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A detailed Army Times report this week explains why after years of neglect during the “war on terror,” the Army is getting “back to its big guns as it prepares for the near-peer fight”. 

Since 9/11 and the US invasions of Iraq and Afghanistan, counterinsurgency warfare has taken center stage and drives US military preparedness and tactics. This means that what the army did best since WWII and throughout the Cold war — field artillery, or “the big guns” such as large arrays of Howitzers positioned along a conventional front — took a backseat while pinpoint counterinsurgency seek-and-destroy missions within an irregular battlefield terrain gained prominence. 

Thus as the Army Times explains, “After nearly two decades of counterinsurgency warfare, the Army’s artillery and missiles — once the core of the modern Army’s way of land warfare — withered in quantity, quality and manpower.”

But now, with a rising focus on the “Russia and China threats” over the past two years, the Army is once again emphasizing the return of its “fires” community and big guns capabilities.

In the words of the Army Times: That brings the fires community, from artillery to missiles to air defense, back to the forefront of what makes a unit effective and lethal.

Army leadership began to take notice of its dwindling capabilities in what was once a core area of battlefield readiness after military studies showed that Russian cannons have far surpassed the American guns in range.

The RAND corporation, for example, has noted that “Russian cannons have 50 percent to 100 percent greater range than current U.S. cannons”.

The Army is now pushing to both exceed the range of that of its adversaries, and return its dwindled “fires” officer corps back to sufficient strength. 

As the Army Times report explains, “To do that, the Army has embarked upon three tiers of focus, from upgrading old school artillery cannons, to swapping out its missile system to double the distance it can fire, and giving the Army a way to fire surface-to-surface missiles at ranges of 1,400 miles.”

This includes upgrading US battlefield tactical missile systems, which the report notes is also behind Russian capabilities, and that “Even now, in the missile community, the strength of the firepower is roughly half of what it was during the Cold War“. Citing an example, The Army Times identifies that “right now, Russia has the U.S. beat. Its SS-26 Iskander missile can reach up to 310 miles. That exceeds the Army Tactical Missile System, or ATCAMS, which goes to 186 miles.”

And concerning long-range missile systems, increasingly in the news of late after over the summer Russia released a series of videos touting its “hypersonic weapons”, and after US generals warned China is also on its way to deploying “unlimited range” hypersonic weapons, the Army is further seeking to jump start two related programs to keep pace.

Per the report: “For strategic ranges, the Army is looking to two programs — the Strategic Strike Cannon Artillery, which hits at nearly 1,000-miles, and the Strategic Fires Missile that can hit 1,400 miles.”

With Russia once again considered a superpower “threat” on the world stage, and as some scholars have suggested the West in recent years initiated an unnecessary and avoidable “new Cold War”, the US Army is attempting a return to its capabilities at the height of the Cold War years, where its artillery and tactical missiles could keep the clear upper-hand along a conventional front.

The Army Times continues: 

When the United States faced an immediate near-peer threat in the then-Soviet Union, the ability to mount massive conventional fires as armor and mechanized units maneuvered around the battlefield was paramount. And the firepower showed it.

At the peak of the Cold War, Army formations could trade artillery and rocket barrages with their foes, confident that they could match or outrange them as the battle progressed.

Or perhaps this is just the latest way the Department of Defense can continue expanding its budget, fueled by a hyped “Russia threat”. 

But regardless, it’s a sign that a new arms race is already well underway with Russia and China, and the Pentagon is seizing the opportunity. 

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Authored by Raul Ilargi Meijer via The Automatic Earth blog,

An ancient Latin saying goes: “Quod licet Iovi, non licet bovi” (what is permissible for Jupiter, is not for an ox). It feels very much on topic when social media are concerned. And as the heat over their censorship is turned up, it may well be the decisive factor.

Reuters reiterates today that on May 23, Manhattan US District Judge Naomi Reice Buchwald ruled that Donald Trump’ Twitter account is a public forum and blocking Twitter users for their views violates their right to free speech under the First Amendment. The same, says the ruling, applies to other government officials’ accounts.

On August 10, the Knight First Amendment Institute at Columbia University sent the Justice Department a list of 41 accounts that remained blocked. Since, at least 20 have been unblocked. Interestingly, the same Justice Department has stated that the ruling was “fundamentally misconceived” arguing Trump’s account “belongs to Donald Trump in his personal capacity and is subject to his personal control, not the control of the government.”

Potentially even more interesting is that “the Internet Association, a trade group that represents Twitter, Facebook Inc, Amazon.com, and Alphabet Inc, filed a brief in the case earlier this month that did not back Trump or the blocked users but urged the court to “limit its decision to the unique facts of this case so that its decision does not reach further than necessary or unintentionally disrupt the modern, innovative Internet.” “

Yeah, they would like that, to make this about Trump only. But that would be strange, because the First Amendment doesn’t only apply to Trump (and/or government officials). It applies to everyone, including Twitter, Facebook, Amazon, and Alphabet. Or does it? Well, not according to the Internet Association:

“Despite any First Amendment status that this court might find in the ‘interactive spaces’ associated with President Trump’s account, Twitter retains authority to revoke access to both his account and the account of any user seeking to comment on President Trump’s account.”

Hmm. So Trump can’t block people from his own Twitter account, but Twitter can do whatever it wishes to that same account. Apart from, you know, banning him, even though many in the ‘left-leaning’ company would like to do just that. Then again, Trump’s 54 million followers make it a profitable account for Twitter. Still, this can obviously not stand. There are no different constitutions for different parties. And they’re not done:

“..there is a considerable risk that any decision that may recognize isolated public forums on Twitter will be misunderstood to hold that Twitter, too, can be subject to First Amendment scrutiny. …Twitter itself is not a state actor when it blocks or withdraws access to its account-holders or users, and it is therefore not subject to the First Amendment’s restraints.”

See? According to the Internet Association, the First Amendment doesn’t apply to its ‘members’, it applies to state actors only. It feels encouraged to make such statements directly by the wording of Judge Buchwald’s ruling. Put differently, Donald Trump’s Twitter account is a public forum but all the rest of Twitter is not (except for other officials).

Now, I’m not a lawyer, but it seems obvious that these people may well be shooting themselves in the foot after first having put it in their mouths. To date, the Internet Association’s members have been able to picture themselves as private enterprises not under the same rules as public ones.

But how much longer is that a feasible attitude? As I said recently, Twitter and Facebook have become the no. 1 warning system in cases of emergencies and disasters, and banning or blocking people from it is as dangerous, life threatening even, as banning people from having radio’s, phones or TVs.

When the first radios, phones, TVs were introduced, other warning systems were in place. But over time they became the warning system. As I put it earlier, first you’re an entity, and then you become a utility. And the US judicial system has acted decisively on this in the past, though by no means perfectly.

Twitter, Facebook, Google seek to find the magic sweetspot where they can do whatever they damn well want while raking in billion after billion. But they’re as much behind the curve as the political and legislative systems are. They have already fallen victim to their own success, but they either don’t realize it or try to obfuscate it.

Meanwhile, they’re still banning, shadowbanning and blocking to their heart’s content. They should understand that cannot go on. They’re not some Harvard hobby club anymore. They’re killing off the very legal protection they claim to be protected by, because their position in society shifts. It takes a while, largely because their rise has been meteoric, but politics will catch up; it has to.

Former UK ambassador to Uzbekistan Craig Murray wrote yesterday:

Facebook has deleted all of my posts from July 2017 to last week because I am, apparently, a Russian Bot. For a while I could not add any new posts either, but we recently found a way around that, at least for now. To those of you tempted to say “So what?”, I would point out that over two thirds of visitors to my website arrive via my posting of the articles to Facebook and Twitter. Social media outlets like this blog, which offer an alternative to MSM propaganda, are hugely at the mercy of these corporate gatekeepers.

As for us, the Automatic Earth, Facebook closed our 9-year account a while back without one word of warning or explanation. We asked many times why, but never received an answer. Sent documents to prove who we are, nothing. Gone 1000s of followers, gone traffic, gone revenues. It’s simply too much power for a bunch of geeks, now aligned with the Atlantic Council, to have. It must be broken up.

Murray on the Atlantic Council:

 “..extreme neo-con group part funded by NATO and whose board includes serial war criminal Henry Kissinger, Former CIA Heads Michael Hayden and Michael Morrell, and George Bush’s chief of Homeland Security Michael Chertoff, among a whole list of horrors.”

The companies could try and hide behind the fact that they’re international, and can’t be defined by US law only, but that would be a risky proposition. Julian Assange has by and large been denied his First Amendment rights by the current administration because he’s not an American, while Christopher Steele was granted his despite not being an American. Wobbly ground, that.

But yes, stay American and Baby Bells loom in your future. Not that this is the only issue Silicon Valley’s legal teams will have to tackle with:

Sammy Ketz, AFP’s Baghdad bureau chief, wrote yesterday:

.. it is not the news organisations who reap the profits but internet platforms, which help themselves to our reporting without paying a cent. [..] The media have endured a lot of pain for a long time before reacting to the financial drain, struggling with the consequences rather than the cause. They have laid off staff almost to the point of absurdity. Now they are demanding that their rights are respected so they can carry on reporting the news. [..]

We can no longer swallow the lie spread by Google and Facebook that an EU directive on such rights would threaten people’s ability to access the internet for free. Free access to the web will endure because the internet giants, which now use editorial content for free, can reimburse the media without asking consumers to pay.

Difficult? Impossible? Not at all. Facebook made $16bn in profits in 2017 and Alphabet (Google’s parent company) $12.7bn. They simply have to pay their dues. That is how the media will survive and the internet titans will be contributing to the diversity and freedom of the press they claim to support.

The Internet Association members don’t appear to get it yet, but their opportunity windows are fast shuttering. There is no way for them to keep on doing what they have, as they have, for much longer. They’ve drawn the ire of Donald Trump, and though they may tend to focus more on denouncing him, they’d better pay attention.

Because they don’t hold the cards. Or rather, they’ve been overplaying them. We know they’ve been meeting with the explicit goal of coming up with a general strategy for the November US mid-term elections. We also know they are left-leaning. And that they’ve banned and blocked many accounts.

All it takes is for a judge or the president to label them a utility, and put them in the same legal frame as a phone company or broadcaster. Because if they can’t be objective, while they are the no. 1 source of news for many people, the potential influence of their secret algorithms and obvious political bias is just too great.

And that is obstruction of democracy, and in the end, justice. As I wrote last week in The Shape of Trump to Come:

Trump will end the ‘monopolies’ of Facebook, Google, Twitter et al. [..] .. you simply can’t have a few roomfuls of boys and girls ban and shadowban people with impunity from networks that span the globe and reach half of the world’s population on the basis of opaque ‘Terms and Conditions’ that in effect trump the US constitution the way they are used and interpreted. Whether they are private companies or not will make no difference in the end.

I have the impression that they think they can fight this. All those billions buy good lawyers. But in the end, you can’t have the president under one set of constitutional rights, and Jack Dorsey or Mark Zuckerberg under another.

Sure, the intelligence community may protest whatever ‘solution’ the White House or DOJ comes up with. But they, too, must realize that elections that are very obviously skewed towards one side are a huge danger to America. And social media have obtained the power to skew them. Much more than a few bucks worth of Russian ads on their podium, that whole story is entirely insignificant compared to America’s ‘own’ social media.

Trump can simply say: if my account must be open, let that be true for everybody else’s too. Forbid any and all banning and blocking unless and until a judge permits it on constitutional grounds, on a case by case basis.

Judge Buchwald has opened that door by declaring Trump’s Twitter account a public forum. That speaks to the status of Twitter -and Facebook et al- in American society. She can’t take that back.

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With a bilateral deal between Mexico and the US already ironed out, Canada said an agreement to salvage the trilateral North American Free Trade Agreement (NAFTA) is possible by the Friday deadline, but it will be hard work to resolve specific issues as talks with the United States entered a second day. Canadian Prime Minister Justin Trudeau said his government is trying to reach agreement with the U.S. this week. But Trudeau added that Canada won’t sacrifice its goal of getting the “right deal.”

“We recognize that there is a possibility of getting there by Friday, but it is only a possibility, because it will hinge on whether or not there is ultimately a good deal for Canada,” he said at a press conference in northern Ontario on Wednesday. “No NAFTA deal is better than a bad NAFTA deal.”

“We’re going to be thoughtful, constructive, creative around the table but we are going to ensure that whatever deal gets agreed to is the right deal for Canada and the right deal for Canadians.”

Trump earlier set a Friday deadline for the three countries to reach an in-principle agreement, and is pressuring Canada to strike a deal by week’s end, which is when the Trump administration plans to inform Congress that he intends to sign a new trade pact with Mexico in 90 days that would replace Nafta. If Canada holds out, Trump warned he would levy tariffs on Canada if it does not come on board with revised trade terms.

This gives Canada three options according to Bloomberg: either strike a deal both can live with, cave to Trump’s pressure tactics or dig in and see what the U.S. will do.

Canadian Foreign Minister Chrystia Freeland said Wednesday that she was optimistic that progress can be made this week, but she added that much work remained to be done to iron out the details: “When it comes to specific issues, we have a huge amount of work to do.”

Foreign Affairs Minister Chrystia Freeland says she is “encouraged” and “optimistic” as NAFTA negotiations resume in Washington.
Read more: https://t.co/FfbLIHqR3O pic.twitter.com/kScaxlYiU0

— CTV News (@CTVNews) August 29, 2018

She declined to name the specific issues, but said on Tuesday that Mexico’s concessions on auto rules of origin and labor rights was a breakthrough. Freeland said the U.S. and Canada agreed to not negotiate the unresolved details publicly.

“There are some important things that we believe we have accomplished together with the U.S. and thanks to some significant compromises Mexico was prepared to make to support Canadian workers,” Freeland told reporters Wednesday in Washington after morning meetings with U.S. Trade Representative Robert Lighthizer.

The Canadian dollar pared losses after Freeland’s comments, and was little changed at C$1.2915 per U.S. dollar at 3:19 p.m. in Toronto trading. It had been down as much as 0.2 percent earlier in the day. Freeland said she’s planning to meet with Lighthizer again at 5 p.m. on Wednesday.

According to Bloomberg, Canada’s dairy market is a focal point for Wednesday’s negotiations, a U.S. official familiar with the negotiations said. Trump has repeatedly deemed Canadian tariffs on some dairy products as unfair for U.S. producers.

Trudeau on Wednesday restated his position of defending the “supply-management” system that controls production of some Canadian farm products like dairy. 

After being sidelined from the talks for more than two months, Freeland will be under pressure to accept terms the United States and Mexico worked out. The U.S. Congress also wants a deal that includes Canada. The three countries are aiming to seal a trade pact by Friday to allow Mexican President Enrique Pena Nieto to sign it before he leaves office at the end of November. The timeline accommodates a 90-day waiting period under U.S. trade law before Trump can sign the pact.

The political implications are big for the other two countries too. Republicans face mid-term elections in November and Trudeau a national one expected by October 2019. “The strategy is to get a better deal,” White House spokeswoman Sarah Sanders said on Wednesday.

Outstanding issues

One of the issues for Canada in the revised deal is the U.S. effort to dump the Chapter 19 dispute resolution mechanism that hinders the United States from pursuing anti-dumping and anti-subsidy cases. U.S. Trade Representative Robert Lighthizer said on Monday that Mexico had agreed to eliminate the mechanism.

As Reuters reports, to save that mechanism, Ottawa plans to change one rule that effectively blocked American farmers from exporting ultrafiltered milk, an ingredient in cheesemaking, to Canada, the Globe and Mail reported, citing sources. Trudeau repeated on Wednesday that he will defend Canada’s dairy industry.

Other hurdles include intellectual property rights and extensions of copyright protections to 75 years from 50, a higher threshold than Canada has previously supported.

“I think that what they probably need by Friday is some indication from Canada to the Americans that it’s ready to play ball, that they’re ready to negotiate in good faith,” said Mark Warner, a trade lawyer with MAAW Law, which specializes in Canadian and U.S. law.

“If Chrystia Freeland goes down there and she starts going on and on about red lines again, then I think it’s all over,” he added.

Commenting on today’s talks, President Donald Trump said they are going well, expressing optimism the two countries could reach a deal this week.

“We’re doing really well,” Trump told reporters at the White House on Wednesday, referring to negotiations between U.S. and Canadian officials in Washington. “They want to be part of the deal. And we gave till Friday and I think we’re probably on track.”

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How Argentina feels tonight… (fwd to 2mins if you can’t bear to wait)

 

Since China intervened mid-month (ahead of the US-China trade talks), the Yuan strengthened and US equities soared (until decoupling the last few days)…

 

And bond yields have fallen (QE trade!?)

 

But Emerging Market currencies have started to collapse again…

 

The Nasdaq is on course for its best August since the year 2000…Things did not end well last time (-74% in under 3 years)

 

Ramping in an echo of January’s exuberance – …Things did not end well last time

 

And we note that VIX has recently decoupled from stocks…

Buoyant appetite for call options may offer one explanation for why VIX rose in tandem with equities in recent sessions. A similar situation preceded the record spike in volatility earlier this year that abruptly ended the previous stretch of all-time highs for U.S. stocks.

 

And finally, if you think stocks are rallying on fun-durr-mentals, you’re wrong!

But apart from that, BTFATH!!!

*  *  *

Chinese stocks continued to drift lower after Monday’s National Team pumpathon…

 

And record highs in US stocks, because why not! From 10amET (Freeland!?) to 1130pmET (EU close), there was a clear systemic bid across the entire US equity market. Cash markets closed on a weaker tone despite 1 billion MoC to buy…

 

Everything was clam overnight but the fact that US equity markets actually opened seemed to invoke a buying panic that ended when EU closed…

Treasury yields were mixed today with most of the curve up around 1-2bps only but the long end slightly lower…

 

30Y Yields remain above 3.00% but appear to have peaked in this micro-ramp…

 

The Dollar ended the day lower, once again though shifting-trend in the middle of the day…

 

The yuan has started to slide once again…

But EM FX was ugly. The Brazilian Real managed modest gains along with the Mexican Peso but the Argentine Peso collapsed and the Turkish Lira continued its renewed weakness…

 

Turkey is tumbling back toward pre-holiday record lows…

 

But the Argentine Peso was utterly destroyed… (biggest drop since 2015’s devaluation) ARS closed on its low tick, a fraction below the 34.0/USD level.

 

Cryptocurrencies were modestly lower today, legging down around the US equity open…

 

PMs managed gains amid the weaker dollar, copper slipped lower but WTI surged after inventory data…

 

WTI Crude is back up near the $70 handle once again…

 

And spot Gold is holding above $1200…

So much for the Fed balance sheet delta impacting stocks!!??

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Reuters has confirmed a bombshell report which first surfaced Tuesday in Lebanese media saying that a high level delegation of US intelligence officials made a secret visit to Damascus in June to meet with President Bashar al-Assad’s most trusted senior advisor, Ali Mamlouk, who serves as Syria’s top security chief. 

The meeting, which took place near Damascus international airport, was first revealed by the Lebanese daily al-Akhbar, which reported it as lasting up to four hours and part of an ongoing secret back-channel dialogue.

Such talks are unprecedented for the fact that the two countries haven’t had such direct dealings since near the start of the conflict in 2011, and the United States and its allies have bombed Syrian government forces and locations multiple times over the past years. 

Perhaps the biggest revelation is contained in the following, according to Reuters:

U.S. officials had demanded the withdrawal of Iranian forces from southern Syria and data on “terrorist groups”, including foreign fighters, and had also requested a role in the oil business in eastern Syria.

The secret face-to-face dialogue between US and Syrian intelligence officials reportedly centered on discussions over chemical weapons usage and stockpiles, defeating ISIS, and the fate of American journalist Austin Tice, kidnapped in 2012 after being embedded with FSA factions. However, US officials blame Damascus or its allies for kidnapping and continuing to hold Tice. 

Reuters was able to obtain separate confirmation of the al-Akhbar report through US intelligence sources: Asked about the reports, two senior U.S. intelligence officials, speaking on condition of anonymity, said there was an “ongoing dialogue with members of the Assad regime”…

Meanwhile, the Al-Akhbar report (which can be read in English translation here) notes that the U.S. officials had additionally demanded with withdrawal of all Iranian forces from Syria’s south, as well as available Syrian government data on all terrorists operating in the country, especially captured foreign fighters.

Crucially, the list of requests also included that the US have a role in Syria’s eastern oil fields, according to Reuters, citing Al-Akhbar. Currently, a number of major oil and gas fields fall in areas under the control of the largely Kurdish and US-backed Syrian Democratic Forces. 

The Al-Akhbar report provided the following details regarding US demands, according to an English translation provided by Syriana Analysis:

The American side made a clear and specific offer: The United States is ready to withdraw its troops completely from Syrian territory, including the Al-Tanf and Eastern Euphrates according to security arrangements supervised by the Russian and Syrian armies. In exchange for three US demands:

First, Iran’s full withdrawal from the Syrian south.

Second, to obtain written guarantees that give US companies a share of the oil sector in the regions of eastern Syria.

Third, the Syrian side to provide the Americans with full data of the terrorist groups and their members, including the numbers of foreign fighter deaths of these groups and those who survived, and those may return to Western countries, considering that the terrorist threat is intercontinental. And what we can get, serve the international security

And the Syrian delegation’s response according to Reuters was as follows: “Mamlouk said Damascus would not cooperate with Washington on security issues until they had normalized ties and he also demanded a complete withdrawal of U.S. forces from Syria, al-Akhbar reported.”

Reuters cites a trusted regional source to say “most details in the al-Akhbar report were correct,” which makes the mention of US eyeing Syrian oil interesting, especially as when Trump publicly mulled pulling US troops out of Syria altogether prominent neocon pundits urged “staying the course,” while saying, “We took the oil. We’ve got to keep the oil.”

But it appears the Syrian government, fully aware it has won the seven year long proxy war, and now headed to complete military victory in Idlib (barring any last minute “provocation” which could spark a new round of major external military intervention), has shut the door on the US intelligence officials. 

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Authored by Daniel Nevins via FFWiley.com,

Recommendation for Bond Investors: Don’t Fight Financial Repression

The Congressional Budget Office (CBO) released two supplemental reports this month – the first reveals budget scenarios it “did not have enough time” to include in June’s 2018 Long-Term Budget Outlook, and the second shows what needs to happen for policy makers to reach certain government debt targets.

I plan to post a few charts summarizing the new reports, but because I’m sounding off on bonds for now (or in a moment) and don’t need all the detail to support my argument, I’ll share only a short summary of the first report.

The CBO Swallowed the Red Pill, and Here’s What Transpired

In its report titled The Long-Term Budget Outlook Under Alternative Scenarios for Fiscal Policy, the CBO produced three scenarios that didn’t make the publication deadline for its primary long-term outlook. In a more honest world, though, the order of publication would have been reversed—the primary report would have contained only the new scenarios. By building the new scenarios on well-established lawmaking practices that are disallowed in the primary report’s “baseline” scenario, the CBO is finally nudging toward a realistic estimate of our government debt trajectory. The new scenarios address the problem that the baseline is so heavily gamed by devious lawmaking and compromised by shoddy economics that it falls somewhere between unhelpful and fraudulent.

Does that sound extreme? Too radical for you?

If you’ve studied the baseline methodology with any seriousness and yet insist on defending it, I know of a guy in the electric car business who’d like to talk to you about financing. Seriously, though, the baseline’s deficiencies are glaring, which is why a growing number of analysts are writing about them while producing their own projections. (Here’s an example from Goldman Sachs and Zero Hedge, and you can find my projections in my book, which includes analysis of all historical episodes of governments running debt as high as America’s today, and in blog posts here and here.)

But if you’re not a sucker for establishment narratives, I have three numbers for you, one for each of the supplemental report’s new scenarios. The numbers tell us where America’s debt-to-GDP ratio might be at the end of the CBO’s 30-year projections, but they were buried in the report’s last paragraph and appeared nowhere in the charts. To explain their omission from the rest of the report, the authors pointed out that the numbers rely on uncertain assumptions that are probably too optimistic. And the stated reasons for excessive optimism don’t even include two points commonly cited by CBO critics (for more discussion, see the second of my blog posts linked above):

• The figures are built on a blissful economic future marked by improving productivity growth and a 30-year average unemployment rate lower than America has ever recorded.

• The figures exclude debt owed to the Social Security and Medicare Trust funds.

So given all the reasons to think the CBO’s debt projections are too low, you might expect numbers that are, well, low, right?

How about this: 210%, 230% and 260% of GDP, respectively, in the three scenarios. Those are the optimistic estimates for where America’s debt-to-GDP ratio might be in 30 year’s time. For reference, America’s “debt held by the public” is currently 76% of GDP, so the optimistic estimates call for about a tripling in proportion to the economy over the next three decades.

The Most Important Thing for Investors to Understand about Government Debt

But enough about debt-to-GDP ratios, let’s talk about the Treasury market. The argument I’d like to layer onto the CBO’s numbers is that United States debt fundamentals are so weak and so short of politically viable solutions that policy makers will resort to a strategy as old as government borrowing. That is, they’ll exploit every possible method for suppressing Treasury yields. In my best shot at big-picture forecasting, I see a potluck table full of yield-suppression methods—within a general category of financial repression—and my nickel’s worth of advice is this: Don’t fight financial repression. 

Centuries and even millennia of recorded history show overindebted governments habitually using financial repression as an essential part of their debt management strategies. That’s not likely to change in a cold flash circa 2018.

But even before we look at history, we can see financial repression having significant effects on government bonds today. We only need to look at the bond holdings of commercial banks, as in a recent article by Victor Sperandeo:

As it happens, the biggest buyers of Treasury debt are commercial banks. Just when the Fed started tapering its purchases in December 2013 and left some issuance for private players to absorb, their Treasury and agency holdings started to skyrocket, from $1.8 trillion to $2.55 trillion, as of July 2018.

Sperandeo suggests a few reasons why commercial banks are content to hold so many government securities, despite an almost continuous bearish consensus on that market. His reasons include the ability to buy bonds with money that banks create from nothing and that banks aren’t required to mark government securities to market for accounting purposes. Throw in the zero risk-weighting for government securities in required capital calculations, and in theory, banks can “infinitely buy government bonds and still not have to put up additional capital.”

In other words, heavily skewed regulations have gifted banks the proverbial money machine. And by cranking that machine, the banking sector has become a gigantic and somewhat price-insensitive government bond buyer, one on which the Treasury Department can depend even as debt spirals higher.

But accounting regulations and required capital calculations are just a few of the levers policy makers can operate to suppress yields. In the decades immediately following World War II, for example, the United States used tactics including caps on deposit rates (Regulation Q) and a continuation of the Great Depression–era prohibition on gold holdings. By making other low risk investments either uncompetitive (bank deposits) or illegal (gold), policy makers ensured plenty of demand for the vast debt America accrued during the war. Bond buyers had little choice but to settle for yields on government securities that were either below or close to inflation rates, and those unusually low real yields helped open a large gap between GDP growth and debt growth. In over three decades from World War II to the 1970s—a period that scholars Carmen Reinhart and M. Belen Sbrancia have dubbed the “financial repression era”—America’s financial repression triggered an unprecedented drop in the debt-to-GDP ratio.

Of course, when it comes to financial repression, we have to look also at the behemoths in the room—central banks. Much of central banking history is, in fact, a history of governments seeking affordable financing and then tasking central banks with achieving that goal. Sovereign nations have granted central banks a variety of rights and privileges, and in return, central banks have

• pegged interest rates on government debt,

• bought large amounts of government debt, sometimes with a commitment to cover demand shortfalls at the pegged interest rates, and

• worked with and regulated privately held banks to further support government financing.

The Federal Reserve, for example, did all of the above during both World War II and the Korean War and throughout the five years in between. And to state the obvious, the Fed once again bullied the Treasury market during the last ten years.

Outside the United States, we’ve seen an even broader array of tactics, especially during Reinhart and Sbrancia’s financial repression era but also in the last decade. Additional forms of repression include capital controls, more aggressive central bank purchases (the ECB has bought so many German bundsthat private investors are left with less than 10% of the market by some estimates) and directed investments, whereby policy makers require government managed or regulated asset pools to invest in government securities.

In the future, desperate American politicians, who seem to have lost any interest in fiscal discipline as a method for slowing debt growth, could decide to add any of the globally popular financial repression tactics to their policy mix. And don’t scoff—just a few years ago you might have ridiculed anyone predicting a fierce tariff war.

The Too-Big-To-Fail Principle: United States Treasury Edition

In my opinion, there’s a kind of natural progression underway. In 2008-9, policy makers threw out the rulebook to rescue the likes of Goldman Sachs and AIG, enacting measures that would have been deemed nonsensical just a few years before. But the rulebook should change once again in the future, and that change may not be too far off. In the next instance, policy makers will do whatever it takes to support the ultimate too-big-to-fail institution, the United States government.

In other words, if it was supposedly such a no-brainer that AIG shouldn’t be allowed to enter bankruptcy, what do you expect to happen when an almost vertical debt trajectory threatens the biggest Kahuna of all?

My answer is that a coalition of lawmakers, administrators and central bankers will usher in a brand new era of financial repression.

So whereas many investors consider rising government debt to be a bearish indicator, owing to the risk of default or hyperinflation, I’m saying it should continue to be a bullish indicator, owing to the likely policy response. That’s exactly how the situation has played in Japan, whose debt is already well above 200% of GDP, and I don’t see the United States being much different. For now, at least. At some (tipping) point, the risk of default or hyperinflation is likely to overwhelm everything else. But assuming the United States can avoid World War III, I would place the tipping point well beyond the average investment horizon.

To be sure, financial repression won’t explain every 10 or 20 basis point change in the 10-year Treasury note, or even every 50 or 100 basis point change. But what it does is to provide a backstop. If you’re not forecasting inflation to head skyward, 1970s-style, as many do but I’m not sold on their story (see herefor discussion), you might expect financial repression to keep the decades-long bull market in Treasuries intact. You might reject the longstanding bearish consensus.

Consider this: When you hold Treasuries, you’re aligning your interests with those of the entire political class, along with the interests of arguably the politicians’ most influential patrons—bankers. You’re gaining the backing of powerful forces, to say the least, and that’s about as “big picture” as it gets.

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One year after Manhattan District Attorney Cyrus Vance Jr. was embroiled in a scandal for accepting $10,000 from Harvey Weinstein’s lawyer after he declined to prosecute sexual assault charges, the same lawyer, David Boies, gave $25,000 to the campaign of New York Governor Andrew “America was never that great” Cuomo, according to state records reviewed by Capital & Main and Sludge. 

While Vance in May opted to reverse course and charge the Hollywood producer, Cuomo declared that an investigation into Vance’s original decision to not prosecute Weinstein was necessary because, the governor said, “it is critical not only that these cases are given the utmost attention but also that there is public confidence in the handling of these cases.”

However, BuzzFeed on Tuesday reported that Cuomo reversed himself in June, sending a letter to New York Attorney General Barbara Underwood asking her to suspend the investigation for six months. The suspension effectively shields Boies from scrutiny of any potential relationship between his 2015 donation to Vance and Vance’s decision not to prosecute Weinstein. –Capital & Main

Cuomo’s June order came within weeks of the $25,000 donation to his reelection campaign, according to New York campaign finance records – approximately 10% of the $245,000 Boies and his firm have donated to Cuomo’s campaigns since 2009. 

“Neither Mr. Boies, nor anyone from his firm, ever discussed Harvey Weinstein or Mr. Vance with Mr. Cuomo, or anyone from his office, at any time,” a spokesperson for Boies Schiller & Flexner told Capital & Main in an emailed statement. “Mr. Boies is a longtime supporter of Mr. Cuomo and his contribution in June was consistent with his contributions to Mr. Cuomo over years past.”

Boies has since dropped Weinstein as a client after learning that he hired a private investigation firm run by undercover ex-Mossad agents to silence his accusers and halt publications from exposing his sexual crimes. 

Cuomo’s office says that the investigation was suspended so as not to interfere with Vance’s ongoing prosecution of Weinstein. 

“As we said when the Governor directed the Attorney General to investigate the Manhattan DA’s Office, it should not interfere with the DA’s ongoing criminal case,” Cuomo press secretary Dani Lever told Buzzfeed. “Given the recent indictment and prosecution of Harvey Weinstein by the district attorney, the attorney general’s investigation has been postponed for six months.”

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