48 hours ago, the European Central Bank announced a bonanza stimulus package: interest rate cuts, money printing, quantitative easing, the whole nine yards.
Europe’s economic growth has ground to a halt. The German economy actually shrank last quarter, according to official statistics.
So the European Central Bank is throwing everything including the kitchen sink at this problem. Their stimulus package is like a monetary defibrillator trying to shock Europe’s economies back to growth.
It’s pretty amazing when you think about it: interest rates in Europe are already NEGATIVE. They’ve been cutting rates for years, and it hasn’t worked.
Back in July 2008, the European Central Bank’s main interest rate was 3.25%.
By the end of 2008, it was clear the global economy was slowing down, and the central bank had slashed interest rates to just 1%.
But they kept going.
By 2013, the ECB had reduced its primary interest rate all the way to zero.
And in 2014, they took the unprecedented step of cutting rates even further– to NEGATIVE 0.10%.
European rates have been negative now for FIVE YEARS. Yet Europe’s economies are still in the dog house.
These results completely defy prevailing economic wisdom.
According to the ridiculous playbook that nearly all central bankers use, cutting interest rates is supposed to stimulate economic growth.
If interest rates are lower, it makes it easier and cheaper for people to borrow money. If it’s cheaper to borrow money, people buy more stuff… which creates more economic growth.
But that’s not happening.
They’ve been cutting rates, even below zero, to the point that you can actually get PAID to BORROW money in Europe. Yet those economies are still stagnating.
So the central bank’s solution? If what you’re doing isn’t working, do more of the same!
It’s astonishing how these economists cling their ridiculous theories…
Unsurprisingly, the European prices of both gold and silver shot up this morning.
Gold is now selling in Europe for nearly 1,400 euros as I write this letter— an ALL-TIME high.
That’s because precious metals are a refuge from keeping your savings held hostage by unelected central bankers who can slash interest rates to negative levels and conjure unlimited quantities of paper currency out of thin air.
It’s not just Europe either.
Across the water in the United States, the central bank has already indicated that they’re going to start cutting rates as well… plus they’re facing pressure from the Tweeter-in-Chief to make interest rates negative, just like in Europe.
That’s a big reason why precious metals prices have been climbing so rapidly; in the past two months alone, the silver price is up 22%.
I’ve been talking about this for months, encouraging you to buy gold and silver. But this isn’t over. There’s a lot more monetary insanity to come from the United States and Europe… so gold and silver prices likely still have a lot of room to rise.
(Silver could actually triple in price, and it still wouldn’t beat its previous record high.)
One big driver of gold demand is actually coming from foreign central banks and governments. They can see what’s happening to the US dollar and euro, and they’re keen to diversify their reserve assets away from negative interest rates.
Russia has been on a gold-buying spree lately, gobbling up more than 18 metric tons of gold in the month of June alone, and nearly 100 metric tons since the beginning of 2019.
China has also added 100 metric tons of gold to its foreign reserves since the beginning of 2019.
Even the central bank of Poland has acquired 100 metric tons of gold this year, nearly doubling its gold holdings from last year.
This is a powerful trend that could continue sending prices higher. So it’s still a reasonable time to buy physical gold and silver.
Israeli Attacks On Syria Halted After Russia Threatened To Shoot Down Jets
According to reports in both Israeli and Arabic regional media, Israel this past week was preparing to expand major airstrikes against “Iran-backed” targets in Syria, but Moscow imposed its red line. The Independent has published a story describing that Russia’s military in Syria threatened to shoot down any invading Israeli warplanes using fighter jets or their S-400 system.
The Jerusalem Post, citing sources in the UK Independent (Arabia), writes just after the latest meeting in Sochi between Prime Minister Benjamin Netanyahu and Russian President Vladimir Putin:
According to the report, Moscow has prevented three Israeli airstrikes on three Syrian outposts recently, and even threatened that any jets attempting such a thing would be shot down, either by Russian jets or by the S400 Anti-aircraft missiles. The source cited in the report claims a similar situation has happened twice, and that during August, Moscow stopped an airstrike on a Syrian outpost in Qasioun, where a S300 missile battery is placed.
Netanyahu’s hasty trip to meet with Putin on Thursday – even in the final days before Tuesday’s key election – was reportedly with a goal to press the Russian president on essentially ignoring Israel’s attacks in Syria.
According to the Russian source, Putin let Netanyahu know that his country will not allow any damage to be done to the Syrian regime’s army, or any of the weapons being given to it…
Israel sources cited by the Arabic newspaper described Netanyahu’s attempts to persuade Putin as “a failure”. This in spite of Netanyahu telling reporters after the meeting that his relations with Moscow were stronger than ever.
Moscow is said to be particularly resistant given the Israeli military’s recent spate of attacks on targets in Lebanon, Iraq, and Syria.
Sources in the report claimed further that Putin in a somewhat unprecedented moment raised the issue of Lebanon:
The Russian source said: “Putin has expressed his dissatisfaction from Israel’s latest actions in Lebanon” and even emphasized to Netanyahu that he “Rejects the aggression towards Lebanon’s sovereignty” something which has never been heard from him. Putin further stated that someone is cheating him in regards to Syria and Lebanon and that he will not let it go without a response. According to him, Netanyahu was warned not to strike such targets in the future.
It could also be simply that Putin understands that Netanyahu, now desperate to extend his political career to a record fifth term as prime minister as next week’s elections loom, could be ready to risk a major and very unnecessary Middle East conflagration in order to continue to appeal to Israeli right wing and nationalist voters.
Securities and Exchange Commission Rule 156 requires financial institutions to advise investors to not be idiots. Hence, the disclosure pages of nearly every financial instrument in the U.S. are embedded with the following admission or variant thereof:
“Past Performance Is Not Indicative of Future Results”
“Buy and hold”… “The market goes always up”… “No-one can time the market”… “Buy the dip” “With what? You said not to sell anything”… “Simple, mortgage the farm…” The image above shows roughly what happens right after everybody feels the warm & fuzzies due to the fact that the market has been going up without a hitch for quite some time. Once the conviction that it can only rise further is widespread and firmly embedded in investor psyches (who cares about valuations?), this is often what the next scene looks like… [PT]
The instruction is futile. Most investors are idiots, including many of the pros. What’s more, suspiciously absent from all disclosures is “how” to not be an idiot. Perhaps this is because such guidance would discourage many unwitting investors from getting mixed up with the stock market in the first place.
Without question, if you don’t know what you are looking at, the past can be an abysmal predictor of future investment returns. One year the S&P 500 is up 10 percent. Another year it is up 20 percent. Then, to the surprise of practically every Wall Street analyst, the S&P 500 crashes 50 percent.
Still, practically everyone projects future returns based on past performance. For example, your retirement advisor at Edward Jones will be quick to point out that the average annual return of the S&P 500 over the last 60 years is about 8 percent. He’ll then show you a colorful chart that calculates precisely how much you must save and invest each month to retire a millionaire.
The phony precision, however, is double flush drivel. Eight percent may be the long term average annual return of the S&P 500. But averages are deceiving. And 8 percent is hardly a factor you should blindly count on.
Lettuce see… what was the long-term return of the Nikkei since 1989? Imagine having invested in the Japanese stock market at the end of 1989, when it looked utterly invincible and the keiretsu system was widely held to guarantee that stocks would never decline… it is now 30 years later, and it is still around 45% below its 1989 peak, in nominal terms to boot! Obviously, the Nikkei is a far better investment proposition today than it was then, but we can assure you that it was widely hated at its lows in 2009 – 2012. We penned a timely update in 2012 as luck would have it, pointing out that the Japanese market offered a low-risk opportunity (see Reconsidering Japan, Part 1 and Part 2). Alas, the buy & holders of the late 1980s are still waiting to break even… [PT]
Attaining or exceeding the average takes luck and/or critical contemplation of the past. Without either of these you’ll end up as another one of Wall Street’s chumps. We will offer some guidance on how not to be another Wall Street chump in just a moment, but first several words on how to not be an idiot…
Price Matters
The return on an investment is a function of three factors: The price you pay for it. The price you ultimately sell it at. The cash flows it generates – or costs you – in between.
Of these, you have most control of when you buy and when you sell. You want to buy low and sell high. Most investors buy high and sell low.
When considering the stock market as a whole, as measured by the S&P 500, the critical distinction to make is the difference between its overall price and the corporate earnings or sales that underlie it. Price, without the context of corporate earnings or sales, has little meaning. But price in relation to earnings or sales identifies whether the stock market is expensive or cheap or somewhere in between.
Obviously, when the stock market is cheap you want to buy and when it is expensive you want to sell. Yet at these times your emotions will be telling you to do the exact opposite. When stocks are cheap, the emotion of fear will be compelling you to sell, or at least remain on the sidelines. When stocks are expensive, the emotion of greed will be compelling you to buy, often at a time of peak mania.
Right now, the stock market, as measured by the S&P 500, is extremely expensive. This is a time to be cautious. A time to take some of your capital – not all – out of the stock market and put it in cash and gold.
Here is why…
Don’t Be Another Wall Street Chump
The Shiller Cyclically Adjusted Price Earnings Ratio (CAPE) looks at the price of stocks relative to their average earnings, adjusted for inflation, over the past 10 years. This provides a big-picture view, which smooths out the year-to-year swings in earnings.
Shiller P/E ratio – it is fairly easy to spot what are inopportune times to buy stocks… right now is definitely one of them. [PT]
Currently, as of market close September 12, the CAPE ratio for the S&P 500 is 30.17. That is over 81 percent higher than the CAPE’s long-term historical average going back to 1881. Moreover, the CAPE ratio has rarely been higher.
For example, on May 3 the CAPE ratio was 31.05, which was higher than its extreme valuation in the late 1920s, right before the October 1929 stock market crash. The only time CAPE ratio valuations were higher was the late 1990s, just prior to the popping of the dot com bubble and subsequent collapse.
Indeed, according to the CAPE ratio the S&P 500 is extremely overvalued. But if you really want to drill into valuations, you should look at the MAPE ratio…
John Hussman, Ph.D. and President of Hussman Investment Trust, is ‘smarter than the average bear’. He has researched stock market valuations and cycles at a deeper level than just about anyone and everyone. As part of his research, he has developed several metrics for valuing the stock market and for identifying subsequent 10 year returns.
One of Hussman’s key valuation metrics is the Hussman Margin Adjusted Price Earning (MAPE) ratio. The difference between the CAPE and the MAPE is that for the MAPE Hussman cyclically adjusts profit margins. Hussman has found that the MAPE correlates better with subsequent 10 year returns than the CAPE.
John Hussman’s MAPE – the CAPE adjusted for profit margins. In terms of the MAPE, the market has never been more overvalued than now. [PT]
The Hussman Market Commentary for September shows a MAPE of approximately 45. At this level, current market valuations exceed the extremes reached in 1929, 2000, and 2007. We recommend reading the entire article. But for our purposes, here is one of Hussman’s deductions:
“The steep losses of the S&P 500 in 2000-2002 and again in 2007-2009 were consistent with a century of historical experience. Given current market valuations, the prospect of yet another 10-12 year period of zero or negative returns for the S&P 500 would also be wholly consistent with a century of evidence.”
In other words, portfolios of S&P 500 index investors could be at or below today’s current price come 2030. Absolutely, the price you buy at matters.
And only Wall Street chumps buy the S&P 500 at these valuations. Don’t be one of them.
Osama Bin Laden's Son Killed In US Operation: White House
The Trump administration has claimed the death of Hamza bin Laden, a son of late al Qaeda leader Osama bin Laden.
According to the White House statement, he was killed in an operation in the Afghanistan-Pakistan region.
“The loss of Hamza bin Ladin not only deprives al-Qa’ida of important leadership skills and the symbolic connection to his father, but undermines important operational activities of the group,” the statement continues.
“Hamza bin Ladin was responsible for planning and dealing with various terrorist groups.”
While no date was given for his death, rumors have been swirling since July 31, when the New York Times cited two anonymous officials who said that the US had played a role in the operation, “but it was not clear how.”
Details of the strike that killed him were scarce, including when and where. The United States government played a role in the operation, but it was not clear how, according to the officials, who discussed his death on the condition of anonymity because it involved sensitive operations and intelligence gathering.
Mr. bin Laden was killed sometime during the first two years of the Trump administration, officials said. He was killed before the State Department announced a $1 million reward for information about his whereabouts in February, but American military and intelligence agencies had not confirmed his death by then. –New York Times
As the Times noted in late July, the news of Hamza’s death “represented more of a symbolic victory for the American government than the removal of a threat,” as Al Qaeda has not carried out any recent attacks, and while Hamza was being groomed to take over the group – that was many years away from becoming a reality.
Hamza’s brother Khalid died attempting to defend his father against US Navy SEALs in May, 2011 – when the Obama administration carried out a CIA-led raid with Joint Special Operations Command (JSOC) in which Seal Team Six killed the Al Qaeda leader and immediately dumped his body in the ocean, citing religious reasons.
Massive Fires Erupt After Drone Strike Hits World’s Largest Oil Processing Facility In Saudi Arabia
What appears to be the most devastating Yemen Houthi rebel attack on Saudi Arabia to date, took place overnight on the world’s largest oil processing facility as stunning videos emerged of massive explosions rocking the major Aramco Buqyaq facility.
Fires burned into the morning daylight hours, with explosions also reported at the Khurais oil field, in what the Houthis said was a successful attackinvolving ten drones. “These attacks are our right, and we warn the Saudis that our targets will keep expanding,” a rebel military spokesman said on Houthi-operated Al Masirah TV.
Satellite images shows extent of fires following the attacks in eastern Saudi Arabia: NASA Worldview/AP
Saudi authorities — initially slow or reluctant to identify the cause of the major blaze — on Saturday issued a confirmation via the Saudi Press Agency: “At 4.00am (01:00 GMT) the industrial security teams of Aramco started dealing with fires at two of its facilities in Abqaiq and Khurais as a result of… drones,” an interior ministry statement said, which further claimed the fires were “under control”.
However, the Saudis have stopped short of acknowledging the Houthis were behind the attack, which Riyadh is also likely to blame on Iran, which has lately promised that if it can’t export its oil then “no one will”.
It remains unclear according to early statements whether there were injuries or casualties in the twin oil facility attacks.
The impact on global oil markets – closed for the weekend – could be significant given the Khurais field produces about 1% of all the world’s oil (estimated at over 1M bpd and reserves of over 20BN bpd) and more importantly Abqaiq, which based on the stunning local footage bore the brunt of the drone attacks, remains the most crucial of the kingdom’s processing plant.
Located 37 miles southwest of Aramco’s Dhahran headquarters, it controls all the flows from fields like the giant Ghawar field to coastal export terminals like Ras Tanura. Saudi Aramco describes the Buqyaq facility as “the largest crude oil stabilization plant in the world.”
According to breaking reports the devastating drone attacks could impact up to 5 million bpd of oil production.
European carmakers are facing what could turn out to be a major crisis cooked up by EU regulators, and it’s all about EVs and emissions. The former are supposed to help solve the problem with the latter, but the likelihood of success is uncertain because there are literally millions of variables: car buyers.
The EU has been enforcing emission caps on cars since 2012. Until this year, this cap has been an average of 130 grams of CO2 per kilometer for all new passenger cars. Beginning next year, however, this would be reduced further to 95 grams of CO per km. In fuel consumption, the 130 g/km cap corresponds to an average 5.6 liters of gasoline per 100 km while the 95 g/km cap corresponds to 4.1 liters per 100 km.
Europe’s big carmakers are lining up the EVs. Volkswagen alone is planning four new EV models for 2020, after earlier this month it unveiled its first mass production affordable EV, the ID3. More models should be coming from the top carmaker in the next few years and its rivals will not be sitting idly by. Everyone who makes cars in Europe has an electric lineup… but there are no guarantees that people will want to buy those cars.
“You have cars that cost an extra 10,000 euros to build, fleet-emissions targets requiring a certain sales volume and consumers who may or may not want them,” one executive from PSA Group (the company that makes Citroen and Peugeot) told Reuters at this week’s Frankfurt Motor Show.
It’s not like the industry hasn’t tried to make EVs attractive. It’s enough, at least in some parts of the EU, to say they are the greener alternative, and there will be people to buy them. Unfortunately, the majority seems to like big cars over green cars.
A report by Automotive News Europe revealed in March this year that while total car sales in 2018 had stayed flat on 2017, sales of SUVs and crossovers in the EU had posted a healthy growth of 18 percent. That’s 800,000 more SUVs and crossovers sold in the EU last year, with the total reaching 5.3 million.
Greenpeace had more bad news for Europe’s carmakers. In a report titled Crashing the Climate: How the Car Industry is Driving the Climate Crisis, the environmental organization said the total carbon emissions of what Greenpeace calls “the dirty dozen” carmakers had exceeded the EU’s carbon emissions in 2018. Fun fact: Volkswagen was the worst offender, probably because it sells the most cars.
Greenpeace went on to add that sales of SUVs in Europe had risen more than four times since 2008, with their market share reaching 32 percent, from just 8 percent in 2008. Sure enough, in recent years, some of these SUVs are hybrid, but the great majority are not.
According to a German engineering consultancy cited by Reuters, based on the EU’s emission targets, sales of EVs would need to increase three times to reach a 6-percent market share by 2021, in order to make a difference. Hybrid vehicle sales, FEV Consulting says, would need to accumulate a 5-percent market share.
That’s quite a rise in EV sales in countries that are not as small and green as Norway. Given the buying trends from recent years, carmakers have every reason to worry about their EV plans not working out. Unfortunately, there is little they can do to tame the wild cards that are SUV-loving customers.
Ukraine President Thanks Trump Admin For Releasing Hold On $250M In Military Aid
Ukrainian President Volodymyr Zelensky thanked the Trump administration for releasing $250 million in military aid which was delayed last month over concerns that the money was not being spent in the best interests of the United States.
Ukrainian President Volodymyr Zelensky
“The president has made no secret when it comes to foreign assistance that U.S. interests abroad should be prioritized and other foreign countries should also be paying their fair share,” a senior administration official told reporters in August.
The move came after US lawmakers on both sides of the aisle pressured the White House – capped off by the threat of an amendement to the $695 billion Pentagon funding lodged by Senate Minority Whip Dick Durbin (D-IL), which would have prevented Trump from withholding such funds in the future, according to Fox News.
Several Republican senators, including Trump ally Lindsey Graham, said they would have voted with the Democrats on the amendment.
“We support Ukraine. Period. End of discussion,” said Sen. John Kennedy, R-La.
Congress initially approved the aid last month, but Trump asked his national security team to review funding for the program, the Ukraine Security Assistance Initiative, to ensure it would be used in the best interests of the United States. –Fox News
Speaking at the Yalta European Strategy annual meeting organized by the Victor Pinchuk Foundation, Zelensky also announced an additional $140 million which accompanied the release, telling the audience “I like this kind of relationship,” calling it a “very good economic model.”
On Thursday, Senate Majority Leader Mitch McConnell (R-KY) said of the decision “It would have been a mistake to hold back our assistance to the brave people of Ukraine. Doing so would have undermined our partners in Ukraine and Eastern Europe and further emboldened the Kremlin,” adding “I criticized President Obama for not responding more swiftly and forcefully to Vladimir Putin’s invasion of Ukraine. I joined my colleagues on both sides of the aisle in pushing that administration to provide assistance to Kyiv.“
The aid represents a substantial boost for Ukraine, whose full 2017 military budget was $5.2 billion. Separately, the State Department is giving $141 million in aid for the country’s military, according to Politico. The aid is seen by Ukraine as important to bolstering the military and keeping Russia at bay.
The administration’s hold on the aid money prompted Trump’s critics to say it was another way the president was going easy on Russian President Vladimir Putin. –Fox News
During his speech and a Q&A session with Council on Foreign Relations president Richard Haas, Zelensky vowed to reclaim Crimea from Russia.
“I’ve said it before and I’ll say it again: We must bring our territories back,” he said, adding that Ukrainian soldiers must be able to return home “as victors,” according to Newsweek.
That said, the former comedian stressed that diplomacy must be the path forward. “I have repeatedly said that diplomacy is the only way to achieve this, and its powerful and effective weapon is sanctions,” adding that sanctions are “the most important weapon.”
The president said he had come under pressure from other nations to lift sanctions on people noting the economic benefits it could have. “You lose money, sorry, we lose people,” he replied. “Unless we restore peace, the sanctions should stay,” he continued.
Nonetheless, the president—whose new party swept a snap parliamentary election in July to solidify his power—acknowledged how difficult it would be to regain control of Crimea, the strategically valuable peninsula annexed by Russia in 2014.
Haass suggested that Ukraine was implementing a soft power strategy over the Crimea question, seeking to present residents there with a more attractive pro-European liberal Ukrainian society to undermine the Russian nationalism favored by the Kremlin.
But Zelensky refused to be drawn on the sensitive issue, wary that his words would be twisted. Instead, he simply said his team have several ideas of how to restore Ukraine’s pre-war borders. “We will be fighting to bring the Crimea back,” he said, “and not only in words.” –Newsweek
Last week Russia and Ukraine conducted a long-expected prisoner swap, raising hopes of thawing relations between the two countries and ending the fighting which has killed some 13,000 people and wounded 30,000 more.
By ratio of 2:1, voters think it’s “fundamentally undemocratic” for some MPs to try and prevent Brexit
A new survey conducted by research experts ComRes, finds that the majority of British people want the Brexit vote to be respected and want the country to leave the EU without any more delays.
Despite calls for delaying and even canceling Brexit from both members of the Labour Party and the entirety of the Liberal Democrat party, the survey finds that a majority of British people categorically do not want that to happen.
More than half of British adults, 54 percent, believe the result of the 2016 referendum should be respected, and Brexit delivered, the poll found.
Only 25 percent disagreed, and 21 percent said they didn’t know.
New @ComRes poll for @Telegraph out tonight: 54% support Boris Brexit pledge, including 35% of 2016 Remainers who say the #EURef result ‘should be respected’
Even among those who voted Remain in 2016, more than a third, 35 per cent, said they now wanted Brexit delivered.
“Irrespective of whether or not I voted to leave, the 2016 Ref result shd be respected” agree 54% incl 35% of 2016 Remain voters, 27% of Lib Dems, 33% of Lab voters @ComRes for @Telegraph
The survey noted that By ratio of 2:1, voters think it’s ‘fundamentally undemocratic’ for some MPs to try and prevent Brexit.
By ratio of 2:1, voters think it’s ‘fundamentally undemocratic’ for some MPs to try and prevent Brexit given that Govt promised before #EURef to implement the result’ (50% to 26%, 24% DK), incl 29% of Remain voters @ComRes for @Telegraph
If Brexit were to be revoked, it is clear from these figures that there would be a massive uprising.
The argument that the 2016 EURef result shd be respected gets almost universal support among BXP voters (97%), plus massive support from Leavers (87%) and Con voters (85%) @ComRes for @Telegraph. Pretty clear that these folk wouldn’t take revoking A50 very well…
The poll also found that 40 percent disagree with Labour leader Jeremy Corbyn’s opposition to Prime Minister Boris Johnson’s call for a general election.
Thirty percent said they do not want an election, with the remaining 30 percent saying they do not know.
The poll also found that almost half of British voters would rather leave the EU with No Deal than have Corbyn as Prime Minister. Only 22 percent thought this was a good idea.
Fascinating Brexit & Corbyn figs from @ComRes for @Telegraph tonight – getting for half (43%) of 2016 Remain voters wd prefer to leave the EU w/a deal than have Corbyn as PM (1/3)
“If the Government cannot get a Withdrawal Agreement through Parliament, they should leave the EU without a Withdrawal Agreement (i.e. without a deal)”
“I am fearful of no-deal consequences for me & my family” agree 46% disagree 33% DK 21%
Remainers – 75% agree
Leavers – 18% agree @ComRes for @Telegraph
Massive party divide over Corbyn’s blocking of Boris’s request for a GE – 79% of Tory voters and 88% of BXP voters support blocking it, compared to 11% of Lab and 21% of LD voters @ComRes for @Telegraph
“If EU refuses any more concessions, UK shd leave w/no deal on 31/10” agree 43% (79% among Tories, 93% among BXP voters) disagree 32% (8% Tories) @ComRes for @Telegraph
IMF Estimates $15 Trillion Of World’s Foreign Direct Investments Are “Phantom Capital”
A new study published by the International Monetary Fund has found that $15 trillion of the world’s foreign direct investments are “phantom capital” – a term used to describe capital that is designed to minimize tax bills of multinational firms.
This total makes up 40% of the world’s foreign direct investments, and is the equivalent to the combined GDP of China and Germany, according to Bloomberg.
These types of investments have risen about 10% over the past decade despite global efforts to curb tax avoidance, according to the IMF study. The capital makes its way through corporate shells that generally have no operations or real business activity.
The study stated:
“FDI (foreign direct investment) is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity. But phantom capital is financial and tax engineering that blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.”
It continued:
“Luxembourg, a country of 600,000 people, hosts as much FDI as the U.S. and much more than China. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy, whose $4 trillion in FDI comes to $6.6 million a person. Unsurprisingly, an economy’s exposure to phantom FDI increases with the corporate tax rate.”
About half of the world’s “phantom capital” is hosted by Luxembourg and the Netherlands, with just 10 economies globally holding more than 85% of such investments.
The study concluded that “international cooperation” was vital to solving the issue: “Indeed, this year the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.”
Trump and Johnson face a common enemy in their complacent and costly establishments, but it is wrong to think they share a common approach to government business and finances. For the moment, all attention in Britain is focused on Brexit, but under Johnson’s predecessors, spending has become increasingly driven by process instead of outcomes. Johnson’s chief strategist has identified the reversal of this trend as offering the key to delivering outcomes in a post-Brexit UK while balancing the budget and reducing tax.
Introduction
Superficially, the electorates of America and Britain share one thing in common. They have both become sick of the establishment’s arrogant presumption that it knows better than the common people. Donald Trump spotted it and won the presidency in the face of enormous hostility from the establishment, both Democrat and Republican, as well as the deep state comprised of unaccountable intelligence operators and bureaucrats. The year before, the Westminster establishment found ordinary people rebelled against its assumed right to run the affairs of the electorate.
In Britain, if a mistake was made, it was to offer a referendum which produced the wrong answer. That is how the establishment appears to see it. In America, the UK as well as in Europe an elite has emerged for which democracy has become an irritant. But the establishment knows the rules and cannot deny their validity. The electorates in America and Britain have now given their establishments an unpalatable message, that they overrated their own importance. The bureaucrats no longer represent the interests of the people. Quite simply, the establishment and its bureaucrats have broken their contract with their electors, drifting away from the primary reason for their existence. The ordinary person has had enough of being ignored.
The result is the establishment is being forced to fight for its survival. President Trump has been fighting this battle on behalf of the American people for nearly two years. The British establishment has been fighting a rear-guard action for three over Brexit. Neither establishment has yet been vanquished. In America, there are signs of an accommodation, a compromise, which will allow the state to gradually resume control. In the UK, the survival of Boris Johnson and his new government depends on his refusal to compromise in its fight against the establishment’s Europhiles and placemen.
Brexit is a conflict that is only now being forced to a conclusion after three years of a Remainer government trying to appear to comply with the referendum result, while locking the United Kingdom into the EU, potentially in perpetuity. The electorate rumbled it and threatened the ruling Conservative party with extinction. Recognising the danger, their parliamentary party in conjunction with the party membership ejected the complicit Theresa May and elected Boris Johnson to take the country out of the EU on the delayed date of 31 October.
It is by no means certain Johnson will succeed. Remainers are now fighting his government in the courts, with the Supreme Court due to adjudicate next Tuesday (17 September) on whether the prorogation of Parliament was legal. And a way has to be found around the Benn-Burt Law, the last act of Remainer MPs.
The behaviour of the opposition parties in Parliament has been unedifying. The public sees a parliament out of control under a partisan Speaker. Not surprisingly, the opinion polls are swinging more in support of Johnson’s Conservatives and against the other parties, widening the gulf even further between Parliament and the people its members are elected to serve. If Parliament had any public respect before recent events, then it has certainly lost it now.
The similarities between President Trump’s position fighting the Federal establishment and that of Boris Johnson fighting Westminster gives the impression to many international observers that Boris is a British version of The Donald. Trump is urging the British to leave the EU, and thinks Johnson is the man to do it. Johnson is happy to encourage Trump’s support for a quick, post-Brexit trade deal. They get on together well.
But they are not peas in the same pod. Johnson has shown a free-marketeer grasp over trade issues and the damage that tariffs can do, while Trump is an interventionist. And when it comes to deficit financing, the evidence is emerging that Boris will fund promised spending in education, policing and health by cutting bureaucracy rather than relying on deficit stimulation now to provide tax income tomorrow. This is where Dominic Cummings comes into play.
This article skims over recent developments in Britain’s fight to free itself from the EU, particularly with respect to the role of Cummings. Making a huge assumption that Johnson and Cummings manage to implement Brexit on 31 October and the Conservatives are re-elected in a general election shortly, it also looks at how the government is likely to fund its promised expenditure plans.
Cummings – the confident back-room operator
Dominic Cummings scares much of the Westminster establishment, with good reason: he is intent on destroying it in its current form and replacing it with a system that prioritises objectives, minimising non-essential political and administrative intervention. There will be no tolerance of virtue-signalling by ministers and pressure groups. Of the money allocated to a project, instead of a Pareto eighty per cent being spent on process and twenty per cent on the final objective, Cummings is bent on ensuring it is the other way around, even releasing funds to permit tax cuts while retaining a balanced budget.
But first Cummings is dedicated to achieving Brexit on 31 October, when he will have directed the strategy to remove Britain from under the stultifying regulations and bureaucracy emanating from EU membership, freeing him to pursue his ultimate objective. On Brexit, we can only watch developments, because outsiders can only guess the government’s next moves and the final outcome.
To understand more fully Cummings’s role as special advisor to Boris Johnson, his ambitions, intentions and prospects for success, it is worth delving into his personal story. He was born in Durham in North-East England to middle-class parents in 1971. He attended Durham School, a middle-of-the-road fee-paying school, and then attended Exeter College at Oxford University, graduating with a First in Ancient and Modern History.
Robin Lane Fox, his tutor in Ancient History described him in a recent BBC profile as “extremely aware of his own abilities and had every reason to be”. When asked who was cleverer, Boris Johnson or Dominic Cummings, Lane Fox responded “Dominic is cleverer by a long way than Boris. Different class altogether”.
Lane Fox would also have known Johnson, who attended Oxford at Balliol, where he entered as a Brackenbury Scholar to read Literae Humaniores, a four-year course in Ancient Greek and Latin Classics. But Johnson, who as a student appears to have lacked Cummings’s focus, only got a 2:1. However, his intellect should not be in doubt, and while one can understand Lane Fox underestimating Johnson due to his lack of intellectual focus, Cummings appears to have been exceptional.
His other tutor in Modern History was Norman Stone, who died in June. Stone was also a notable intellect, and in his day had been an advisor to Margaret Thatcher. Both Stone and Thatcher shared a distrust of the British and European establishments. Stone’s was based on his deep knowledge of European history, honed from his studies at Glasgow University. Smith’s association with Glasgow University would have also had a bearing on Stone’s free-market thinking. Adam Smith, the founder of economics as a human science, had been appointed as its Professor of Logic, and the following year he was appointed Professor of Moral Philosophy.
Stone was a man who would cut to the quick and did not suffer mediocracy, let alone fools. He was a chain-smoking hard-drinking argumentative Glaswegian who would not have endeared himself to “the humourless halfwits who are the bedrock of university management and the political class”. As an example of his impiety and wit he came up with one of the best questions ever set in a Cambridge tripos: “Romanticism: masculine, feminine or neuter?”
In his own way, Stone wanted to help Mrs Thatcher undermine the rotten British political system, which by 1979 had drifted onto the rocks of socialism. The Thatcher revolution saved Britain by driving Marxist Labour into the wilderness, much as the Johnson/Cummings partnership seeks to today.
After Thatcher’s initial success against socialism, the establishment reconstituted itself on proto-capitalist lines and ejected her in 1990. Despite Stone’s brilliance, his influence and role as Thatcher’s foreign policy advisor on Europe and speech writer was sadly limited in the light of events. Stone would have found that with all its mediocracy, the establishment always regroups. But perhaps a more sober, focused and ruthless operator in his protégé might have a better chance. It appears that Stone quickly recognised Cummings’s intellect, and would have been attracted by his directness and sense of purpose. They were like-minded dissident geniuses.
Cummings learned about Thucydides from Fox Lane, and Bismarck from Stone. I see a parallel with TE Lawrence, another young man a century ago who was a loner, aloof from his contemporaries but with a remarkable intellect. In Lawrence’s case, he single-mindedly inspired Bedouin tribesmen to revolt against the Turks in Palestine, leading to the creation of nation states in the Middle East. As well as having Lawrence’s detached ability to analyse and lead, Cummings appears to possess Lawrence’s brilliant singlemindedness. He clearly identifies an objective and is ruthless in his focus and determination to achieve it, just as was Lawrence.
Cummings’ first serious role in government was as special advisor to Michael Gove, at that time David Cameron’s education secretary. He helped Gove push through many major reforms, and his view on the importance of the state getting education right and the means of achieving it is the subject of his 235-page essay, Some thoughts on education and political priorities. His ambition then and now is for Britain to become the school of the world, echoing Pericles’ description of Athens as the school of Greece.
In his essay, Cummings describes those in English politics and power as lacking structured and disciplined thought, being much more interested in appearing to be on the side of the poor and less able, than they are in raising standards. Policy debates had become little more than exercises in moral exhibitionism.
Crucially, from his essay he is convinced that enormous savings can be made in the administration of state education, enough to fund the achievement of end-objectives and still have money left over to spend elsewhere or to reduce spending overall. He also observes that savings from his focused approach can be made across all Whitehall departments. It is clear from his essay that he intends to release the funds for the new Johnson government’s proposed spending on education, policing and health by cutting spending on bureaucratic and political processes not essential to end objectives.
This has been attempted before. All attempts, and there have been many over the years, to have a bonfire of the quangos have failed. [Quango is an acronym which stands for quasi-autonomous non-government organisation, an arms-length entity set up by a government department, which usually add little value and much bureaucracy. It is estimated there are 742 quangos spending some £100bn annually, though estimates vary considerably].
Cummings’ approach to eliminating this waste appears to be different from previous attempts. He is the lead special adviser in a network of nearly a hundred “spads” (as at end-2018). He is moulding them into a combined force, separate from both government and the civil service, responsible directly to him as well as their relevant ministers. This ensures that ministers will be advised in accordance with Cummings’ policy of cutting waste and increasing the effectiveness of decision making by focusing on objectives, and not process.
In effect, the continuing advice given to ministers by their departmental civil servants will be made to conform with the Cummings policy. It is no less than a carefully planned attempt to wrest control from a floundering political establishment to make government more efficient and objective in its aims. However, the initial task is to deliver Brexit on 31 October, and we are already seeing the consequences of the Cummings approach.
Cummings does not compromise in pursuing his objectives. He has ensured the removal of the whip from plotting Remainers in the Conservative parliamentary party in brutal, public fashion. Any special adviser not totally onside is treated equally brutally, one in the Treasury suspected of leaking having been sacked by him on the spot and marched out of Downing Street by an armed policeman. Whitehall has not in living memory seen this level of hard-headedness, focus and determination. And he is Boris Johnson’s real chef de cabinet.
The relationship with Boris was forged when they worked together on the Brexit referendum campaign where Boris was the front man and Cummings the operator. It suited Boris, who is an excellent delegator and was happy for Cummings to run the show on his and his political colleagues’ behalf. It is a relationship that continues to endure between two like-minded classicists. Boris’s other appointments, particularly in Gove, Javid, Rees-Moog and Raab, amount to an intellectually capable cabinet espousing free market economics. By restoring Cabinet discipline, Johnson has ensured ministers will be in tune with Cummings’s plans to reduce government’s operating costs to the lowest possible level. But their first task, to deliver Brexit, is still in play. With Cummings and Boris working on a plan towards a clear objective, they are likely to succeed against the Remainers, who beyond being disruptive, are incapable of coming up with any feasible strategy. But for the moment, we do not know how this will play out and can only speculate.
Britain’s future under a reforming government
Without a majority in the Commons and an antagonistic House of Lords it may seem premature to consider how a Johnson government will change the political landscape. However, much of the current uncertainty will disappear when an uncompromising Brexit is finally achieved, and the hastily formed alliance on the opposition benches can then be expected to collapse. This assumes the government finds a way of neutralising the Benn-Burt Law, which forces it to secure the approval of MPs for either a withdrawal agreement or leaving without a withdrawal agreement. If at the end of 19 October neither has been achieved, the Prime Minister must then have sought an extension of the Brexit date until at least 31 January 2020. But assuming a way is found around this hurdle, the loose coalition of opposition parties will have no binding reason for its existence. Scottish Nationalists and Liberals will then relish the prospect of taking Labour seats and support a move to a general election.
Following that election and assuming Johnson achieves a working majority, all the pointless, virtue-signalling politics that ministers who served under Mrs May and their departments indulged in will be confined to the opposition benches, since Cummings and his cohort of special advisers will expunge them from ministerial decision-making. Despite the headline numbers reflecting more spent at the point of delivery in all ministries, they should be adequately funded by the elimination of needless process. At least, that’s the plan.
This is why Johnson is not on the same page as Trump, at least when it comes to the prosecution of government business, and there is a strong likelihood his Chancellor will be able to run a balanced budget (all else being equal), compared with Trump’s deliberate ramping up of unfunded spending to perpetuate the illusion of American prosperity.
