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Authored by James Durso via RealClearDefense.com,

The tab to date: over $840 billion for military operations, $126 billion for reconstruction, probably another $1 trillion for veterans’ health care, over 2,400 dead, and over 20,000 wounded.

In August, U.S. Defense Secretary James Mattis kiboshed Erik Prince’s plan to privatize the war in Afghanistan which Prince called “an expensive disaster for America.” But with Mattis’s  tenure in doubt, we may not have seen the last of the Prince plan, which is forthrightly titled “An Exit Strategy for Afghanistan.”

U.S. forces arrived in Afghanistan two weeks after the 9/11 attacks in New York and Washington, D.C. and are still there seventeen years later. The tab to date: over $840 billion for military operations, $126 billion for reconstruction, probably another $1 trillion for veterans’ health care, over 2,400 dead, and over 20,000 wounded. The annual cost is $50 billion, more than the defense budget of the U.K.

Despite the cost in dollars and lives, there hasn’t been much progress. The Afghan central government controls or influences under 60% of the country and “opium production in Afghanistan increased by 87 percent to a record level of 9,000 metric tons in 2017 compared with 2016 levels” according to the latest report by the UN Office on Drugs and Crime.

President Trump was channeling many Americans when he asked his national security advisor, “What the f**k are we doing there?” Though Trump didn’t promise to leave Afghanistan during the campaign, his advisors, some of them mired in the conflict for the past two decades, convinced him to authorize an additional 4000 troops for training and counter-terrorism missions.

In parallel with the troop increase, the administration slashed assistance to Pakistan, the state sponsor of the Taliban. This won’t change Pakistan’s behavior in Afghanistan, but at least America won’t be insulting itself by funding its enemy.

U.S. diplomats have started direct talks with the Taliban while reiterating that the end to the conflict will only come through an intra-Afghan settlement. At the same time, Uzbekistan’s diplomats hosted talks with Taliban representatives as part of Tashkent’s initiative to include Afghanistan in Central Asia, and to give the Taliban an interlocuter other than Pakistan.

Trump’s pro-intervention advisors probably want to block him from deciding to withdraw and upsetting the Afghan presidential election on 20 April 2019 (parliamentary elections are on 20 October 2018), and to give the new NATO commander time to make progress (known as “calendar creep”). But Afghan President Ashraf Ghani’s opponents in the Coalition for the Salvation of Afghanistan may hand Trump an opportunity to break out.

The Coalition, an assembly of the minority Tajiks, Uzbeks, and Hazara, with Pashtun leadership, will be a serious challenge to Ghani in the April 2019 election, but it may try to invalidate the October 2018 parliamentary election and call a traditional Loya Jirga to unseat Ghani. If the Coalition uses the extra-legal Loya Jirga to oust Ghani, Trump has the justification he needs to go to the American people with his decision to quit and cut America’s considerable losses, especially if he is bolstered by a pessimistic National Intelligence Estimate.

So now comes Erik Prince, the man everyone loves to hate, with a plan to privatize and streamline the tasks now being performed by about 14,000 American and 8,000 NATO troops and over 26,000 contractors. Prince earned his notoriety in Iraq when his security company, Blackwater Worldwide, was involved in a shooting incident at Baghdad’s Nisour Square that left seventeen innocent bystanders dead and caused Blackwater’s expulsion from the country. Prince, in his defense, claims he never lost a client which, if you were protected by his teams, is probably the most significant criterion.  

Prince proposes to replace the NATO forces and their support contractors with 6,000 contractors, all special operations veterans, and 2,000 U.S. special operations troops, who will provide QA for the contractors, and unilateral direct-action capability. The mentor-contractors will stay with their assigned Afghan National Army battalions for a minimum of three years. 2,000  contractors will operate aircraft for medical evacuation and close air support and will staff two western-style combat surgical hospitals that would also treat wounded Afghan soldiers. The contractors and U.S. forces would be subject to the Uniform Code of Military Justice and Afghan law, and contractor medical care would be provided by Defense Base Act insurance, which is current practice for contingency contracts.

The plan includes a governance support unit that will provide logistics to the force and, very importantly, prevent payment to Afghanistan’s “ghost soldiers” and the skimming of soldiers’ pay by their commanders, perennial corruption problems in Afghanistan’s military.

The most remarked upon feature of the plan was Prince’s suggestion that the effort be led by a “viceroy” who would answer directly to the President and command all military, diplomatic, and intelligence assets in Afghanistan. This is known as “unity of command,” and has never existed in America’s long project in Afghanistan. That person would need experience with the military and intelligence agencies, but no candidate may satisfy all the bureaucracies so the President (and Congress) will have to back it up by giving the viceroy hire-and-fire authority and control of the budgets.  

Another noted feature was contracting the effort under Title 50 of the United States Code which is the authority for the security services, such as the Central Intelligence Agency, but also for most military operations. This may expedite the contract award process, but particular attention will be required for “contract administration,” that is, ensuring the vendor completes the terms and conditions of the contract. As the military, the diplomats, and the reconstruction officials have been unable to define “success” in Afghanistan, the contracting officer and the vendor may be left to their own devices.   

And using contractors has one big benefit for a government: their deaths are pretty much off the radar, especially if they aren’t American (and a share of Prince’s force will be non-American). The media reports the death of every deployed military member, even if he dies in a vehicle accident on base, but dead contractors go unnoticed. 257 American contractors died in Iraq from 2003 to 2011 but received far less attention than the soldiers they supported.      

The opportunity to mine Afghanistan’s trove of rare earth elements was highlighted in Prince’s plan which immediately drew accusations of plunder. Yes, there is wealth to be had: Russian, British, and American geologists have found that Afghanistan has enormous untapped mineral resources, possibly valued at $3 trillion. The minerals are there, but there’s no way to mine them, so they’re effectively worthless. And there’s no way to get them out because the country is violent and corrupt which scares away investors. Outsourcing may be the last chance to recover Afghanistan’s mineral wealth for its people. It will also chip away at China’s control of a significant share of the world’s rare earths.

Moreover, Afghanistan’s government has some concerns the U.S. must address:

1. Is the plan legal under international law?

2. Will using foreign contractors encourage local warlords to circumvent the newly-formed democratic institutions in the country?

3. Who will be accountable for the success or failure of outsourcing a military campaign? How will the government of Afghanistan provide oversight of military operations on its territory?

4. Will outsourcing be seen as a for-profit corporation taking control of the conflict and selling war as a product, dooming prospects for peace and reconciliation in the country?

5. The regional powers, China and Russia, and the active neighbors such as Pakistan and Uzbekistan, may stop their support to the peace process if they interpret outsourcing as indicative of the waning interest by the U.S.

Criticism of Prince’s plan runs up against the ticking clock that is close to chiming “20 years” so   Trump may soon run out of patience and present Kabul (and U.S. officials) with a “take it or leave it” proposal. There’s no voting constituency in the U.S. for continued loitering in Afghanistan and Trump won’t lose any votes in 2020 if he says he gave it his best shot but getting out now is best for America. Secretary Mattis is concerned that outsourcing may make NATO allies jump ship, but how many American lives and dollars should we pay for Latvia’s thirty-seven troops?

Detractors of a new approach may say the sacrifice of our GIs will be dishonored by resorting to “mercenaries,” but the sunk cost of the dollars, dead, and wounded shouldn’t stop us from examining alternatives after 17 years fighting a war we are “not winning” according to  Secretary Mattis.  

Prince has suggested a “test drive” of his proposal which would see contractor deployments to Nangarhar and Helmand provinces. Nangarhar is an egress route to and from safe havens in Pakistani, and Helmand is the Taliban’s financial center of gravity where one-third of the arable land is used for poppy cultivation. That would give the U.S. some interesting lessons learned whatever the outcome but, given internal resistance in the U.S. government, it will require an impartial evaluator who will also consider Afghan concerns.

Another test drive option was suggested by Gary Anderson, a former reconstruction advisor in Iraq and Afghanistan: “the provision of construction security for the Ring Road in the remote northwestern region.” The Ring Road would like it possible to travel from the western city of Herat, which borders Iran and Turkmenistan, to Mazar e-Sharif in the north of the country and close to Uzbekistan. It would spur economic activity, increase access to education, and allow Kabul to extend its writ to the far north and west of the country, and thus be more consequential to “winning” than killing another bunch of Taliban. It would also mute “plunder” allegations and encourage Afghanistan’s Central Asia neighbors to continue their effort to integrate the country into the region.

Erik Prince’s plan gives the U.S. the opportunity to try a new strategy in Afghanistan instead of spending another year while yet another new NATO commander get acquainted with his job. It may prompt Washington to consider three options: Prince’s original plan, Anderson’s infrastructure-focused plan, or the “decent interval” option, providing mentoring and training to the Afghan army so, if worse comes to worst, the U.S. will be several years removed from a Taliban takeover.

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Two weeks after the latest economic data dump from China showed a continued slowdown in the local economy, the latest PMI surveys confirmed that the weakness in China’s manufacturing sector was accelerating.

According to the official NBS manufacturing PMI which was released on Sunday, sentiment dropped further in September, despite what has been a mild upward seasonal bias in recent years. All sub-indexes showed weaker growth momentum. The Caixin manufacturing PMI also declined in September, reflecting the nation’s economic slowdown and fallout from the trade war with the U.S. The NBS non-manufacturing PMI was stronger, however, due entirely to a surge in the construction PMI.

China’s NBS manufacturing PMI fell to 50.8 in September, from 51.3 in August and below the Bloomberg consensus of 51.2. While this was the first September drop since the NBS manufacturing PMI series was released, it was also the 26th consecutive month of prints above the 50-point mark that separates growth from contraction.

Looking at the components, all the major sub-indexes showed weaker growth momentum in September. The production sub-index moderated 0.3pp to 53.0 and the new order sub-index was 0.2pp lower at 52.0. Trade indicators softened as well—the new export order sub-index fell to 48.0 from 49.4, and the imports sub-index declined 0.6pp to 48.5. Both indexes were at the weakest levels since February 2016. The employment sub-index fell 1.1pp to 48.3, and the suppliers’ delivery times sub-index rose 0.1pp to 49.7 (higher suppliers’ delivery times imply weaker demand conditions). The raw material inventories index was 0.3pp lower, and the finished goods inventory index was unchanged vs August. Inflationary pressures increased mainly at the input level – the input price index rose 1.1pp to 59.8, and the output prices index was unchanged at 54.3.

Separately, the Caixin manufacturing PMI – which better reflects sentiment among smaller, private firms – declined to 50 from 50.6, the lowest since May 2017 and ending 15 months of expansion, with export orders falling the fastest in over two years as U.S. tariffs are starting to take a toll on the economy.

The output sub-index fell 1.4pp to 51.1, and the new orders sub-index was 50.1, 0.5pp lower the August. Similar to the NBS manufacturing survey, new export order index in the Caixin manufacturing survey softened in September, with companies citing “the China-US trade war and subsequent tariffs” as contributing factors according to the Caixin survey.

“The further slowdown in China’s official manufacturing PMI in September reflects the intensifying impact of the U.S.-China trade war on China’s manufacturing export sector,” said IHS Markit APAC chief economist Rajiv Biswas. “The near-term outlook for the Chinese manufacturing export sector remains weak, albeit the Chinese government may apply some further stimulus measures to support growth.”

It was not all gloom, however: the official non-manufacturing PMI picked up to 54.9, signaling that domestic demand for services and construction remains strong enough to mitigate some of the external headwinds that the economy is facing, largely the result of the bubble housing sector. While the services PMI reading was the same as August at 53.4, the construction PMI spiked to 63.4, 4.4pp higher from August (which might reflect the unwinding of previous drag from adverse weather conditions). That construction uptick, if sustained, could be a sign that the measures aimed at boosting infrastructure investment are starting to kick in.

According to Goldman’s Maggie Wei, the decline in the manufacturing PMI surveys “indicates that growth faced increased downward pressures in the manufacturing sector, driven by weaker export growth, possibly due to a combination of slower global demand and increased trade tensions, has possibly weighed on activity growth in the manufacturing sector.”

Goldman’s assessment is that as a result, “more policy easing measures (such as targeted RRR cuts as discussed in the recent state council meeting) could be announced in the near future to help buffer growth downside.”

Others agreed: “the government’s support policy will start to have an impact in the fourth quarter, which could offset the damage of the trade war,” said Gao Yuwei, a researcher at Bank of China. “The efforts to shore up infrastructure investment has been driving up construction activity, and services industries normally perform better in the third and fourth quarter.”

As Bloomberg notes, officials have promised fiscal stimulus in the form of tax cuts and infrastructure spending to buffer the domestic economy somewhat from the effects of the trade dispute. Analysts also expect China’s central bank will continue topping up liquidity in the financial system to support economic growth.

And while there are pockets of strength, primarily within construction, whatever stimulus China has injected has yet to reach the broader economy.

While private companies fared worse than state-owned enterprises, discrepancies in that data suggest that the picture for Chinese manufacturers may be worse than officially-reported growth rates show, according to Bloomberg.

More ominously, the official PMI report also indicates rising unemployment in the manufacturing sector, with CIC Corp’s Wenqi Liu writing that she will “continue to closely watch infrastructure and property investment growth, as they might lead the cyclical stabilization.”

For now, however, the attention of China’s manufacturing sector remains squarely focused on the growing danger of escalating trade war with the US, and as long as there is little hope of a solution, sentiment will continue to deteriorate.

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Authored by Federico Pieraccini via The Strategic Culture Foundation,

The tragic episode that caused the death of 15 Russian air force personnel has had immediate repercussions on the situation in Syria and the Middle East. On September 24, Russian Defense Minister Sergei Shoigu informed allies and opponents that the delivery of the S-300 air-defense systems to the Syrian Arab Republic had been approved by President Vladimir Putin. The delivery had been delayed and then suspended as a result of Israeli pressure back in 2013.

In one sense, the delivery of S-300 batteries to Syria is cause for concern more for Washington than for Tel Aviv. Israel has several F-35 and has claimed to have used them in Syria to strike alleged Iranian weapons transfers to Hezbollah. With the S-300 systems deployed in an updated version and incorporated into the Russian command, control and communications (C3) system, there is a serious risk (for Washington) that Israel, now incapable of changing the course of events in Syria, could attempt a desperate maneuver.

It is no secret that Greece purchased S-300s from Russia years ago, and that NATO and Israel have trained numerous times against the Russian air-defense system. Senior IDF officials have often insisted that they are capable taking out the S-300s, having apparently discovered their weaknesses.

Tel Aviv’s warning that it will attack and destroy the S-300 battery should not be taken as an idle threat. It is enough to look at the recent downing of Russia’s Il-20 surveillance aircraft to understand how reckless a desperate Israel is prepared to be. Moreover, more than one IDF commander has over the years reiterated that a Syrian S-300 would be considered a legitimate target if threatening Israeli aircraft.

At this point, it is necessary to add some additional information and clarify some points. Greece’s S-300s are old, out of maintenance, and have not had their electronics updated. Such modern and complex systems as the S-300s and S-400s require maintenance, upgrades, and often replacement of parts to improve hardware. All this is missing from the Greek batteries. Secondly, it is the operator who uses the system (using radar, targeting, aiming, locking and so forth) that often makes the difference in terms of overall effectiveness. Furthermore, the system is fully integrated into the Russian C3 system, something that renders useless any previous experience gleaned from wargaming the Greek S-300s. No Western country knows the real capabilities and capacity of Syrian air defense when augmented and integrated with Russian systems. This is a secret that Damascus and Moscow will continue to keep well guarded. Yet two years ago, during the operations to free Aleppo, a senior Russian military officer warned (presumably alluding to fifth-generation stealth aircraft like the F-35 and F-22) that the range and effectiveness of the Russian systems may come as a surprise.

The following are the words of Russian defense minister Sergei Shoigu concerning the deployment of the S-300 to Syria and its integration with other Russian systems:

“Russia will jam satellite navigation, onboard radars and communication systems of combat aircraft, which attack targets in the Syrian territory, in the Mediterranean Sea bordering with Syria. We are convinced that the implementation of these measures will cool hotheads and prevent ill-considered actions threatening our servicemen. Otherwise, we will respond in line with the current situation. Syrian troops and military air defense units will be equipped with automatic control systems, which have been supplied to the Russian Armed Forces. This will ensure the centralized management of the Syrian air defense forces and facilities, monitoring the situation in the airspace and prompt target designation. Most importantly, it will be used to identify the Russian aircraft by the Syrian air defense forces.”

If the Israelis will follow through with their reckless attempts to eliminate the S-300 (if they can find them in the first place, given that they are mobile), they will risk their F-35s being brought down. The US military-industrial complex would suffer irreparable damage. This would also explain why Israel (and probably the US) has for more than five years put enormous pressure on Moscow not to deliver the S-300 to Syria and Iran. The US State Department’s reaction over the future purchase by Turkey and India of the S-400 confirms the anxiety that US senior officials as well as generals are experiencing over the prospect of allies opting for the Russian systems. This would allow for a comparison with weapons these allies purchased from the US, leading to the discovery of vulnerabilities and the realization of the US weapons’ relative inferiority.

Given Tel Aviv’s tendency to place its own interests above all others, it would not be surprising to find them using the possibility of attacking the S-300 with their F-35s as a weapon to blackmail Washington into getting more involved in the conflict. For the United States, there are two scenarios to avoid.

The first is a direct involvement in the conflict with Russia in Syria, which is now unthinkable and impractical.

The second – much more worrying for military planners – concerns the possibility of the F-35’s capabilities and secrets being compromised or even being shown not to be a match against air-defense systems nearly half a century old.

An illuminating example of how the United States operates its most advanced aircraft in the region was given in eastern Syria around Deir ez-Zor. In this part of Syria, there is no threat from any advanced air-defense systems, so the US is often free to employ its F-22 in certain circumstances. The Russian military has repeatedly shown radar evidence that unequivocally shows that when Russian Su-35s appear in the same skies as the F-22, the US Air Force simply avoids any confrontation and quickly withdraws such fifth-generation assets as the F-22. The F-35 is not even ready in its naval variant, and has yet to be deployed on a US aircraft carrier near the Middle Eastern theater or the Persian Gulf; nor is it present in any US military base in the region. The US simply does not even consider using the F-35 in Syria, nor would it risk its use against Russian air defenses. Israel is the only country that so far may have already used these aircraft in Syria; but this was before the S-300 came onto the scene.

The F-35 program has already cost hundreds of billions of dollars and will soon reach the exorbitant and surreal figure of over 1 trillion dollars. It has already been sold to dozens of countries bound by decades-long agreements. The F-35 has been developed as a multi-role fighter and is expected to be the future backbone of NATO and her allies. Its development began more than 10 years ago and, despite the countless problems that still exist, it is already airborne and combat-ready, as the Israelis insist. From the US point of view, its employment in operations is played down and otherwise concealed. The less data available to opponents, the better; though the real reason may lie in a strong fear of any revelation of potential weaknesses of the aircraft damaging future sales. At this time, the Pentagon’s marketing of the F-35 is based on the evaluations provided by Lockheed Martin, the manufacturer, and on the tests carried out by the military who commissioned it to Lockheed Martin. Obviously, both Lockheed Martin and the US Air Force have no interest in revealing any weaknesses or shortcomings, especially publicly. Corruption is a big thing in Washington, contrary to common assumptions.

The combination of Israel’s ego, its inability to change the course of events in Syria, coupled with the loss of its ability to fly throughout the Middle East with impunity due to Syria now being equipped with a superior air defense – all these factors could push Israel into acting desperately by using the F-35 to take out the S-300 battery. Washington finds itself in the unenviable position of probably having no leverage with Israel over the matter ever since losing any ability to steer events in Syria.

With the Russian air-defense systems potentially being spread out to the four corners of the world, including China, India, Saudi Arabia, Qatar, Saudi Arabia and who knows how many other countries waiting in the queue, Russia continues to increase its export capacity and military prestige as it demonstrates its control of most of the Syria’s skies. With the introduction of the the S-500 pending, one can imagine the sleepless nights being spent by those in the Pentagon and Lockheed Martin’s headquarters worrying about the possibility of an F-35 being taken down by an S-300 system manufactured in 1969.

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After briefly turning negative in April of this year, South Korean export growth – described by BofA’s Josh Hartnett as “a notoriously good global cyclical indicator” – just collapsed, flashing bright red warning signals for global profit and economic growth.

In April Korean exports dipped modestly negative…

But tonight the September print came in at -8.2% YoY – dramatically worse than the 5.5% drop expected) with exports to US plunging:

• Exports to China at $14.59b, +7.8% y/y

• Exports to US at $5.82b, -11.8% y/y

• Imports from China at $7.89b, -6.5% y/y

• Imports from US at $4.31b, +5.8% y/y

And while Semiconductor exports soared, autos and ships/vessels plunged…

• Semiconductor exports at $12.43b, +28.3% y/y

• Steel exports -43.7% y/y

• Automobiles exports at $2.97b, -22.4% y/y

• Ship/Vessel exports at $1.39b, -55.5% y/y

And, as a further reminder, the last time South Korean export growth turned negative in the downward direction was just around the time of China’s devaluation in the summer of 2015, when global markets were on the verge of a 20% bear market, and only the Shanghai Accord of February 2016 prevented a free fall in risk assets.

If the South Korean “advance indicator” is as accurate as it has always been, forget about soaring earnings for the coming quarters: an earnings depression is just around the corner!

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With Washington in a frenzy over the FBI’s probe of Judge Kavanaugh, which according to Judiciary Committee Chairman Chuck Grassley would be no more than a week long and would be limited solely to “current credible allegations”, a new and potentially explosive allegation has emerged.

Late on Sunday, Charles Ludington, a former varsity basketball player and friend of Kavanaugh’s at Yale, told the Washington Post that he plans to deliver a statement to the FBI field office in Raleigh on Monday detailing violent drunken behavior by Kavanaugh in college.

Ludington, an associate professor at North Carolina State University, provided a copy of the statement to The Post.

In it, Ludington says in one instance, Kavanaugh initiated a fight that led to the arrest of a mutual friend: “When Brett got drunk, he was often belligerent and aggressive. On one of the last occasions I purposely socialized with Brett, I witnessed him respond to a semi-hostile remark, not by defusing the situation, but by throwing his beer in the man’s face and starting a fight that ended with one of our mutual friends in jail.”

What prompted this latest last minute memory “recollection” by a peer of Kavanaugh’s? According to the report, Ludington was deeply troubled by Kavanaugh appearing to blatantly mischaracterize his drinking in Senate testimony.

“I do not believe that the heavy drinking or even loutish behavior of an 18 or even 21 year old should condemn a person for the rest of his life,” Ludington wrote. “However … if he lied about his past actions on national television, and more especially while speaking under oath in front of the United States Senate, I believe those lies should have consequences.”

The NYT also got an interview out of Ludington, and reported that Ludington said he frequently saw Judge Kavanaugh “staggering from alcohol consumption” during their student years. He said he planned to tell his story to the F.B.I. at its office in Raleigh, N.C., on Monday.

avanaugh told outside c ounsel Rachel Mitchell during the hearing that he has never “passed out” from drinking. “I’ve gone to sleep,” he said. “But I’ve never blacked out, that’s the allegation. And that’s, that’s wrong.”

During last Thursday’s hearing, Kavanaugh was agitated by questions from Democratic senators about his history with partying and drinking, at one point asking Sen. Amy Klobuchar (D-Minn.) if she has ever blacked out due to alcohol consumption.

“I like beer,” he said in response to one of Sen. Sheldon Whitehouse’s (D-R.I.) questions. “Do you like beer, senator? What do you like to drink?”

While this latest statement to the FBI does not corroborate the testimony of Ford, or the sexual assault allegations of several other women, Democrats have called for the FBI to take a broader look at “whether Kavanaugh may have misled senators by minimizing his carousing behavior in high school and college or by mischaracterizing entries in his high school yearbook that could indicate a penchant for drunken and misogynistic behavior.”

Sen. Amy Klobuchar (D-Minn.), speaking on CNN, said Kavanaugh’s claims that he had never blacked out or suffered any memory loss while drinking don’t “quite make sense to me” and said she hoped the FBI would interview friends to determine whether that was credible.

She added that the FBI could also interview high school friends of Kavanaugh’s to determine whether his innocent explanations for portions of his yearbook entry are accurate.

“I’ve never heard that the White House, either under this president or other presidents, is saying: ‘Well, you can’t interview this person; you can’t look at this time period; you can only look at these people from one side of the street,’” she said. “I mean, come on.”

It is unclear if his testimony will play a role in the weeklong FBI investigation into allegations of sexual assault against Kavanaugh, the Times reported.

Several other classmates in recent days have accused Kavanaugh of misleading Congress over his alcohol consumption. Former FBI Director James Comey in a Times op-ed published Sunday charged Kavanaugh with “lying” under oath.

And while it is too early to determine what, if any, impact this latest statement to the FBI will have on Kavanaugh’s candidacy, it would stand to reason that there is only so much opposition that the Supreme Court candidate can take before even he decides that the SCOTUS seat is just not worth the constant anguish and media spotlight. At least, that’s what democrats are hoping.

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Despite the consensus view heading into 2018 that the Treasury yield curve would finally steepen as the Federal Reserve raised interest rates 4 times in 2018 (and possibly again in 2019), driving US stocks lower as higher interest rates brought  the post-crisis epoch of “accommodative” monetary policy to a decisive conclusion, the yield curve continues to flatten. But as US markets have mostly shrugged off this vanishing term premium, some of the country’s most respected hedge fund managers have been making the rounds in the financial press, warning that the next recession – if not a devastating debt crisis – is just around the corner.

First it was Jeffrey Gundlach, then Ray Dalio (who even devoted a free e-book to the subject comparing the modern economy to that of the late 1930s) and Ken Griffin. Now Stanley Druckenmiller has joined the party with an interview with Kiril Sokoloff, chairman of 13D Global Strategy & Research, published by RealVision. During the interview, which was taped earlier this month, Druckenmiller warned that the US’s “massive debt problem” would eventually lead to another financial crisis. “We tripled down on what caused the crisis. And we tripled down on it globally.”

But while President Trump’s decision to blow out the federal budget deficit at a time of 4.2% US GDP growth certainly won’t help, Druck blames the Federal Reserve for waiting so long to raise interest rates, allowing cheap debt to proliferate and encouraging the formation of asset bubbles in both the US and emerging markets, where the strengthening dollar has allowed fears of a possible contagion to fester.

“I would raise rates every meeting as long as I could. And the minute you got substantial disruption, I would back off. And the sad thing is, since I made that statement, oh, my god, we’ve had these just rip roaring markets. And what I was saying is, just sneak one in every time you can. Just sneak one in. And they’ve passed up on so many golden opportunities. But the problem now – and you articulated it beautifully – is, now, the debt is so much higher, particularly in emerging markets, than it was five years ago. You’re not going to be able to raise that much more, and we’re already starting to see the consequences.”

And the longer it takes the Fed to normalize interest rates, the more devastating the eventual crash will be.

The reason the debt has exploded – again, there’s no hurdle rate for investment. And when you can borrow money at zero, of course, debt is going to explode.

So you’re exactly right. We have this massive debt problem. If we don’t normalize, it’s going to accelerate and cause a bigger problem down the road.

That doesn’t mean US markets won’t see further upside in the coming months. Indeed, as US rates rise, Druckenmiller believes it’s entirely possible that money invested in emerging markets will flow back into the US, driving US equities even higher. At the same time, this will add unneeded stress to the already precarious situation in emerging markets, increasing the risk of another debt crisis. And once these “bombs start to go off” in the EM world, contagion could quickly spread to the US. Oblivious to these risks, the Fed will continue to tighten, heaping more suffering in the EM world, until the pressure spreads to the US – at which point policymakers will scramble to slash rates and move back to an “accommodative” stance. 

On a practitioner’s basis, we have a lottery ticket in Brazil and in South Africa, because, as we’ve seen, back in the ’90s and again now, these things can move 50%, 60%, and your risk is probably not much more than the carry. I don’t know whether I’m going to get paid, but with the monetary tightening, we’re kind of at that stage of the cycle where bombs are going off. And until the bombs go off in the developed markets, you would think the tightening will continue.
And if the tightening continues, the bombs will keep going off…”

Moving on from the subject of monetary policy, Druckenmiller shared his thoughts about the future of Alphabet stock, which, like Facebook, Twitter and a handful of other massive tech firms, has been embroiled in controversies over how it collects and monetizes personal user data, as well as whether Alphabet constitutes a monopoly. To the latter point, Druckenmiller brushed off the concerns of Margrethe Vestager, the EU’s competition commissioner, who levied billions of dollars in fines against Google and Alphabet over alleged anti-trust violations. If Vestager – whom Druckenmiller derisively refers to as “that woman from Denmark” – is so concerned about a Google being a monopoly, she should try using another search engine for a year. As Druckenmiller argues, “they’re only a click away.”

And to hear the woman from Denmark say that the proof that Google is a monopoly and that iPhones don’t compete with Android is that everyone uses the Google search engine is just nonsense. You’re one click away from any other search engine. I just I wish that woman would have to use a non-Google search engine for a year– just, OK, fine, you hate Google? Don’t use their product, because it’s a wonderful product.

That doesn’t mean there shouldn’t be some regulation, of course, Druckenmiller concedes. Still, he believes his Alphabet shares are worth holding on to.

But clearly, they are monopolies. Clearly, there should be some regulation. But at 20 times earnings and a lot of bright prospects, I can’t make myself sell them yet.

Asked to comment on the theory that most big-name investors earn the bulk of their returns off two or three trading ideas, Druckenmiller said that, during his career, he preferred to place big bets in bond and currency markets that trade 24 hours…that way he can close out some or all his position at any time, thus making it easier to “change his mind.”

If an investor is going to make a play like this in the equity markets, they “have to be right.”

As the disclaimer, if you’re going to make a bet like that, it has to be in a very liquid market, even better if it’s a liquid market that trades 24 hours a day. So most of those bets, for me, invariably would end up being in the bond and currency markets because I could change my mind. But I’ve seen guys like Buffett and Carl Icahn do it in the equity markets. I’ve just never had the trust in my own analytical ability to go in an illiquid instrument, which in equity is if you’re going to bet that kind of size on– you just have to be right.

Watch the full interview below:

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Authored by Nicholas West via ActivistPost.com,

As the march toward a cashless (and privacy-less) society accelerates forward, a new high watermark has been reached…

India first introduced its concept for a nationwide biometric ID database more than 7 years ago, which they touted as a necessary “social welfare” program to assist the millions of India’s unbanked, streamline welfare distribution and reduce corruption. At the time, Brandon Turbeville reported on the plan for Activist Post.

Yet, although the justification for the billion person database is the increased ability to accurately disperse social welfare benefits, it will not be just the Indian government’s social welfare programs that have access to and utilize the UIDAI. Indeed, even before the program has been completed, major banks, state/local governments, and other institutions are planning to use the UIDAI for identification verification purposes and, of course, payment and accessibility.

As Aaron Saenz of the Singularity Hub writes:

Yet the UID is going to be used for much more than social welfare programs. The UIDAI is in discussion with many institutions (banks, local/state governments, etc.) to allow them to use the UID as a means of identity verification. These institutions will pay the UIDAI some fee to cover costs and generate revenue. There seems to be little doubt that once it is established, the UID will become a preferred method (if not the preferred method) of identification in India.

Saenz also sees the eventuality of the UIDAI program becoming a means of payment and accessibility. He continues:

Ultimately, I wouldn’t be surprised if the UID, with its biometric data, could be used as a means of payment (when linked to a bank account), or as an access key to homes and cars. Purchase a meal with your fingerprint and unlock your door with the twinkle in your eye. Similar results could be expected in other nations that adopted biometric identification systems.

This appears to be exactly the path the country is on now that more than 1 billion people are signed up. According to a new article in The Wall Street Journal, India’s top court addressed the constitutionality of the program as well as deeper concerns about ongoing privacy violations.

The country’s controversial Aadhaar program uses photos, finger and eye scans and has already signed up more than 1 billion people. It has sparked an intense global debate over how far a democracy should be able to go in collecting the personal data of its citizens and how that data can be used, shared and protected.

Wednesday’s Supreme Court ruling was a response to multiple challenges to the system.

A five-judge panel ruled in a 4-1 decision that the program is constitutional and helps the poor by streamlining disbursement of welfare benefits. Being in the database, however, shouldn’t be required for using mobile phones, opening bank accounts or for school admissions, according to the 1,448-page document outlining the court’s decision. It had been unclear for some time whether such organizations could compel people to supply Aadhaar numbers.

“It’s a historic judgment,” Finance Minister Arun Jaitley said. “Everyone must realize, including critics of Aadhaar, that you can’t defy technology or ignore it.” (N.W. emphasis added)

In case it’s not ultra clear, that last statement is as close to an admission of technocratic policy as you’re likely to get coming from a supposed democracy. Or if you prefer the Star Trek version: Resistance is Futile … as you give up your freedom and are assimilated into the Borg.

To WSJ‘s credit, they do address some of the practical problems that people are already facing with the arrival of “the machines.”

Time and again, we have seen countries both democratic and autocratic serve as blueprints for others to follow. Given the surge in the use of biometrics for airline travel and other forms of “elective” identification in the United States, is it really unreasonable to assume that if a country of more than 1 billion people can implement this, the U.S. population of 350 million will be protected by its own Constitution?

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As previewed yesterday, ahead of tonight’s midnight deadline for a Nafta deal between the US and Canada, it appears that a deal has been agreed upon according to unconfirmed reports, with the only outstanding items being approval from Trudeau and Trump.

To that end, moments ago Canada’s CTV reported that Canada Prime Minister Justin Trudeau has called a cabinet meeting for tonight at 10pm, “as senior Canadian officials appear to be close to a NAFTA deal.” Trudeau arrived at his office around 7 p.m., where high-level staff and Foreign Affairs Minister Chrystia Freeland have been working since early Sunday morning to secure a NAFTA deal.

BREAKING: Sources tell @CTVNews that Trudeau has convened a cabinet meeting on the Hill TONIGHT at 10 p.m. My understanding is that any minister who is in town has been asked to come in, others are to join by phone. #cdnpoli #NAFTA

— Rachel Aiello (@rachaiello) October 1, 2018

He took no questions from reporters who have gathered there to monitor the latest developments as the intense last-minute push before the U.S.-imposed midnight Sunday deadline inches closer.

Trudeau arrives at his office and doesn’t answer questions #cdnpoli pic.twitter.com/IVcq1s2jmu

— Mackenzie Gray (@Gray_Mackenzie) September 30, 2018

The end of day deadline is to work out a trilateral renegotiated text that can be presented to the U.S. Congress and can be signed off by the outgoing Mexican president before his term runs out on November 30, otherwise the U.S. and Mexico intend to go ahead without Canada.

According to a Bloomberg report, the two sides were discussing the last sticking points, including greater market access for U.S. supplies into Canada’s dairy market, in exchange for concessions from the Trump administration which was reportedly ready to agree with Canada’s wish to keep Chapter 19′s dispute-settlement mechanism.

Earlier on Sunday, Canada’s ambassador to Washington, David MacNaughton, said that talks are moving forward but not yet completed. “Lots of progress but we’re not there yet,” MacNaughton told reporters in Ottawa, where the Canadian team is gathered. He said he didn’t know if a deal would be reached Sunday, although an announcement now appears imminent.

Reaching a pact with Canada allows the 24-year-old pact to remain trilateral and for the U.S. to check another box for its legislative process in the lead up to a congressional vote.

As reported yesterday, last minute progress on negotiations was made thanks to Trump senior adviser Jared Kushner for helping smooth the path toward a deal.

When it looked like negotiations had stalled or broken down due to friction between the U.S. and Canadian sides, Kushner kept talks going with aides close to Prime Minister Justin Trudeau, including Gerald Butts and Katie Telford, three people said.

Meanwhile, the Canadian dollar was rallying on anticipation of a deal, strengthening 0.5 percent, while the Mexican peso gained abut 0.2 percent. S&P futures rose 10 points ahead of the announcement.

 

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The IMF released the Currency Composition of Official Foreign Exchange Reserves (COFER) data for Q2 2018 on Friday. The total of reserves that are broken down by currency went up by $123BN, and unallocated reserves fell by $243BN. The most notably observation in the COFER report is that reserve managers actively decreased their allocation to USD – more than offsetting the effect of dollar appreciation – while at the same time adding significantly to non-USD allocations and especially to Chinese Yuan reserves.

Commenting on the report, Steven Englander from Standard Chartered notes that there are two possible big pieces of news in the Q2 COFER data, but only one that is likely to be meaningful.

The meaningful news is the continued run-up in CNY in reserves portfolios, even in a quarter when CNY depreciated sharply. This suggests increasing demand among reserves managers for CNY in their portfolios. Most likely this reflects the importance of CNY in trade and initiatives taken by the Chinese government to internationalize CNY. This buying is probably long-term in nature, as CNY is not yet sufficiently liquid in all time zone and EM selling of CNY when EM is under pressure could backfire.

At the same time, the drop in the USD share of allocated reserves is likely to be the less meaningful development. It could be interpreted as diversification away from USD but this conclusion is premature. The currency allocation of the China reserves portfolio is still being added piece by piece, and the USD share is uncertain. In addition, some EM countries were very likely intervening to stabilize their currencies to prevent a sharp drop. This intervention was likely USD selling and buying of local currencies as the USD is the most liquid part of their portfolios.

Putting the data together, Englander finds some unambiguous inferences. The major one is that Q2 non-China reserve manager holdings of CNY went up from USD 146bn to USD 193bn, despite a 5.2% depreciation that would normally have reduced the value of CNY reserves in USD terms.

This suggests that:

1. global reserve managers have a strong appetite for CNY;
2. market participants excluding non-China reserve managers were big sellers, offsetting reserve manager buying and forcing the CNY down by 5.2%;
3. CNY in reserves is now roughly at the levels of AUD and CAD, and about 40% of GBP and JPY holdings, so there is room for a lot more buying.

Meanwhile, of the USD 123bn increase in allocated reserves, the USD went up by USD 53bn, well below its 62.5% share in allocated reserves in Q1. Most likely there was some intervention by EM reserve managers whose currencies were under pressure, with USD sold as the most liquid holding. On the other hand, reserve managers appear to have actively purchased EUR to lean against the effects of EUR depreciation.

However, as noted above, what was most notable was the rapid allocation to China by reserve managers.

The chunk of China’s reserve portfolio that was integrated may have had a small USD share, but it would have had to be unusually small to generate the small USD increment. The selling of USD in intervention was more important; the reverse of the USD buying that occurred when the USD was under pressure. It is also possible that reserve managers were diversifying out of the USD, either for portfolio reasons or because of political differences with the US. That said,  at just 1.8%, the CNY weight remains relatively limited, but we think this can slowly rise over the next few years.

While there are various nuances to the data, the accelerating rotation out of USD reserves and into Chinese reserves is a trend that is worth watching, especially if it indeed represents a “diversification away from USD” as a result of political disagreements with the US, a sign that de-dollarization is starting to affect capital allocation decisions at the institutional level among global central banks.

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