Donald Trump unleashed a barrage of sanctions in September targeting North Korea’s imports of refined petroleum products.

The US. Treasury Department sanctioned an additional six North Korean shipping and trading companies and 20 of their ships after the satellite pictures surfaced. In the above picture, the North Korean ship named Ryesonggang 1, was easily identified and connected to the illegal sale of oil from China.

Interdiction in Chinese waters is something likely to be avoided, however – as the U.S. will likely inform Chinese authorities of banned cargo transfers and ask them to perform inspections, one official said. 

David Shear, former deputy secretary of defense for Asia for the Obama administration said “It’s probably impossible to stop everything, but you can raise the cost to North Korea.”

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In its latest annual letter, released at 8am on Saturday, Warren Buffett’s Berkshire Hathaway said Q4 profit hit an all time high, rising more than five time, as net income soared to a record $32.44 billion, or $19.790 a share, from $6.29 billion, or $3.823 the prior year, while operating EPS fell 24% to $3,338, hurt by losses in the company’s insurance operations, however it was enough to beat the $2,617 consensus estimate.

For the full year, Berkshire earned $44.940 billion, up 87% last year’s $24.1 billion, despite “only” an 8% increase in total revenue to $242.1 billion. Where did the delta come from? Largely from Trump’s tax reform, which needless to say Berkshire was not a big fan of.

As Berkshire admits in its annual report, while the gain in net worth during 2017 was $65.3 billion – which increased the per-share book value of both our Class A and Class B stock by 23% –  $29.11 billion of its net income to the reduction of the U.S. corporate tax rate, to 21 percent from 35 percent.

As Buffett admits in starting the letter, “the format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire.”

The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code attributed roughly $29.11 billion of its net income to the reduction of the U.S. corporate tax rate, to 21 percent from 35 percent, that President Donald Trump signed into law in December.”

Next, on the increasingly sensitive topic of Berkshire’s mounting cash pile – which as discussed yesterday is invested mostly in Treasury bills – it grew to $116 billion at year-end, up from $109 billion in the third quarter.

* * *

First a few thoughts on what was not discussed in the letter: the most notable omission appears to be the lack of succession discussion – which is particularly notable given yesterday’s news that Buffett would retire from the board of Kraft Heinz.

Last month, Buffett elevated Ajit Jain and Greg Abel – the two most likely candidates to succeed Buffett and Charlie Munger atop the Berkshire Hathaway hierarchy – to vice chairmen, which the financial press widely interpreted as a signal that Buffett was toying with retirement.

Other things missing: any discussion on Wells Fargo, the recently announced Bezos-Buffett-Dimon employee health plan, Buffett’s traditional American bullishness… oh, and bitcoin.

* * *

Before moving on to discuss his company’s performance in greater detail, Buffett advised readers about a change in GAAP that could lead to significant distortions in Berkshire’s numbers:

After stating those fiscal facts, I would prefer to turn immediately to discussing Berkshire’s operations. But, in still another interruption, I must first tell you about a new accounting rule – a generally accepted accounting principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire’s net income figures and very often mislead commentators and investors.

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.

Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless. The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse).

As Buffett points out, coverage of corporate earnings releases is often instantaneous, with media reports focusing on the year-over-year change in GAAP net income. Buffett said he would try to alleviate this problem by methodically explaining how the company’s per-share earning power – the key metric that he and Munger use to evaluate the company’s performance – changed during the quarter, and also by continuing their longtime practice of releasing earnings reports late Friday or early Saturday, when markets are closed – allowing investors more time to digest the material.

Acquisitions:

Addressing a topic near and dear to the company’s shareholders, Buffett lamented the lack of well-priced acquisition opportunities and reiterated his advice that individuals should avoid debt and invest passively. He also said that Berkshire needs to make “one or more huge acquisitions” to increase Berkshire Hathaway earnings, but admitted that finding a deal at “a sensible purchase price” has become a challenge.

“Prices for decent, but far from spectacular, businesses hit an all-time high” in 2017, preventing Berkshire from spending more cash on acquisitions, Buffett said, fondling his $116BN. “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”

Buffett said that a debt-fueled “purchasing frenzy” binge by deal-hungry chief executives is making that task very difficult. “Price seemed almost irrelevant to an army of optimistic purchasers,” Buffett said. “The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity.”

In terms of M&A activity, Berkshire was notably inactive during 2017, largely thanks to one recurring factor: Buffett’s inability to find sensibly-valued companies:

While the rest of the world embarked on an M&A frenzy fueled by cheap debt and the incessant cheerleading of investment bankers, Buffett says he and Munger sleep well at night because of their aversion to taking on debt.

As Buffett says, it’s foolish to risk what you have – and something you need – for something you don’t.

In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.

Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint. The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity.

After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never factor in, nor do we often find, synergies.

Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so “partners” have joined us at Berkshire.

Berkshire’s one notable deal was the purchase of a 38.6% partnership interest in truck stop operator Pilot Flying J, which Buffett describes as “far and away the nation’s leading travel-center operator.” Berkshire, Buffett explains, is obligated to increase its partnership interest to 80% in 2023.

* * *

Check back for updates…

Read the report in its entirety below (pdf link):

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Authored by James George Jatras via The Strategic Culture Foundation,

Republicans love to caricature Democrats as big spenders whose only approach to any problem is to throw money at it. As with most caricatures, it is made easy by the fact that it is mostly true. At least when it comes to domestic entitlement programs, nobody can top the party of FDR and JFK when it comes to doling out goodies to favored constituencies paid for by picking someone else’s pocket.

However, Republicans are hardly the zealous guardians of the public purse they would have us believe. While quick to trash their partisan opponents for making free with taxpayers’ money, they are no less happy to do the same – at least when it’s called “national defense.”

Over the next five years, the Trump administration will spend $3.6 trillion on the military. The GOP-controlled Congress’s approved, with Republicans voting overwhelmingly in the affirmative, the “Bipartisan Budget Act of 2018” (HR 1892) and the “National Defense Authorization Act for Fiscal Year 2018” (HR 2810). With respect to the former, the watchdog National Taxpayers Union urged a No vote:

‘An initial estimate of approximately $300 billion in new spending above the law’s caps barely scratches the surface in terms of total spending. The two-year deal also includes $155 billion in defense and non-defense Overseas Contingency Operations (OCO) spending, $5 billion in emergency spending for defense, and more than $80 billion in disaster funding. $100 billion in proposed offsets are comprised of the same budget gimmicks taxpayers have seen used as pay-fors over and over and are unlikely to generate much of a down-payment on this new spending.’  

Senator Rand Paul (R-Kentucky) poses the question that few in Washington – and certainly few Republicans – are willing to ask: “Is our military budget too small, or is our mission too large?” He notes:

‘Since 2001, the U.S. military budget has more than doubled in nominal terms and grown over 37% accounting for inflation. The U.S. spends more than the next eight countries combined.

It’s really hard to argue that our military is underfunded, so perhaps our mission has grown too large. That mission includes being currently involved in combat operations in Iraq, Syria, Afghanistan, Somalia, Niger, Libya, and Yemen. We have troops in over 50 of 54 African countries. The wars in Iraq and Afghanistan have cost over a trillion dollars and lasted for over 15 years.’

Defense spending is about survival, right? If you need to spend it, you spend it. But realistically, how does one assess whether spending is too much or too little without looking at the strategy the military is tasked with carrying out, and whether it makes any sense?

Proponents of increased – always increased – spending, like Defense Secretary James Mattis, point to real problems with increased accident rates due to poor training or equipment maintenance or the fact that most army brigades and navy planes are not ready for combat. But is that a symptom of too little money or of a force stretched beyond its limits by conducting operations anywhere and everywhere with little regard for actual U.S. interests?

That doesn’t matter politically, though. The message is, if you don’t support giving more money, you are guilty of neglecting the nation’s security and of killing service personnel. No wonder only a brave handful of Republican legislators consistently are willing to say No, like Senator Paul and a few House members: Justin Amash (Michigan), John Duncan (Tennessee), Walter Jones (North Carolina), Raul Labrador (Idaho), and Thomas Massie (Kentucky).

Here’s a crazy idea. What if instead of taking for granted a national security policy that seeks to maintain U.S. supremacy over every square inch of the globe we figure out what our real defense needs are – protecting our own country, not mucking about in the rest of the world – and then structure and fund the forces we need? What would that look like?

To start with, we know what it doesn’t look like: the policies followed by Presidents and Congresses of both parties for the past three decades since the Berlin Wall came down.  While the Trump administration’s new National Security Strategy (NSS) takes a commendable but befuddled nod toward genuine American interests – Pillar I (defense of American borders and tightening immigration controls to keep dangerous people out) and Pillar II (ending unfair trade practices and restoring America’s industrial base) – the real meat and potatoes is in Pillar III (“Preserve Peace Through Strength”), which could have been drafted by any gaggle of George W. Bush retreads – and no doubt was – or for that matter by Obama holdovers.

The NSS’s Pillar III is little more than a rehash of the usual litany of “threats” from China, Russia, North Korea, Iran, etc. It’s symptomatic that these are clustered under “Strategy in a Regional Context” as Indo-Pacific (a perfectly ridiculous concept that could best be summed up as “China – bad!”), Europe (“Russia – bad!”), Middle East (“Iran – bad!”), and South and Central Asia.  Next comes the region that should be our first concern, but isn’t: the Western Hemisphere (“Cuba and Venezuela – bad!”).  Last comes Africa (well, at least we can agree on something), but we still need a dedicated Africa Command (which for some reason is located not in Africa but in Stuttgart, Germany).

Still, just suppose that by some wild unpredictable accident we ended up with a strategy that in some way resembled the “America First!” prioritization Donald Trump promised us? Here’s a possible broad sketch:

1. Western Hemisphere comes first, not last. As they say in New England, “Good fences make good neighbors.” Presumably good walls make even better neighbors. Whatever happened to controlling our own border with Mexico, which was the cornerstone of President Donald Trump’s campaign? That remains hostage to political horse-trading and a budgetary game of chicken in the Washington Swamp. As far as the political class is concerned, the Wall can wait until mañana.

At the same time, the U.S. is all too happy to meddle in our neighbors’ internal affairs under the justification of “democracy promotion.” Recently Secretary of State Rex Tillerson claimed such meddling was an expression of the Monroe Doctrine, which he said “clearly has been a success, because… what binds us together in this hemisphere are shared democratic values.” Really? That would have been big news to President James Monroe, who promulgated the Doctrine back in 1823 when no other country in the Americas could be described as a democracy and when even most of the U.S. Founding Fathers would have disputed that label for the Republic they sought to create. Monroe’s declaration had nothing to do with democracy. Rather, its core was a warning to other powers not to establish colonies in our hemisphere, an exclusion which we have considered essential to our security for almost two centuries. Even as a relative infant on the international scene, long before our young nation had emerged as a power on a par with those of Europe, the United States considered it reasonable to ask other powers not to step on our toes in our own neighborhood.

2. Respecting the “Monroe Doctrines” of other powers: The regional deference the United States has demanded in our own area for nearly 200 years is precisely the one we today refuse to accord to other respectable powers, namely China and Russia, by conceding the primacy of their security interests in, respectively, the former Soviet space and in the western Pacific. Instead – as under Bill Clinton, Barack Obama, George W. Bush – the Trump administration still rejects the principle of “spheres of influence,” which in practice means not only asserting mastery in the Western Hemisphere but over every square inch of the globe. Today not a single sparrow falls to the ground anywhere but that a divinely omniscient and omnipotent Washington must have the last word about it – generously lubricated with rhetoric about democracy, human rights, rule of law, and other invocations of “universal principles.”

Despite suggestions from the foreign policy establishment, neither China nor anyone else is threatening the sea lanes in the South China Sea. Even America’s closest regional partners do not want to be pushed into a military confrontation with China to suit the agenda of “indispensables” in Washington. American concerns about North Korea can only be solved with Beijing’s security respected – and without the presence on the peninsula of almost 30,000 American “tripwire” troops and tens of thousands more in Japan.

In Europe, NATO forces should stand back from Russia’s borders and territorial waters.  NATO expansion should be ended – even after the Trump administrations ill-advised decision to induct tiny and corrupt Montenegro – while a new security architecture in Europe takes shape. The Alliance’s 2008 pledge to bring in Georgia and Ukraine should be withdrawn. Better yet, get us out of NATO entirely! We and our European friends should be finding a way to cooperate with Russia on pulling Ukraine out of its political and economic crisis as a united, neutral state, not pumping in lethal weapons so touch off renewed large-scale fighting.

An American accord with Russia and China is the stable tripod of any rational global peace, and no one else really matters at the moment. Russia boasts the world’s greatest landmass and natural resources unrivalled by any other country. She also has the only nuclear arsenal comparable to America’s. China is the most populous country in the world, with an economy achieving a par with ours and a burgeoning military sector. If American policy had been designed to alienate both of these giants and drive them to cooperate against us – and maybe it was designed to do that – it could not have been more successful.

3. Get the hell out of the Middle East and Central Asia. The NSS risibly refers to the undesirability of America’s earlier “disengagement” from the region, evidently a reference to the Obama administration’s not being quite as bellicose as its authors might prefer (for example, only supporting terrorists in Syria, not invading the place outright), Of dubious value even in its time, President Jimmy Carter’s 1980 declaration that the Persian Gulf region lies within thevital interests of the United States is only a dangerous absurdity now.  The entire region designated under the goofy moniker “Greater Middle East” is a welter of ethnic and religious antagonisms and unstable states that for America have only two things in common: (1) they ain’t us, and (2) they ain’t nowhere near us. It’s not America’s job to sort the place out, via such fool’s errands as nation-wrecking in Libya and Syria, nation-building in Afghanistan and Iraq (after wrecking them), and “mediating” to “solve the problem” of the Israelis and the Palestinians.

The sole interest the U.S. and the American people have in the region is to ensure that jihad terrorism doesn’t achieve a sufficient foothold as to present a threat to us here. However, our regional efforts have instead served to increase and import that threat, not diminish it. American policy toward the region should rest on two pillars: (1) limiting our contact with it, above all drastically cutting down immigration from the area and, hence, the prospect of importing more terrorists; and (2) instead of favoring terrorism-supporting regimes like Saudi Arabia and Pakistan, defer to countries with more direct interests in the region but who also have a fundamentally anti-jihad outlook, principally Russia, China, and India. Let them babysit Afghanistan.

Other than that – include us out.

Granted, this is only an outline, but it’s a start.

Back to the matter of Republicans’ penchant for overspending on the military, the force needed for this concept of “America First!” – one that focuses first of all on defending our territory and people – could only be a fraction of what we spend now.

Wouldn’t it be great to finally get that “Peace Dividend” we were promised until George H.W. Bush decided he’d rather build a New World Order starting in Kuwait?

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