Americans Must Get Serious, Leaders Aren't, Recession Risk Rises

Jan 16--Three recent news stories highlight the lack of viable American leadership, which may be the biggest risk in the world today. Leading economic indicators continue to decline, see charts below, indicating increasing risk of recession the next year. Without viable leadership, the U.S. is totally unprepared should a deteriorating economic environment help trigger a crisis, economic/financial, political or military, as global debt remains near an all-time high at 318% of GDP.

First news item, of course Trump’s border wall and government shutdown. Trump says there’s a “crisis,” using anecdotes, the Dems and liberal media say it’s “manufactured,” citing data. The media sound bites of both sides are focused on the “optics” of this issue for their respective political bases.

The rest of the world wonders what the heck is going on in the U.S. Trump’s China hawks want to fight a new cold war. How can they be critical of China’s system when the U.S. government is shut down while China lands on the far side of the moon?

During the cold war with the Soviet Union, America’s abysmal historical record on race was a very large negative globally, which was a major impetus behind the civil right laws of the 1960s. Is how the immigration issue being addressed helping the global status of the U.S. relative to China?

Second news item, Trump on Syria and the Mattis resignation. Have the liberals and the Dems learned nothing from the repeated failed attempts of the U.S. to export democracy to the Middle East? Their response to Syria/Mattis indicates that they may be at least as likely to blunder into another major war as Trump, also shown by their Russiagate.

Can you imagine liberals during the Vietnam War falling in love with a general nicknamed for good reason “Mad Dog.” An infamous if disputed quote of that war was “It became necessary to destroy the town to save it,” has the U.S. not learned since?

Third news item, Powell caves in to Wall Street’s latest temper tantrum. If Americans seem to have little trust and confidence in the two major political parties, perhaps they can count on U.S. technocrats? Doubtful.

The Dems and liberal media were up in arms protecting the much-vaunted “independence” of the Fed from Trump. Independent from whom? After Wall Street threw another of its temper tantrum stock market declines in Dec, Fed chair Powell caved in to them. Has the Fed not learned anything from decades of the Greenspan/Bernanke/Yellen “put”?

The Fed’s ZIRP and QE explicitly financed massive asset inflation, exacerbating huge inequality, even giving the Fed the benefit of the belief/hope that it will “trickle down.” The Fed eschews credit allocation, but essentially that is what it does for front-running leveraged speculators, and for corporate share buy-backs and M&A deals.

This has cracked open the political door for the Alexandria Ocasio-Cortez (AOC)/Stephanie Kelton (MMT, Modern Monetary Theory) view that the U.S. can print money to finance the Green New Deal, Medicare for All, etc. That is a debate worth having, exactly for what and for whom is government debt, which is now growing even more rapidly than the headlines and will go much higher in the next recession, being issued and financed?

As would a debate on AOC’s 70% tax rate on “the rich” to pay “their fair share,” e.g., what about focusing on uneconomic rentier incomes, often courtesy of the Fed, that has made so many so wealthy, while lightly taxing incomes of productive entrepreneurs, including very wealthy, and workers?

And I do mean actual debates, streamed live on social and mass media, e.g. Bloomberg, with serious, real experts, which I have called for a number of times in the past, including on health care, education, housing, immigration, national security, innovation and competition, climate change (see my Dec 18 article), etc.

As I’ve noted before leading economic indicators show slowing global growth but still not immediate recession, this article updates several charts I’ve previously shown.

The Jan 2 Markit release of the J.P.Morgan Global Manufacturing PMI said: “Output growth remained stubbornly low, rates of increase in new orders and employment slowed and international trade flows deteriorated. The outlook also remains relatively lacklustre, as business confidence dropped to its lowest level in the series history.”

The Jan 14 release of the OECD’s Composite Leading Indicators (CLI) said: “In the United States and Germany, the tentative signs of easing growth momentum, that were flagged in last month’s assessment, have been confirmed.” As can be seen in the chart below, this is the third global growth slowdown since the 2007-09 Great Financial Crisis (GFC).

There is a similar message in the next two charts, from Advisor Perspectives. Both the monthly and weekly charts have turned down, with a variable lead time before they signal the next recession [first chart updated on Jan 24, second chart on Jan 18--jf].

Seven of the ten components of the Conference Board’s Leading Economic Index (LEI) , the next release is Jan 24, deal with the real economy, three with financial conditions.

The chart at the top of this article is an update of another one I’ve shown before, financial condition/stress indexes from three regional Feds, which are increasing but not yet at recession levels. Since the GFC these indexes have risen on the three occasions that the OECD CLI shows slowing global growth, including now.

The next chart shows global debt as a percent of GDP for four sectors, the largest increases in that ratio since the 2007-09 GFC have been in the government and non-financial corporate sectors, before that crisis it was in the household and financial corporate sector.

The January 15 release from the Institute of International Finance (IIF) indicates that government debt has increased 76% from the GFC. It's been manageable so far due to ultra-low interest rates.

Although total debt and as a percent of GDP is still very high, it’s possible that government debt might be less prone to crisis, since some governments can print their own money, or if there is another crisis, then it will have a large political component, e.g public pensions in U.S.

There is a view from both the right, e.g. conservative libertarian David Stockman, and the left, e.g. liberal Berkeley economist Brad DeLong in a Jan 7 article in Project Syndicate, that recessions nowadays are caused by financial crisis, not the other way around.

Increases in gross sector debt perhaps don’t necessarily indicate the risk of a financial crisis, which are essentially the modern-day equivalent of old-fashion bank runs triggered by loss of confidence in opaque valuations and counter-party risks, e.g. for CDO, CDS, etc in the GFC. To try to anticipate a modern-day financial panic, one needs to drill down much further into specific financial markets.

A number of people comment and post many excellent charts on Twitter about the risks in emerging markets, corporate debt and junk bonds, auto and student loans, real estate, China, the EU, Italy, Brexit, etc., I follow a very eclectic mix there and greatly appreciate and learn from all their efforts.

Some are outside the mainstream, usually the ones who see crises coming in broad terms are, that's how professional career advancement works in America. My feeling is that without insider knowledge from actually participating in various financial markets, especially in credit and currencies, it seems very difficult to accurately guess if and especially when they might trigger a crisis.

E.g., Nobel economist Paul Krugman in his Jan 15 NYT article admitted he and others have had no luck for years in forecasting a China crisis. Krugman has no insider information on China, virtually no one does, since the policy-making of the China Communist Party (CCP) is secretive and opaque, again that key word for crisis.

Just a very few outsiders who managed to get insider information profited from it in the GFC, as depicted in the book and movie “The Big Short.” What is needed ASAP is input from insiders, and of course they have no incentive to share such information. I have called here and here for a Financial Prevention/Crisis Resolution Committee of leaders from the financial community to try to deal with this situation.

I’ve shown the above charts before, this next one is new, it’s from a Dec 16 paper “The financial cycle and recession risk” by Claudo Borio and others at the BIS, which is the official institution that has the most credibility on the GFC. At least according to this chart, the current financial cycle does not appear to be nearly as severe as before the GFC, although the chart ends in 2017.

My previously expressed view is that left out of most informed discussions of financial crises is the issue of political power. Many in financial markets prefer to ignore political issues. But financial crises are made worse by lack of viable political leadership, and that lack in turn results in a sub-optimal resolution.

I think that happened in the two most important systemic crises during my lifetime, the GFC and the 1971-73 crisis that ended the Bretton Woods system. In both cases there was not a viable political alternative to increased Wall Street dominance coming out of the crises, so that's what happened.

In 1971-73, Paul Volcker, then a technocrat at the U.S. Treasury, hoped to somehow help piece together a new version of a “sound money” international financial system, as described in his new memoirs, “Keeping At It,” but was unsuccessful, resulting in a financial world dominated by huge increases over the past forty years in debt, speculation, leverage, Eurodollars, derivatives, securitizations, etc.

When the GFC hit in 2007-09, the political power for “sound money” was still nowhere to be found, so the financiers and speculators still came out on top during and after that crisis and the ensuing one in Europe in 2010-12.

Systemic crises tend to occur about every 35-40 years, besides the ones I just mentioned there was one in the 1890s, which cemented Republican political power until FDR in the 1930s Great Depression.

It's possible that the best chance at profound change already passed in the 2007-09 GFC, the right took advantage of it, at least with the Supreme Court, which is for life, unlike presidential terms. The Federalist Society was arguably far more successful in the "Leninist" sense than anything on the left.

Given the current dismal state of American politics and the evisceration of U.S. industrial labor unions that accelerated under Reagan, perhaps the only potentially powerful enough force to change “the correlation of forces” of the neoliberal world order that was ushered in by Reagan and Thatcher may be China, which Trump and other American elites recognize, as does the CCP.

In the current trade war, as I and others have noted, Trump watches the stock market and wants to get re-elected, which helps the chance of a deal with China.

For its part, China’s leaders have been known for their pragmatism and flexibility throughout the era of “reform and opening up” since 1978, captured in quotes attributed to Deng Xiaoping. "Cross the river by feeling the stones." "It doesn't matter if a cat is black or white, so long as it catches mice.""Hide your strength, bide your time, never take the lead."

That pragmatic flexibility may be built into the DNA of the CCP from way back when Mao eschewed Marx’s industrial proletariat as leading the class war in favor of China’s peasantry. Sometimes it works, as it mainly has the past forty years of China's "socialist market economy," sometimes it doesn’t.

Some have questioned whether Xi has moved away from Deng’s legacy. Regardless, the overriding goal of the CCP has always been to remain in power, and it will try to do whatever it takes to do so.

So if Xi and CCP leaders believe cutting a deal with Trump is now considered the prudent thing, then that’s what they will try to do, within the constraints of their key national goals and strategies for continuing to modernize and strengthen China, and of dealing with a huge middle class.

As I have repeatedly said, e.g. here and here, the U.S. should be far less concerned with China and far more concerned about its own glaring problems. The U.S. did not win its cold war with the Soviet Union mainly due to Reagan’s defense spending, it won because most people wanted to be on the West's side of the Berlin Wall.

The same will be true with competition with China, especially in developing nations, where people understandably care far more about getting clean water and electricity than they do “identity politics” and “culture wars” that American politics and media have been obsessed with for decades.

In that regard, I will note that TerraPower, a nuclear energy company that Bill Gates is involved with, announced that it is shelving its hope for building a trial reactor in China, evidently a victim of Trump’s trade war, according to this Jan 1 WSJ article.

I mention this because of my long-standing hope that the tech elite will finally step into the huge leadership deficit in the U.S. before it is too late, e.g. as Marc Benioff has started to do in San Francisco. The tech elite has been under attack by the liberal media, in part over Russiagate, liberals and Dems have a long-standing issue of dividing themselves.

Ray Dalio, who posts on LinkedIn, has compared the current situation to 1937. I feel there are similarities with the 1970s. In both cases there were systemic economic/financial/political crisis, the Great Depression, deepest in 1929-33, and the 1971-73 breakdown of the Bretton Woods system.

There was another systemic crisis in the 2007-09 GFC and the 2010-12 European crisis. They have not been resolved yet, economically and politically. The aftermath of the 1971-73 crisis also dragged on. Carter came to D.C. in 1976 as an “outsider” trying to reform the FDR/LBJ New Deal coalition. Trump came to D.C. in 2016 as an “outsider” trying to change the Reagan/Thatcher neoliberal system.

Both Carter and Trump may have been “disjunctive presidents,” who unsuccessfully try to change the failed previous political/economic systems. Carter gave way to the neoliberal regime of Reagan. What will Trump give way to? Sanders/Warren/AOC are essentially FDR/LBJ New Deal liberals, notwithstanding the “socialist” label, the Green New Deal, which btw had been around since 2008 before AOC took it viral, explicitly acknowledges this.

In a country of 325 million people, Trump became President by about a mere 80,000 votes in four key swing states. In a Congressional district of 712,000, his fellow New Yorker AOC became an overnight media sensation by getting 16,898 total votes and a mere 4,018 winning margin in the primary, assuring her election in a very safe Democratic district in the Bronx and Queens in NYC.

Huge political changes from such small margins for “populists” of the right and left, such is the influence of mass and social media, because these are very fluid times politically, things can and may change very rapidly.

According to Wikipedia, born in the Bronx, after five AOC grew up and attended high school in Yorktown Heights, an affluent suburb in Westchester about 36 miles north of her earlier Bronx neighborhood, with a median family income of $137k. Another millennial, Mark Zuckerberg, grew up in Dobbs Ferry, Westchester, about 22 miles south of Yorktown Heights.

Since Zuckerberg and the rest of the tech elite feel strongly about the immigration and climate change issues, see my Dec 18 article here on the latter, perhaps they can find some common ground with AOC, to the benefit of both, and on health care, which both he and especially his pediatrician wife, Priscilla, are very involved with. And Gates's nuclear power with AOC on the Green New Deal.

I know that sounds absurdly strange, but somehow the tech elite and millennials have to help take back the country from D.C. and Wall Street. After watching Trump, Pelosi and Schumer, aged 68 to 78, address the border wall and government shutdown on national tv, perhaps America can benefit from input from younger leadership.

It's very difficult for the U.S. to get serious after nearly fifty years of economic fantasyworld. How do you boil a frog? Slowly, otherwise it will jump out of the pot. Some who want major change seem to hope for a "Sputnik moment" or "Minsky moment" to wake America up. That didn't happen during and after the 2007-09 GFC, when many innocent people both in the U.S. and worldwide were devastated. A similar outcome would probably occur if there was another crisis, unless the American people get serious ASAP.

MAWA, Make America and World Awesome

John Furlan