Month: October 2018

Authored by Charles Hugh Smith via OfTwoMinds blog,

The desire to improve our social standing is natural. What’s unnatural is the toxicity of doing so through social media.

It seems self-evident that the divisiveness that characterizes this juncture of American history is manifesting profound social and economic disorders that have little to do with politics. In this context, social media isn’t the source of the fire, it’s more like the gasoline that’s being tossed on top of the dry timber.

My thinking on social media’s toxic nature has been heavily influenced by long conversations with my friend GFB, who persuaded me that my initial dismissal of Facebook’s influence was misplaced.

Our views of all media, traditional, alternative and social, is of course heavily influenced by our own participation / consumption of each type of media.Those who watch very little corporate-media broadcast “news” find the entire phenomenon very bizarre and easily mocked, and the same holds true for those who do not have any social media accounts: the whole phenomenon seems bizarre and easy to mock.

As for alternative media, many people accustomed to traditional media have never visited a single blog or listened to a single podcast.

Part of my job, as it were, is to monitor all three basic flavors of mass media, and do so as objectively as I can, which is to say, seek out representative narratives and commentaries across the full political and social spectra of each media.

So why is social media so toxic to healthy dialog and tolerance, and to those who live much of their lives via social media? I think we can discern several dynamics that direct the entire social media space.

1. The feedback loops within each “tribe” strengthen the most divisive, toxic narratives and opinions.

In the anti-Trump tribe, for example, those calling most vociferously for Trump’s head on a stake are “rewarded” by praise from other members of the tribe via “likes” and positive comments on the “bravery” of their extreme language.

Others note this feedback and are naturally drawn into trying to top the extreme language: I want Trump’s head on a stake, and then let’s set it on fire, etc.

In the real world, expressing such extreme views soon draws negative or moderating feedback from those outside the social media’s claustrophobic “tribe.” More reasonable people will politely suggest that such extremism isn’t very helpful, or they will start shunning the frothing-at-the-mouth firebrand.

But in the social media world, there are no moderating feedbacks. Anyone who dares question the extremism being reinforced by the “tribe” is quickly attacked or ejected from the tribe. Attacking moderate voices increases the potential “rewards” / likes from tribal members.

2. All human social interactions have a potential impact on the perceived relative status level of the participants, and jockeying for higher status is embedded in social animals such as humans. So naturally we’re drawn to organizing our participation in social media around the implicit task of improving our status / upward mobility.

In the real world, it’s relatively arduous to increase one’s social status,especially as the widening wealth/income gap effectively disenfranchises an increasing percentage of the populace.

In the real world, increasing one’s social status depends on one’s class, i.e. who we hope to impress. Raising one’s status usually requires some expenditure: a trip abroad to an exotic locale that few other social climbers have visited; a new fully loaded pickup truck, another graduate degree, a trip to Las Vegas, etc.

In the social media world, increasing one’s perceived place in the pecking order of “likes” (or views), number of “friends”, etc., depends less on conspicuous consumption / bragging (without appearing to brag, of course) and more on pleasing the tribe in ways that garner more “likes” and “friends.”

In the real world, to raise one’s status, we need to flash the diamond ring, show off the new luxury car/truck, flash photos of the exotic locale, display the graduate diploma, etc. But online, there’s very little in the way of verification: we are who we present ourselves to be.

As opportunities to upward social/financial mobility fade and downward mobility becomes the norm for a great many individuals and “tribes,” the appeal of a cost-free way to increase one’s status increases proportionately.

3. The expansion of the number of “tribes” one can belong to in social media. In the real world, jockeying for higher status is limited to one’s immediate circle of family, friends and colleagues, and to a lesser degree, wider circles in membership organizations such as alumni groups, trade associations, etc. It’s hard to impress the wider world because very few of us have any access or exposure in traditional media.

But in social media, we can become “known” and “liked” in Instagram, Facebook, Twitter, etc. or within specific online communities within the social media world. In other words, if we can’t “be somebody” in the wider world or the real world, we can still “become somebody” in a smaller (but still very real and important to its participants) group online.

The desire to improve our social standing is natural. What’s unnatural is the toxicity of doing so through social media.

If we put these three dynamics together, it’s little wonder so many people are drawn to living a major part of their lives online, and modifying their behaviors and views to increase their social standing / visibility online by whatever attracts more view, “likes” and “friends.”

These dynamics help us understand why social media is intrinsically toxic to civil society: being civil doesn’t raise one’s status, while reaching for new extremes is rewarded by the “likes” and “friends” all humans crave as manifestations of our social status.

*  *  *

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF). My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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After facing down US threats of possible economic sanctions should it follow through with its plans to purchase nearly $5.4 billion in Russian S-400 anti-ballistic missile systems, India has successfully called the US’s bluff.  After India stood its ground and insisted on moving ahead with the arms deal, the White House said it would consider giving India a waiver on the deal, according to RT.

For anybody who has followed our coverage of the growing mutiny against the dominant dollar-based trade paradigm – a rebellion that’s being led by Russia and China – the US’s reasons for granting the concession should be self-evident. After the US threatened to block the deal via SWIFT, the supposedly “politically independent” system for international payments over which the US Treasury exercises de facto veto power via economic sanctions, Russia and India found a viable workaround: Carry out the transaction in rubles and rupees.

As a quick refresher, here’s a rundown of our recent posts about Russia’s efforts to bypass SWIFT as US economic sanctions, first imposed after the annexation of Crimea in 2014, threaten to cut off the country’s largest banks from the global financial system. As the US prepares to reimpose sanctions on Iran, even purported US allies like the European Union are beginning to contemplate alternatives to circumvent the Treasury’s authority.

• India Defies Washington, Will Acquire Russian S-400 Missile Shield
• Foreign Banks Are Embracing Russia’s Alternative To SWIFT, Moscow Says
• Europe Is Working On Alternative To SWIFT For “Financial Independence” From The US
• Russia And India Ditch Dollar In Military Deals
• Putin: The US Is Making A Big Mistake By Weaponizing The Dollar

• India Defies US, Signs $5.4BN Arms Deal With Russia Amid Promises Of Closer Ties

* * *

New Delhi and Moscow officially agreed on the deal during a summit earlier this month, where they also pledged to work toward closer military and economic ties, much to the chagrin of the US. In addition to the S-400s, India is also reportedly planning to buy Russian T-14 Armata tanks and guided-missile frigates, and could even pursue the development of next-generation submarines and fighter jets in cooperation with Moscow. 

By deciding to tolerate the deal, the US is, in effect, acknowledging that Russian President Vladimir Putin had a point when he said earlier this month that the US’s willingness to impose economic sanctions is a “colossal strategic mistake.” 

That’s because sanctions, as Putin argued, will only further incentivize countries to pursue an alternative to the dollar-based trade system. And as China and Russia increasingly conduct more of their bilateral trade in yuan and rubles, while also pursuing alternatives to paying for oil in dollars, the US may finally be starting to realize that this small mutiny represents a real threat to the dollar’s global hegemony.

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Authored by Michael Lebowitz via RealInvestmentAdvice.com,

“Inflation is everywhere and always a monetary phenomenon.” – Milton Friedman

This oft-cited quote from the renowned American economist Milton Friedman suggests something important about inflation. What he implies is that inflation is a function of money, but what exactly does that mean?

To better appreciate this thought, let’s use a simple example of three people stranded on a deserted island. One person has two bottles of water, and she is willing to sell one of the bottles to the highest bidder. Of the two desperate bidders, one finds a lonely one-dollar bill in his pocket and is the highest bidder. But just before the transaction is completed, the other person finds a twenty-dollar bill buried in his backpack. Suddenly, the bottle of water that was about to sell for one-dollar now sells for twenty dollars. Nothing about the bottle of water changed. What changed was the money available among the people on the island.

As we discussed in What Turkey Can Teach Us About Gold, most people think inflation is caused by rising prices, but rising prices are only a symptom of inflation. As the deserted island example illustrates, inflation is caused by too much money sloshing around the economy in relation to goods and services. What we experience is goods and services going up in price, but inflation is actually the value of our money going down.

Historical Price Levels

The chart below is a graph of price levels in the United States since 1774. In anticipation of a reader questioning the comparison of the prices and types of goods and services available in 1774 with 2018, the data behind this chart compares the basics of life. People ate food, needed housing, and required transportation in 1774 just as they do today. While not perfect, this chart offers a reasonable comparison of the relative cost of living from one period to the next.

Chart Courtesy: Oregon State LINK

Three characteristics about this chart leap off the page.

1. Prices were relatively stable from 1774 to 1933

2. Before 1933, disruptions in the price level coincided with major wars

3. The parabolic move higher in price levels after 1933

Pre-1933

As is evident in the graph, prior to 1933 major wars caused inflation, but these episodes were short lived. After the wars ended, price levels returned to pre-war levels. The reason for the temporary bouts of inflation is the surge in deficit spending required to fund war efforts. This type of spending, while critical and necessary, has no productive value. Money is spent on making highly specialized technical weaponry which are put to use or destroyed. Meanwhile, the money supply expands from the deficit spending.

To the contrary, if deficit spending is incurred for the purposes of productive infrastructure projects like roads, bridges, dams and schools, the beneficial aspects of that spending boosts productivity. Such spending lays the groundwork for the creation of new goods and services that will eventually offset inflationary effects.

Post 1933

After 1933, price levels begin to rise, regardless of peace or war, and at an increasing rate. This happened for two reasons:

First, President Franklin D. Roosevelt (FDR) took the United States off the gold standard in June 1933, setting the stage for the government to increase the money supply and run perpetual deficits. FDR, through executive order 6102, forbade “the hoarding of gold coin, gold bullion and gold certificates within the continental Unites States.” Further, this action ordered confiscation of all gold holdings by the public in exchange for $20.67 per ounce. Remarkably, one year later in a deliberately inflationary act, the government, via the Gold Reserve Act, increased the price of gold to $35 per ounce and effectively devalued the U.S. dollar. This move also had the effect of increasing the value of gold on the Federal Reserve’s balance sheet by 69% and allowed a further increase in the money supply while meeting the required gold backing.

That series of events was followed 38 years later by President Nixon formally closing the “gold window”, which was enabled by the actions of FDR decades earlier. This act prevented foreign countries from exchanging U.S. dollars for gold and essentially eliminated the gold standard. Nixon’s action eradicated any remaining monetary restrictions on U.S. budget discipline. There would no longer be direct consequences for debauching the currency through expanded money supply. For more information on Nixon’s actions, please read our article The Fifteenth of August.

The second reason prices escalated rapidly is that, following World War II, the U.S. government elected not to dismantle or meaningfully reduce the war apparatus as had been done following all prior wars. With the military industrial complex as a permanent feature of the U.S. economy and no discipline on the budget process, the most inflationary form of government spending was set to rapidly expand. Excluding World War I, defense spending during the first 40 years of the 1900’s ran at approximately 1% of GDP. Since World War II it has averaged around 5% of GDP.

Returning to Milton Friedman’s quote, it should be easier to see exactly what he meant. Re-phrasing the quote gives us an effective derivation of it.  Inflation is a deliberate act of policy.

Fed Mandate

The Fed’s dual mandate, which guides their policy actions, is a commitment to foster maximum employment and price stability. Referring back to the price level graph above, the question we ask is which part of that graph best represents a picture of price stability? Pre-1933 or post-1933? If someone earned $1,000 in 1774 and buried it in their back yard, their great, great, great grandchildren could have dug it up 150 years later and purchased an equal number of goods as when it was buried. Money, over this long time period, did not lose any of its purchasing power. On the other hand, $1,000 buried in 1933 has since lost 95% of its purchasing power.

What does it mean to live in the post-1933, Federal Reserve world of so-called “price stability”? It means we are required to work harder to keep our wages and wealth rising quicker than inflation. It means two incomes are required where one used to suffice. Both parents work, leaving children at home alone, and investments must be more risky in an effort to retain our wealth and stay ahead of the rate of inflation. Somehow, the intellectual elite in charge of implementing these policies have convinced us that this is proper and good. The reality is that imposing steadily rising price levels on all Americans has severe consequences and is a highly destructive policy.

Cantillon Effect

The graph below uses the same data as the price level graph above but depicts yearly changes in prices.

Chart Courtesy: Oregon State LINK

What is clear is that, prior to 1933, there were just as many years of falling prices as rising prices and the cumulative price level on the first chart remains relatively stable as a result. After 1933, however, Friedman’s “monetary phenomenon” takes hold. The money supply continually expands and periods of falling prices that offset periods of rising prices disappear altogether. Prices just continue rising.

There is an important distinction to be made here, and it helps explain why sustained inflation is so important to the Fed and the government. It is why inflation has been undertaken as a deliberate act of policy. As mentioned, periods of falling prices are not necessarily periods of deflation. Falling prices may be the result of technological advancements and rising productivity. Alternatively, falling prices may result from an accumulation of unproductive debt and the eventual inability to service that debt. That is the proper definition of deflation. This occurs as a symptom of excessive debt build-ups and speculative booms which lead to a glut of unfinanceable inventories. This is followed by an excess of goods and services in the market and falling prices result.

Furthermore, there are periods of hidden inflation. This occurs when observed price levels rise but only because of policies that intentionally expanded the money supply. In other words, healthy improvements in technology and productivity that should have brought about a healthy and desirable drop in prices or the cost of living are negated by easy monetary policy acting against those natural price moves. By keeping their foot on the monetary gas pedal and myopically using low inflation readings as the justification, the Fed enables a sinister and criminal transfer of wealth.

This transfer of wealth euthanizes the economy like deadly fumes which cannot be smelled, seen or felt. It works via the Cantillon Effect, which describes the point at which different parts of the population are impacted by rising prices. Under our Fed controlled monetary system, new money enters the economy through the banking and financial system. The first of those with access to the new money – the government, large corporations and wealthy households – are able to invest it before the uneven effects of inflation have filtered through the economic system. The transfer of wealth occurs quietly between the late receivers of new money (losers) and the early receivers of it (winners). Although a proponent of inflationary policies as a means of combating the depression, John Maynard Keynes correctly observed that “by continuing a process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Conclusion – Investment Considerations

In the same way that only a very small percentage of recent MBA grads could, with any coherence, tell you what inflation truly is, the investing public has been effectively brainwashed into thinking that they should benchmark their investment performance against the movements of the stock market. Unfortunately, wealth is only accumulated when it grows faster than inflation. In our modern society of continually comparing ourselves with those around us on social media, we obsess about what the S&P 500 or Dow Jones are doing day by day but fail to understand that wealth should be measured on a real basis – net of inflation.  For more on this concept, please read our article: A Shot of Absolute – Fortifying a Traditional Investment Portfolio.

Mainstream economists, either unable to decipher this process of confiscation or intentionally complicit in its rationalization, have convinced an intellectually lazy populace that some degree of rising prices is “optimal” and normal. Individuals that buy this jargon are being duped out of their wealth.

Holding elected and unelected officials accountable for a clear and proper measurement of inflation is the only way to uncover the truth of the effects of inflation. In his small but powerful book, Economics in One Lesson, Henry Hazlitt reminded us that policies should be judged based on their effect over the longer term and for society as a whole. On that simple and clear basis, we should dismiss the empty counterfactuals used as the central argument behind inflation targeting and most other monetary and fiscal policy platitudes. The policy and process of inflation is both toxic and malignant.

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Former Nevada Democratic Senator Harry Reid said that comments he made in 1993 over birthright citizenship were a “mistake,” after President Trump fired off several tweets on Wednesday – one of which is a clip of Reid making virtually the same argument:

“If making it easy to be an illegal alien isn’t enough, how about offering a reward for being an illegal alien? No sane country would do that, right? Guess again. If you break our laws by entering this country without permission to give birth to a child, we reward that child with US citizenship and guarantee a full access to all public and social services this society provides – and that’s a lot of services. Is it any wonder that 2/3 of the babies born at taxpayer expense at county-run hospitals in Los Angeles are born to illegal alien mothers?”

Trump tweeted on Wednesday: “So-called Birthright Citizenship, which costs our Country billions of dollars and is very unfair to our citizens, will be ended one way or the other,” adding “Harry Reid was right in 1993, before he and the Democrats went insane and started with the Open Borders.”

So-called Birthright Citizenship, which costs our Country billions of dollars and is very unfair to our citizens, will be ended one way or the other. It is not covered by the 14th Amendment because of the words “subject to the jurisdiction thereof.” Many legal scholars agree…..

— Donald J. Trump (@realDonaldTrump) October 31, 2018

….Harry Reid was right in 1993, before he and the Democrats went insane and started with the Open Borders (which brings massive Crime) “stuff.” Don’t forget the nasty term Anchor Babies. I will keep our Country safe. This case will be settled by the United States Supreme Court!

— Donald J. Trump (@realDonaldTrump) October 31, 2018

Trump then tweeted a clip of Reid introducing his bill  

Harry Reid, when he was sane, agreed with us on Birthright Citizenship! pic.twitter.com/ypiE1QWKag

— Donald J. Trump (@realDonaldTrump) October 31, 2018

Reid called his comments a “mistake” on Wednesday following Trump’s tweet. 

“After I proposed that awful bill, my wife immediately sat me down and said ‘Harry, what are you doing? Don’t you know that my father was an immigrant,” Reid said in a statement. “In my 36 years in Washington, there is no more valuable lesson I learned that the strength and power of immigrants and no issue I worked harder on than fixing our immigration system.”

(Were Reid’s in-laws illegal immigrants?)

If Trump needs clips of any more prominent Democrats arguing for strong borders, look no further: 

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Via Golem XIV’s blog,

On Wednesday Feb 7th 2007 HSBC issued a profit warning.  It was the first in its 142 year history. The bank told its share holders it would have to take an unprecedented charge of $10.5 billion because one of its units, its sub prime lender, was in deep trouble. And so began the sub prime crisis.

This week, GE issued a profit warning and cut its dividend to share holders from 12 cents to 1 cent. It is only the third time since the Great Depression that GE has reduced its dividend in this way. It told its share holders it would be taking a $22 Billion charge because one of its units, its power unit, is in deep trouble.

In 2007 the banks had flooded the global market with sub-prime loans. The banks were also holding many of those same loans themselves or had transferred them to Special Purpose Vehicles (SPVs) they had set up, staffed and lent money to.

Today it is not the banking world which stands at the centre of the storm but the corporate world. In the last years they have flooded the market with junk rated bonds. At the same time they are also burdened with high yielding, leveraged and covenant- lite loans. Taken together they are about $2.4 Trillion of debt.

2007 sub prime loans. 2018 corporate junk bonds and leveraged loans. 2007 banks and SPVs funded by the banks. 2018?

Where is this sub-prime corporate debt sitting today?

Nearly half sits in Insurance Companies and Pension funds.

Given the close ties between insurance and pensions this is not a happy picture.

Along side the pension and insurance industry who are sitting on a mountain of high risk/high return junk there is the liquidity trigger of bond backed, fixed income and high yield ETF’s. They are admittedly still small compared to the still larger mutual funds but they are a choke and panic point. The ETF market is broad in its consumer appeal but very narrow where it counts – in who makes and provides the heavy lifting for the market. There are about 5 main companies who ‘Sponsor’, which means run and control ETF’s globally. They are BlackRock, Vanguard, State Street, Invesco and Charles Schwab.  According to Forbes in 2017,

Five Largest ETF Providers Manage Almost 90% Of The $3 Trillion U.S. ETF Industry

Of those 5,

…the top 3 ETF providers dominate the market with a combined market share of 82% …  the top-three players also account for more than 70% of all ETF assets globally.

The sponsors in turn rely for the heavy financial lifting – to buy and sell the assets that go into an ETF – on what are called the Authorised Participants. Who are they? The main ones are … the big banks like Merrill Lynch, Fortis bank, Morgan Stanley, HSBC, Barclays, Citi etc. Some companies are both sponsor and authorised participant.

And some of those banks are also the people who have extended the leveraged loans and revolving credit lines to GE and others. As well as buying their bonds to put into their ETFs.

What could possibly go wrong?

Well… the Fed is trying to ‘normalise its balance sheet by withdrawing some of its liquidity. It is also trying to let interest rates rise. Taken together this is the Fed trying to bring to a much postponed end, the temporary and extraordinary measures brought in to deal with the little 2008 sub prime blip.  The ECB is also planning to end in December its vast 2.4 trillion euro bond buying stimulus package of the last three years.  Though it has said it will not raise interest rates till late next year. While over in China the central bank has, as far as I can see, lost control and is now more reactive than proactive.  It has again and again tried tho reduce official lending and hold back the flood of shadow bank lending that fuels the property speculation market that is the centre of all regional ‘development’ and social stability in China.

Corporates are floundering in a river of debt of their own creation. They are the ones who have taken on loans they will not be able to pay if interest rates increase even a little. The banks have packaged up and sold on that leveraged loan debt and those junk bonds and they have been gobbled up by pensions and insurance companies desperate for yield after a decade of ‘temporary’ low interest rates.

In place of zombie banks we now have zombie corporations kept alive by low interest rates and bond buying QE. Those low interest rates have created a dysfunctional market. Zombie corporations are kept alive because they can sell their sub-prime bonds and get sub prime loans in a market where the buyers of those bonds and securitised loans, the insurers and pension funds and fund managers, are so desperate for yield that they gobble up ‘high yield’ which is just a euphemism for sub prime.

This time it will not be the banks that trigger another financial collapse. Not HSBC or Countrywide this time but GE or Caterpillar. The companies who have been propping up their share prices with endless buy backs funded by… low interest rate loans and junk bond issues. Or perhaps it will be the corporates who are merging and acquiring.

Last time the top of the market was marked by and to some extent triggered by a wave of vast and disastrous bank mergers. HSBC was early when in 2003 it bought one of the largest subprime lenders in america, Household International for $15 billion. Bank of America bought Merril Lynch. RBS bought ABM Ambro. Hypo bought Depfa.  Every one of them saddled the purchaser with unmanageable debt and most ended in massive bail outs.

Today it is the turn of the corporates. 2016 – Bayer bought Monsanto. Funded with $15 billion in bond sales. 2017 – CVS, a retail pharmacy and health care company bought Aetna which is a health insurer for $70 billion 40 billion of which was funded by a bond issue. 2018 – American health provider and insurer, Cygna bought Express Scripts. Funded by a $20 billion bond issue.  2015 – AT&T bought DirectTV. Funded by debt. 2018 – AT&T bought Time Warner. Funded by debt. AT&T’s total debt is now around $180 billion which is a larger debt than many countries. Just yesterday IBM bought RedHat for $34 billion of which about $20 billion will be backed by new debt.

Buybacks supporting share prices, while huge acquisitions attempt to capture market share or buy growth that the parent can’t generate themselves and all funded by debt.

Of course you could say that issuing bonds insulates the corporates because the interest on those bonds is fixed. Quite so. The question I would ask is who bought those bonds and what with? Was it debt?

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Unsurprisingly given the intense focus on Saudi Arabia’s brutal proxy war, coverage of Defense Secretary James Mattis’ appearance at the US Institute of Peace in Washington on Tuesday focused on his call for a ceasefire in the Yemeni civil war. But the former Marine general’s wide-ranging interview touched on a number of other topics, including his support for building out the US’s offensive capabilities in space.

As RT highlighted in its coverage of Mattis’s talk, when asked about the nascent US ‘Space Force’, Mattis explained that dominance in space is essential for preserving the American way of life. And in order to counter geopolitical rivals who might abuse their own space superiority, the Pentagon must pursue the development and deployment of space weapons.

“We’re going to have to be prepared to use offensive weapons in space should someone decide to militarize it and go on the offensive. You cannot simply play defense. No sport in the world, no competitive sport in the world, can simply play defense and win. And this is not an area where we want to be second place.”

Mattis, who once said that he “wasn’t against” the space force, has previously warned about Russia and China’s efforts to develop their own space firepower and described their efforts as a direct threat to American autonomy. To counter this, the US will need to deploy more advanced satellites and weaponry, which in addition to their defense capabilities, will also have an economic component.

As Mattis explained, space is “critical to our economy, it’s critical to our way of life, we’ve grown reliant on it,” Mattis said. In addition to the surveillance capabilities, US satellites are used for navigation, communication, commerce, and banking.

And while he hopes the US will never have to resort to space warfare, as competing powers deploy more resources in the final frontier, eventually the US will be forced to reckon with the possibility that rival powers might not abide by the longstanding policy of space neutrality that has existed between nations since the 1960s. One example of this happened more than a decade ago, when China carried out its first test of an anti-satellite weapon back in 2007.

“We’re going to have to recognize if nations are not willing to live by those rules…we’re going to have the ability to defend, and the ability to do offense.

Back in August, Vice President Mike Pence unveiled a spending plan to establish the Space Force as an entirely separate branch that will cost $8 billion over five years – a paltry sum compared with the $716 billion allocated to the US military in 2019. While he didn’t comment on the budgetary allocation, we imagine Mattis would view this as money well spent, if not slightly on the lean side for something that should be a top national security priority.

Mattis’s Space Force comments begin at the 50-minute mark in the video below:

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Authored by Jonathan Turley, op-ed via The Hill,

Halloween is again upon us. Across the United States, the prospect of frightening images have some pledging to skip the holiday or closely shield their children. It is not the scary decorations or costumes but “cultural appropriation” that has triggered a tradition of recrimination and anger. Colleges and universities have warned students not to dress as Indian chiefs or Mexican bandits, while parents have publicly debated whether they can allow their children to dress as the Black Panther or Moana without being accused of cultural appropriation or racism.

“Cultural appropriation” has become a common term on campuses and is receiving broader meaning with each passing year. In Utah, a high school student was denounced for wearing a Chinese dress to her prom. White students wearing hoop earrings or dreadlocks have been denounced, while there have been protests over serving sushi at Oberlin College, holding yoga classes at the University of Ottawa or having a “Mexican food night” at Clemson University. The reason behind such limitless forms of cultural appropriation is its limitless meaning. Fordham University law professor Susan Scafidi has defined the term as encompassing the “unauthorized use of another culture’s dance, dress, music, language, folklore, cuisine, traditional medicine, religious symbols” and more.

That makes Halloween a nightmarish orgy of cultural appropriation.

Colleges and universities now post warnings not to dress as Native Americans, geishas, samurai, or other images. Syracuse University even threatened a few years ago to have its campus police force students to remove “offensive” costumes. There is remarkably little debate over such directives because many faculty members fear being labeled as racist or insensitive. What is increasingly rare is any dialogue or willingness to accept that people can hold good faith views on both sides.

CNN political analyst Kirsten Powers dismissed the concerns of white people who object to being labeled racist over Halloween costumes, tweeting,

“Dear white people who are upset that you can’t dress up as another race or culture for Halloween: your feelings don’t matter.”

She went on to add that the only feelings that matter are of those who feel disrespected or mocked by appropriating their culture. Similarly, in an Everyday Feminism article a few years ago, Kat Lazo advised that people who do not see the inherent racism or cultural appropriation in costumes are “very privileged” individuals who “never had the misfortune of experiencing or witnessing acts of racism.” That of course is a common conversation stopper if someone says any objection to cultural appropriation means you are ignorant and likely a racist in denial.

There is another possibility that reasonable people can disagree. There are clearly racist costumes that most of us join in denouncing, such as blackface or other raw portrayals. However, the cultural appropriation movement opposes any depiction of another culture. Indeed, what constitutes a social norm can be hard to discern. A New York Times column gave a tortured account of whether parents could allow their children to dress as Black Panther. The article included advice on sitting down with kids to discuss racial implications of their choices and, as Texas Woman’s University professor Brigitte Vittrup warned, “by not mentioning it, by not talking about it, we’re essentially preserving the status quo.”

An article by Sachi Feris explored her struggle with her young daughter who wanted to dress like Moana or Elsa last year. She wrote, “I had some reservations regarding both costume choices” and about cultural appropriation, noting the “power” and “privilege” carried by “whiteness” and the standards of beauty that go along with it. Elsa did not reflect cultural appropriation but rather discomfort over how her character “sends the message that you have to be a certain way” to look “beautiful” or to be a “princess” and that you have to have blonde hair and blue eyes. Feris disliked the message. Moana was portrayed as a perfect nightmare for a white girl to adopt, since she told her daughter she is white like Elsa. She instead encouraged her daughter to be Mickey Mouse because this way she would not be “making fun of anyone or dressing up as a culture different from our own because Mickey Mouse is a pretend mouse!”

Ironically, under the standard definition, Halloween itself could be denounced as a raw cultural appropriation. The precursors to Halloween can be traced to the old Celtic tradition of Samhain that explores the line between the living and the dead. However, there has long been a fantasy tradition around the world of using Halloween festivities to pretend you are someone else, as shown by the British tradition of “fancy dress” balls.

Despite the dismissal by Kirsten Powers, there are legitimate concerns on both sides and legitimate questions of whether common cultural images should be viewed as owned or controlled by a group. There also is the debate over who decides in limiting such free expression. Last week, Aulii Cravalho, the actress who played Moana in the Disney movie, declared it “absolutely appropriate” for kids to dress up as the Polynesian princess if it is “done in the spirit of love” and “for the little ones who just want to dress up as their favorite heroine.” Is it enough for a native Hawaiian teenager, with a financial interest in the Disney movie, saying it is okay?

Cultural foods and images are shared in society and the arts, particularly in a pluralistic nation like the United States. Adopting a cuisine or a costume is not “appropriating” a culture. Those are part of the mosaic of shared influences and images in a diverse free society. Dressing as a bandit from the movie “Treasure of Sierra Nevada” is not appropriating the Mexican culture. It is mimicking the character of Alfonso Bedoya.

Notably, motivation or message seems irrelevant to the definition of cultural appropriation. It does not matter if such symbols were viewed as celebrating the purity or bravery of a group. Certainly, many costumes incorporate cultural images that have exaggerated or oversimplified elements. But when children dress up as princesses, they are fantasizing, just as they do in dressing as cowboys or soldiers or samurai. They often are portraying positive elements like courage or grace in wearing those cultural images. Is it necessary to dump all our adult anxieties on our children or draw connections to our existing social problems?

The alternative is that we accept that cultural icons like Moana are shared and become part of a broader cultural tradition and dialogue. That little girl in the Indian outfit just might be a little girl who wants to be like Pocahontas, a heroine who is strong and unafraid, nothing more. By the way, it is pretty cool to see kids still pretending and dressing up without having to carry all of our problems, from rapes to racism, as they file down our streets on Halloween. We somehow forget how to do that along the way to adulthood. Maybe, just maybe, we have something to learn from that samurai or princess who comes knocking on our door on Halloween.

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In a lengthy in-house interview between Goldman’s Allison Nathan, editor of the popular Top of Mind newsletter, and Goldman’s chief political economist, Alec Phillips, the latter runs through the policy and market implications of various midterm election outcomes, arguing that the base case of a divided Congress – one which is already largely priced in – implies little change to the current direction of policy and economic growth.

In the context of Trump’s repeated allegation that “stocks will fall if Democrats win in the midterms, and rise if Republicans win”, Phillips counters that midterm elections have historically been less of a market event than presidential elections, with only modest market moves on the day regardless of the outcome, and points out that over the last 60 years or so, the S&P 500 has risen by 0.7% on average from the day before to the day after midterms.

On the other hand, Fund Strat’s Tom Lee argues that Trump “has history” on his side, and observes that of the 30 midterms since 1896, chows that markets have generally outperformed when there is no change in House majority control.

@realDonaldTrump has history on his side. Of the 30 midterms since 1896, this is the outcome of markets in the following year (2019) based on whether there is a change in House majority control. pic.twitter.com/Yod8MpHQeS

— Thomas Lee (@fundstrat) October 31, 2018

The Goldman strategist, in turn, responds that even when the president’s party suffered big losses or control of Congress shifted, the market reaction has been relatively muted, a fact which he attributes to midterm election outcomes usually being in line with prediction markets, and the market has tended to discount the results in advance.

That said, Phillips points out that the equity market rallies pretty consistently after the midterms, usually beginning not long before Election Day and continuing into the middle of the next year; in the last several decades there haven’t been many instances of negative returns during that period. That isn’t the case with presidential elections.

Overall, the impact on the macro markets is likely to be small, especially relative to other drivers. But to the extent that the base case of divided Congress suggests slightly weaker fiscal stimulus and growth, and little reason to expect friendlier trade policy, I see slight downside risk to Treasury yields and the dollar, all else equal. Since a divided Congress is the consensus view, some of this may be priced in, but probably not all of it. In contrast, Republican control of both chambers would imply slightly higher growth expectations on more fiscal stimulus and reduced regulatory risk, which could see yields and the dollar—as well as equity indices—rise.

While there is more in the full interview (see below), perhaps the most notable question was what, if any, scenario would present the biggest shock to the macro markets? Here is Phillips’ answer:

I’m not sure any outcome would provoke a strong reaction from the macro markets, but the one with the biggest chance is probably Republicans gaining a bunch of seats in the Senate. Six Democratic seats are up for reelection in states that Trump won by a substantial margin in 2016. So far the focus has been on how many of those seats Democrats can hold, but they are all competitive races, and it is certainly possible that the Republicans increase their majority instead. That matters because a larger majority would provide Republicans extra room to pursue priorities such as further tax cuts more aggressively, which would imply even more upside to Treasury yields.

As for Trump’s claim that a Republican victory would be good for stocks, while a Democrat win bad, it is unlikely that any party would stop the runaway fiscal spending debt train which is now the dominant source of equity upside in the US, and therefore beyond all the posturing, it is unlikely that anything will change for the trajectory of market based on who ends up winning the House or the Senate.

* * *

Alec Phillips is Chief US Political Economist at Goldman Sachs. His full Goldman in-house interview is below:

Allison Nathan: How do you expect the midterm elections to play out?

Alec Phillips: It’s hard to argue with the consensus view that Republicans will hold the Senate and Democrats will win the House majority. Polling suggests the chances of the Democrats gaining the Senate majority have declined in recent weeks, but they appear to be ahead in about 30 Republican-held House seats, more than the 23 they need to win the House majority. Generic ballot polling also still points clearly to a Democratic-led House. And Democrats still seem to have a turnout advantage judging by their larger share of the vote among people “likely” to vote, as opposed to those who are simply registered. That said, polling for the House is particularly unreliable and many of the races that are leaning Democratic are only doing so by a slim margin; so the marginal races that will actually determine control are tighter than what some headlines suggest. That raises the risks around the base case of a divided Congress, though I still agree it’s the most likely outcome.

Allison Nathan: How have markets typically  responded to midterm elections?

Alec Phillips: Midterm elections have historically been less of a market event than presidential elections, with only modest market moves on the day regardless of the outcome. Over the last 60 years or so, the S&P 500 has risen by 0.7% on average from the day before to the day after midterms. Even when the president’s party suffered big losses or control of Congress shifted, the market reaction has been relatively muted. I attribute this to the fact that midterm election outcomes have usually been in line with prediction markets, and the market has tended to discount the results in advance. However, the equity market rallies pretty consistently after the midterms, usually beginning not long before Election Day and continuing into the middle of the next year; in the last several decades there haven’t been many instances of negative returns during that period. That isn’t the case with presidential elections.

Allison Nathan: Is the historical pattern of positive equity returns following the midterms likely to hold this time?

Alec Phillips: I’m doubtful that midterms will provide the same boost. Setting aside the fact that many other factors impact equity performance, one thing that’s different today is the timing of fiscal stimulus. Typically, fiscal policy contracts early in the four-year election cycle, and then eases after midterm elections as the focus shifts to the presidential race. This time around, we have the opposite; a big fiscal boost took hold in the first half of the cycle and is now set to fade. All else equal, to me, that calls into question the historical trend.

Allison Nathan: Would any of the possible election outcomes materially impact your base case of fading fiscal stimulus?

Alec Phillips: Probably not. Regardless of the outcome, the midterms are unlikely to substantially change the medium-term path of fiscal policy; we would still expect the fiscal boost of 0.75-1.00pp of GDP in 2H 2018 to fade to about neutral over the next couple of years. In the base-case scenario of a divided Congress, we don’t expect any changes to taxes, but see slightly more spending coming out of the budget deal Congress will have to negotiate next year for fiscal years 2020-21. Under a Republican-controlled Congress we might see slightly more fiscal stimulus, but only on the order of a couple of tenths of a percentage point of GDP. That’s because heightened political sensitivity around the rising deficit will constrain lawmakers from much further action. So under Republican control of both chambers, we might see a small additional tax cut partly offset by more restraint on spending, for example.

Allison Nathan: Could next year’s fiscal deadlines be more disruptive under certain midterm outcomes?

Alec Phillips: A divided Congress is probably the most disruptive scenario in terms of fiscal deadlines, and in particular for raising the debt limit, which will have to happen in July or August 2019. The last time that we really got into trouble around those deadlines was in 2011 and 2013, when we had a divided Congress and a divided government. So far congressional Democrats have not pushed against the Trump administration on these fiscal deadlines in the same way that congressional Republicans pushed against the Obama administration, but every year that goes by, the odds increase that they try to use it for leverage. And next year, under a Democratic-led House, might be the moment when Democrats demand something in return. But at this point it’s difficult to predict—and having President Trump on the other side of the negotiating table makes it even less predictable.

Allison Nathan: Does trade policy become more or less market-friendly under a divided Congress?

Alec Phillips: The administration generally has more discretion over trade policy than many other policy areas, so the midterms are unlikely to have a large impact. But they will still be relevant for a few reasons. First, the next Congress will need to approve the new US-Mexico-Canada trade deal that is set to replace NAFTA. I think Democrats will ultimately support the deal, but under a Congress that is divided or under Democratic control, the process could be bumpy; Democrats would probably seek some changes or side agreements in areas like labor and the environment. And in the face of this opposition, President Trump might once again raise the possibility of withdrawing from the existing NAFTA in order to pressure Congress into approving the new deal. So Congress might end up facing a take-it-or-leave-it situation, which leaves some uncertainty. Beyond that, a more constrained legislative agenda under a divided Congress might very well push the president to take more action in areas like trade where he has more executive authority. If he moves forward with additional trade restrictions that face bipartisan opposition, such as auto tariffs, Congress could attempt to restrict the administration’s trade authority. But given the president’s veto power, this is unlikely to result in any real change. So, while we don’t expect big changes to the trajectory of trade policy as a result of the midterms, none of the potential paths look particularly market-friendly.

Allison Nathan: Given these views, how might the macro markets respond to your base case or other midterm scenarios?

Alec Phillips: Overall, the impact on the macro markets is likely to be small, especially relative to other drivers. But to the extent that the base case of divided Congress suggests slightly weaker fiscal stimulus and growth, and little reason to expect friendlier trade policy, I see slight downside risk to Treasury yields and the dollar, all else equal. Since a divided Congress is the consensus view, some of this may be priced in, but probably not all of it. In contrast, Republican control of both chambers would imply slightly higher growth expectations on more fiscal stimulus and reduced regulatory risk, which could see yields and the dollar—as well as equity indices—rise.

Allison Nathan: What scenario—if any—would present the biggest shock to the macro markets?

Alec Phillips: I’m not sure any outcome would provoke a strong reaction from the macro markets, but the one with the biggest chance is probably Republicans gaining a bunch of seats in the Senate. Six Democratic seats are up for reelection in states that Trump won by a substantial margin in 2016. So far the focus has been on how many of those seats Democrats can hold, but they are all competitive races, and it is certainly possible that the Republicans increase their majority instead. That matters because a larger majority would provide Republicans extra room to pursue priorities such as further tax cuts more aggressively, which would imply even more upside to Treasury yields.

Allison Nathan: Shifting to the equity markets, what sectors should we be watching?

Alec Phillips: Healthcare is the sector most in focus when it comes to midterms largely because it’s such a priority for Democrats. Democratic voters typically rank healthcare first among their concerns and generally give Democrats better marks on healthcare than on most other issues, so Democratic candidates have seized on the issue. That said, in a divided Congress, Democrats probably won’t be able to enact any legislation, although they’ll surely try. In a Democratic-controlled Congress, things would get much more interesting because they could use the reconciliation process—the same process Republicans used last year to pass tax reform—to pass healthcare legislation without any Republican support, and send it to the president. Normally, a Republican president would veto anything a Democratic Congress sends to his desk. But in the case of an issue like reining in drug costs, which Trump has endorsed, it’s unclear what he would do.

Infrastructure is also in focus because both parties seem to support an infrastructure program. But I am skeptical that anything on infrastructure will actually happen. I liken bipartisan support for infrastructure to bipartisan support for lower deficits: the two parties may be in favor of it, but they disagree on almost everything else related to the issue. So under a divided Congress, I just don’t see sufficient common ground to make progress. If Republicans control both chambers, a small infrastructure program is possible, but a small spending boost seems more likely. On the other hand, should the Democrats control Congress, they could attempt to pass a larger program under reconciliation, but they would most likely try to pay for it by repealing some of the 2017 tax cuts, which would surely invite a presidential veto. They could figure out another way to pay for it, but I’m skeptical that Democrats would want to give Trump that legislative victory going into the 2020 presidential election. So when all is said and done, the market is likely too positive on the prospects for infrastructure legislation.

Allison Nathan: What about defense?

Alec Phillips: Defense spending will come up next year simply because the budget deal that Congress enacted in March of this year expires next September, and about half of that deal was defense spending. Typically, congressional Democrats have been less supportive of defense spending, while congressional Republicans have been less supportive of domestic spending. But the agreement they struck earlier this year had a lot more of both. So under Democratic control of the House or of both chambers, the next spending increase would likely be more heavily weighted towards domestic spending. But we’re not talking about substantial cuts to defense spending; it’s probably more a question of whether it is down slightly or up slightly.

Allison Nathan: How do you see the prospects for regulatory change?

Alec Phillips: Major changes on the regulatory front are unlikely, simply because most legislation requires 60 votes in the Senate, which would necessitate bipartisan support under any plausible midterm scenario. And in areas where bipartisan support exists—like aspects of financial regulatory reform— legislation was already enacted earlier this year. On most other aspects of financial regulation, or regulation in other sectors for that matter, there is not much agreement between the parties. So I think most regulatory change ahead will have to come from the administration. That said, I do think increased congressional scrutiny of the tech sector will continue regardless of the midterm outcome, although it could intensify under a Republican-controlled Congress and lessen slightly under a Democratic-controlled one. But either way, it is very unclear at this stage what that might entail.

Allison Nathan: What else should we be watching going into these elections?

Alec Phillips: If the Democrats do gain control of the House, I think we will see more action on some policy areas that haven’t been getting as much attention from lawmakers lately. One that might be especially important to investors, many of whom are already focused on labor costs, is raising the minimum wage.

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