The Pence Doctrine

I subscribe to Jim Rickards's Strategic Intelligence newsletter, which combines political with stock market intelligence. Rickards devotes the last issue to the Pence doctrine, based on the speech, embedded above, which the vice president gave at the Hudson Institute last October.  Rickards compares Vice President Pence's speech to George Kennan's Long Telegram, which set the stage for the Cold War containment policy of Truman and subsequent Cold War-era presidents.

Without revealing Rickards's proprietary stock advice, I conclude that investing in China is going to be a bumpier ride than most analysts have thought and that the rationales for the Trump trade war are  more complex and subtle than I had previously thought.   The arguments for free trade are correct, but they are entirely economic. Economics does not justify trade when trade creates a political or military threat. Chinese industrial espionage and its use of economic power to coerce trade secrets from American firms do create broad military threats whose costs are not borne by the firms that do business with China but who benefit from trade.

If economic actors are politically neutral and the Trump administration can wrangle concessions from Germany and China and then go back to free trade in short order, investors will be happy and economically the world will be better off. However,  Vice President Pence makes clear that there are intransigent political and military reasons to curtail trade with China, and these will not go away anytime soon even if the Chinese adopt a policy of reciprocity. (Economically, we are better off adopting a free trade stance even if a trading partner is protectionist. However, if we are selling ee cummings's nipponized "old sixth avenue el" to World War II Japan, it's a different matter.)

That American politicians and businesses have been willing to ignore China's history and ongoing practice of mass murder and political incarceration has been, until now, a moral disgrace. Americans, including me, have ignored torture and mass killing in the interest of a cheap sponge mop.  Pence states that one million Muslims are currently incarcerated in Chinese reeducation camps, where they are tortured and brainwashed.   Beijing continues to murder political dissidents; they continue to suppress minority religions, including  Tibetans and Christians as well as Muslims; they continue to attack free speech. Beijing's socialist state  has killed and continues to kill more human beings than almost any other in history--with a handful of similarly socialist exceptions.

Tech companies like Google and websites like Quora have long been apologists for China's mass murder regime. I was chastised and then I terminated my Quora account after a moderator insisted that my criticism of Chinese mass murder was outside Quora's speech parameters.  

As Vice President Pence points out, the Chinese state is taking control of  American newspapers and TV and radio stations. It runs cloaked newspaper advertisements on behalf of its political interests; it uses American airwaves as propaganda vehicles.  The Chinese mass murder state censors speech and scholarship in American universities.

The Chinese Scholars and Students Association functions as a spying organization against Chinese students here, and information it has gathered has been used to attack families of Chinese students.  It censors movie studies, and it has made direct changes to American-made films.  (Its power to do so comes from selective granting of access to its market.) In other words, Hollywood has been willing to sacrifice American security interests for access to the Chinese market.  It has attacked the New York Times and cyberattacked the Hudson Institute, where the vice president gave the speech.

President Trump, through the concerns enunciated by Vice President Pence, is the first president since Nixon's détente to identify the  threat that China poses. This has not been recognized in Democratic Party-dominated universities, Democratic Party-dominated newspapers, or Democratic Party-dominated media.  

If Rickards is right and the Pence doctrine is going to become foundational to American policy, the trade issue is going to become more complicated rather than less, and we may be in for a protracted cold war with China. 

The Trade War, Central Bank Contraction, and Stock Market Volatility

Two useful emails today came from Liberty Investor’s Brandon Smith and Daily Proof’s Jim Rickards. 

Based on the correlation between G3 central bank balance sheets and stock prices, Smith  writes that the rising stock market has had had little to do with free markets but rather is the product of central bank asset purchases.  When the central bank sells assets, stock prices will reverse. 

The G3 are the US, Japan, and Europe. 

Smith claims that currently fashionable stock buybacks are the last gasp of paper money stimulus.  The trade war, in Smith’s view, is a mere distraction. 

                                     Source: Brandon Smith, Liberty Investor

Central bank monetary expansion, the result of expansion of central bank balance sheets, underlies the rising stock market that we have witnessed for the past century.  What have been remarkable about the post-2008 period are the enormous quantity of bank credit created, the enormous quantity of assets purchased, and the enormous stock market bubble. 

Central bankers and their shills in the media and academia claim that reducing asset holdings will not matter because so much assets have been purchased.  It is kind of like Bill Gates giving to charity: He is still very rich even after giving away a lot.  The Establishment claims that contraction can be done gradually and in the Goldilocks manner--just right. 

At the same time, additional regulation, including tariffs, can reduce the potency of the narcotic of flexible money by making firms less profitable, i.e., reducing efficiency.   Once a given regulatory system is in place, monetary policy will drive the stock market, but if there is disruption, then there can be sharp change. If the disruption occurs in tandem with monetary contraction, then it seems likely that it can contribute to declines.   

Smith is right that monetary contraction will threaten the stock market; adding tariffs to the mix can contribute, but it is not the underlying factor.  

Jim Rickards has been writing about central bank policy for a long time, but he puts greater emphasis on the tariffs.  He cites Patrick Donahue and Arne Delfs of Bloomberg news, who have written a piece about a warning by German chancellor Angela Merkel of a potential global financial crisis because of the tariffs.  

The Establishment is always careful not to question  central banks, for the state depends on wealth extraction from the productive population using paper money.  In this way both the financial sector and the state are aligned with the central banks. The general population believes the claims of the media and universities that big government is necessary to its well being and low wages are necessary to their happiness--except when the subject of income inequality is raised; then,low wages are a problem that requires bigger government.

Hence, Rickards's comments are compatible with Smith’s claim.  Smith's claim that news about tariffs is coordinated with central bank policy is impossible to substantiate, but the underlying elements are present. 

While stock markets decline because of monetary contraction, tapering, or deleveraging (choose your mumbo jumbo) and contraction saddens Wall Street, the average American has been hurt financially by the long-term, century-long monetary monetary expansion. It has led to declines in innovation rates and the real hourly wage. It also has led to expanding income inequality.

Jim Rickards Describes Increased Global Interest in Blockchain and Gold instead of the Dollar

Alex Stanczyk interviews Jim Rickards in the June 2018 edition of Gold Chronicles.  Rickards’s thesis is that the dollar is going to collapse.  I agree, but while it is easy to know that this will happen, it is hard to know when—whether in three years or 35 years. 

I am accumulating gold gradually and plan to have about 20% of my portfolio in gold and silver, although I’m at about eight percent now.  I’m not totally convinced that the downturn in the gold price from the 2011 peak--due to monetary expansion and the Trump stock market bubble--is over.

Rickards says that gold production has flatlined.  We all know that the “peak” thesis was wrong for oil, and I have little reason to believe that it will be right for gold.  However, production is not a determinative factor in the long run. 

Rickards claims that there is a new axis of gold formed by secondary and tertiary powers who are looking a way out of the dollar system, and they will hasten the invention of an alternative monetary system that will include both blockchain technology [but not Bitcoin] and gold.  Incidentally, I have purchased a small amount of Overstock.com, which has become a blockchain incubator.

Stanczyk says that gold is migrating from the West to the East, especially from London to Switzerland and then to China and India.  Gold reserves held in emerging market central banks increased 91% from 2006 to 2017.  The Russian central bank has purchased over 600 tons of gold over the past four years.  The Keynesian claims that gold is a “barbaric metal,” defunct, and meaningless with respect to monetary policy, seems to have escaped central bankers around the world.

          “The dollar is still boss,” Rickards says, but “Russia buys [gold] like clockwork.” Still,  remember that the price of oil collapsed a couple of years ago [and gold can still do the same].  The oil collapse hurt Russia’s economy. In the 2014-2016 period,  Russian dollar reserves declined by 40% due to the fall in the price of oil, but Rickards points out that the Russians did not stop buying gold even during this difficult period.  It’s like you buy $100 a month in gold, but then you lose your job. Even then, you still buy the gold. That’s conviction.

China is less transparent than Russia, according to Rickards. China has purchased 600 to two thousand tons; Turkey has acquired gold; Iran has acquired gold; Kazakhstan has been acquiring gold. From 1999 to 2010 central banks sold gold. [They apparently sold into the gold bull market.] Since then, the central banks have been buying gold.  The last time the US sold gold was 1980, despite the scoffing of foundation-funded academics.

The big sellers after 1980 were the UK, Switzerland, and the IMF. Germany, France, and Italy never sold.  The central banks that were selling have stopped. Now, on net, banks are buying.  Miners are having difficulty finding new gold. “What’s going on is strategic,” says Rickards.

The US dollar is currently more than 60% of global reserves, 80% of global payments, and 90% of oil payments.  The Establishment (Ben Bernanke, Tim Geithner, John Lipsky) sees continued dominance of the dollar.  Currently the US is in financial wars with Iran, Russia, North Korea, and possibly China. 

          The ubiquitous dollar enables the US to be effective at enforcing economic sanctions. The problem is that these countries, at the short end of US foreign policy and trade policy, are trying to get around the dollar system.  Russia, China, Iran, Turkey, Venezuela, and Brazil are looking for an alternative to the US dollar system.

It's a Social Security Scheme

Jim Rickards' s Agora Financial forwarded this Vanity Fair article and video-taped interview with Jeffery Gundlach, a Forbes 400 Wall Streeter. According to Wikipedia Gundlach was the fund manager for the TCW total return bond fund. He was fired; then, he founded Doubleline Capital. Wikipedia suggests that he has sometimes been overly bearish. In 2011 he liquidated 55% of his position in municipal bonds, but municipals did not decline.

It is easier to know what will happen than when. Rickards forwarded the piece because Gundlach is bearish on bonds--six years after his pullout from munis.  That is understandable.  I too have been  bearish, cutting back on my stock holdings in 2016 and hence getting a smaller benefit from the 2017 rally than I might have. (As well, I am a tech skeptic, which also has been a costly mistake. C'est la vie.)

The current rally will snap, either in '18 or later, and there will be a correction. There will then be monetary expansion on top of the already immense monetary expansion since 2008, and Americans will continue to suffer declines in their real wages and real household income as Wall Streeters like Gundlach benefit handsomely and those with at least some assets in the market continue to gain.

What I found most interesting about Gundlach's talk is his cavalier attitude toward screwing middle income baby boomers by instituting means testing for Social Security. He does not seem to have thought through the issue carefully, but he seems to suggest that currently benefit-eligible elderly should have their benefits cut in order to make federal government bonds more attractive to him.

Like all Wall Streeters, Gundlach has benefited handsomely from public subsidization.  No one knows how wealthy Warren Buffett or Jeff Gundlach would have been without the massive monetary expansion since 1971, but neither would be nearly as wealthy as they are.  Feeling comfortable with his own benefits from the public purse, Gundlach sees the need to cure federal indebtedness fast by reducing Social Security benefits. That way bonds will surely rally.

Gundlach is right that benefits need to be reduced. Federal indebtedness is now in excess of 100% of GDP, not including the future unfunded liabilities of the Social Security System.   According to CNBC, if actuaries use an unlimited time horizon (beyond 75 years)  rather than a 75-year horizon, the future unfunded liabilities of the system are $32 trillion.  Current GDP is $19 trillion.

Projections beyond 10 or 20 years have little meaning because the assumptions that actuaries make become increasingly inaccurate.  Technological shifts, demographic shifts, wars, diseases, impoverishment of the middle class, inflation, and monetary expansion change life expectancy.  CNBC claims  that until 2034 Social Security will be able to cover benefits. Thereafter, there will be a 25% deficit until 2090.  After that the system will be in extremis.

Gundlach suggests that boomers' benefits be cut by instituting means testing.  In other words, the middle income savers whom Gundlach's backers at the Fed have screwed by reducing interest rates should be screwed again by means testing Social Security.  Those who made life decisions based on government lies that Social Security is an insurance plan should end their lives in poverty. Gundlach is confident that boomers will not complain. He claims that they are a unique generation, but he does not offer a reason. 

Gundlach is right: Through monetary policy Wall Street has screwed boomers who save, and they have been too dumb to complain for 40 years, so Wall Street's lackeys in Congress might as well once again screw them by cutting Social Security in order to gain a few extra years' bond rally. They likely won't complain again.   Gundlach will profit. That's what the phrase "a good economy" means in today's English language.

As Gundlach suggests, the retirement age should be raised.  An increase of one year beginning with  two years from now might be a fair solution. Thus, people born in 1953 wouldn't get full benefits until 2020; people born in 1954 (my birth year) wouldn't get full benefits until 2022, and so on. The full-benefit age might be raised to 72.  That would likely solve the short-term problem. Actuaries will need to determine the precise increase in retirement age.  Fairer still would be slower increases of say six months or to start the increases five years hence so that those nearing retirement will have time to plan.

In some areas Gundlach is surprisingly uninformed.  He suggests, for instance, that air conditioning repair men, competent, technically trained blue collar workers, are now permanently unemployed. That claim reflects economic illiteracy. I have seen this strange claim repeatedly coming from elite America. It reflects the lack of competent economic instruction at elite, left-wing universities.

In any case, the employment rate in America is currently at an all-time high. Many technical jobs remain unfilled.  The employment-to-population ratio  is slightly lower than in 2008, but that is to be expected given an aging population.  The employment-to-population ratio in Nov. 2017 was 60.1; it was 63.3 in January 2007. The number of employed is at an all-time high.

The high employment rate has been achieved by reducing real wages through monetary expansion.  More Americans work; they earn lower wages.  The wealth is transferred to Wall Street because the low interest rates boost the bond market. Insiders like Gundlach and Buffett benefit most as Americans work harder for suppressed wages.

Social Security was originally sold to Americans as an insurance plan combined with a welfare plan. There is no such thing. Insurance is actuarially fair. If there is no actuarial relationship between contributions and benefits, then the plan is not insurance. Social Security was designed to give higher benefits to lower earners than they have earned and lower benefits to higher earners than they have earned.  There was never any connection between the FICA tax and the OASDI Social Security benefit.

The plan was set up to fool people. It was set up to be a fraud.  The biggest fraud was the impression given to Americans that there is a fund into which their contributions go to fund their own retirement.  That deception was accomplished by pretending that FICA was somehow separate from other federal taxes and somehow linked to OASDI. It has always been just another, albeit regressive, income tax with no connection to the statutory welfare benefit that OASDI provides.

There is no easy way out of the mess that the two parties have caused with respect to Social Security.  There are ways to reformulate monetary policy.  The two parties will not betray Wall Street, and I'm afraid Americans are unable to think without the say-so of Wall Street-backed media.  Perhaps in the future the phrase "Social Security scheme" can replace the phrase "Ponzi scheme."