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Divergent Themes in Late 2016

Politics / GeoPolitics Oct 31, 2016 - 02:15 AM GMT

By: Andy_Sutton

Politics

Despite the arrogance, hubris, and lying (obviously – its election season!), we have never seen a cycle that has be more absent in terms of policy details worthy of analysis. Outrageous claims about job creation, making America strong, and so forth are issued, but there is no substance. We have tried on numerous occasions to find enough specifics to even perform cursory analysis and it is just not there. It is very reminiscent of Nancy Pelosi telling America in 2010 that if they wanted to read the healthcare bill they had to pass it first. This is what passes for economic jurisprudence in the Republic the founders gave us all those years ago.


Rest easy good friends, this is not an article about the election. Andy said he’d rather watch goat races in Antarctica and frankly we think many people might be inclined to join us rather than hear another word about the election. We have long stated that this country will not rise from the ashes by the presence of a single person at the top, but rather from the millions below. That’s where the power is.

There are two very relevant topics floating around this week. We’re going to try to give an update on each of them.

Syria – We Told You Russia Wouldn’t Give Her Up

Included in this update are going to be excerpts from Andy’s 2013 Quarterly newsletter. At the end of the article will be a link to the entire article. The title of the article is “The Middle East Conundrum – Why We Fight”. Three years and change later, the Russians are dug in, moving missile systems, warships and the like to protect this strategic area. The Americans, of course, are doing the same thing. The ‘bad guys’ in this case are ISIS. Everyone wants rid of ISIS. Saying that, you MUST watch this clip. It is a short admission of how we do things here. Notice the justification that is given. Sounds rational. To be fair, here is another clip of a politician of the opposite stripe saying the same thing about funding and arming ISIS. Just so you see what the deal is here regarding Syria and WHO is fighting WHO.

The allegation of course is that the Syrian leadership, specifically Assad is protecting ISIS and allowing them to butcher civilians. This allegation comes from the same group that claims Assad used Sarin gas on his own citizens a few years ago. We don't know Assad personally obviously. He’s probably cut from the same bolt of cloth as most of today’s leaders, which means he’d fit right in at the Capitol building or the Kremlin. Well, the first story really didn’t stick so in August of this year, Assad was again accused of using chemical weapons – this time chlorine gas.

What does any of this have to do with economics? From the 2013 Quarterly:

“Syria is strategic, both to the Russians as well as banking interests here in the US and in Europe, including the house of Rothschild. At the current, the Russians, through their state-owned natgas company Gazprom, have what is essentially monopoly pricing power in the European natural gas markets. With this monopoly comes a lot of influence, especially when it gets cold. In 2009, Russia shut off the gas to Europe. The cutoff arose due to pricing disputes and assertions by the Russians that gas shipped through the Ukraine was being siphoned.”

This is where we’ll link the article because there is a lot of background. The whole thing can be read in about 15 minutes and understood in about 15 seconds. So we’ll continue, assuming you’ve read the background on the Caspian Sea pipeline deal because you’re most likely wondering: Why the Russians didn’t care about the Caspian Sea deal in 1999? Seriously, read the article. The Taliban had a choice in the Caspian matter, refused, and a year later (conveniently after 9/11) were bombed to the stone age. This is a recurring them and is tied directly to the term hegemony. Dollars or bombs. Your choice.

So, Onto Syria. Buckle Up

“Enter Qatar. This little nation is sitting on a treasure chest of LNG (70 billion tons at last count). Here’s where a map comes in handy. The folks in Qatar would love to push their gas to the European markets and compete with the Russians. However, they have no cost-effective way of getting the gas there. They need a pipeline and they need it to go through one of two places: Saudi Arabia or (drum roll please…) Syria. The Saudis gave an emphatic ‘no’ because it isn’t in their best interests. Qatar has the gas, but no way to impose political influence in the region so they cut a deal with the US and Exxon Mobil. ( Added: We had this tidbit linked in the 2013 article from both Exxon’s website as well as the Statesmen – a mainstream source; both citations have since been removed by the respective websites).”

So this deal was cut in May of 2013 and by August, the US Government wanted Assad’s head on a platter for ‘war crimes’, namely the poorly concocted story about the use of Sarin. See, Assad, like the Saudis took a pass on the pipeline, but unlike the Saudi’s he’s not influential enough to pull this off without help. Enter the Russians. They were a natural partner in this situation since they have a lot to lose and already had business relations with the Syrians. There is so much more to this story, like the Russians being targeted in the Cyprus banking holiday, but they were tipped off. This is why we’re linking the whole article and practically begging you to read it. This is not a tease, there is no cost, no links, no special offers, just an article.

The bottom line is that the Syrian situation started in May of 2013, percolated to the surface in August and we told you in September that Russia would NOT leave Syria’s side and why. And look at what has happened since. Between the saber-rattling, bombing of various areas, and the fact that US-funded/armed ISIS is fighting the Russians, we are in a de facto hot war with a major superpower. The media won’t say it, but we will. This little situation in the Middle East has already gone further than the Cold War. It is approaching the level of the Cuban Missile Crisis in 1962 when the Russians, after being provoked, parked a bunch of nukes 90 miles off the coast of Florida.

Even then we were looking to turn a bad situation into a worse one. Go hit your favorite search engine and look up a fellow named Lemnitzer and his plan to stage false flag attacks – namely shooting down either a fighter or a commercial airliner and blaming it on the Russians vis a vis the Cuban government. It was called Operations Northwoods. I know, break out the tinfoil hats. Like it or not, this has all be well-documented. Fortunately, Lemnitzer’s plan was shot down – no pun intended, but don’t put it past governments to do damage to their own countries or citizens in order to justify war with an economic enemy. After all, they’ve been doing exactly that for a long time.

The rhetoric has escalated in the past few weeks with the US now saying it is planning a cyberattack on Russia and as we begin to collaborate on this article, there is a major denial of service going on here in the US on various DNS backbone servers. The US Government has been publicly blaming Russia for various high-profile hacks. Better take a snapshot of NPR’s article; it is liable to disappear down the memory hole like those of the Exxon-Qatar deal if things go sideways. Then you have the US telling people the Russians might fake election rigging in a few weeks. So, we’ve got a nice setup here with a scapegoat already decided. But people will believe it because Americans are dumber than a post when it comes to critical thinking. Unless it involves football statistics, reality TV, or other social drek, most people are clueless and demand to remain so. We’re only getting what we deserve.

Consumer Spending – A Slightly Less Infuriating Topic (But Only by a Little)

Bank of America economist Ethan Harris said in a recent note that US consumer spending has ‘settled at a lower trend’. The note uses the logic that household wealth is nearly back to its peak during Housing Bubble v1.0 as a percentage of disposable income, record low interest rates, and initial jobless claims that are at the lowest levels since 1973. People should be spending like crazy, yet it is obvious they aren’t. What gives? Harris wants to know. The first thing trotted out is the savings rate and the fact that it is increasing. Before we dissect this too much further it MUST be pointed out that consumer spending is measured in dollars, not units. We’ve been here before, but it must be restated, for to miss this point is to lose the analysis. If you paid a buck for one soda last month and this year you pay $2.00 for one more soda, the government will say consumer spending doubled. It is portrayed as ‘growth’ when in reality you bought the same amount of soda in each year; the change was purely a function of price.

Below you’ll note two charts: the first is the rate of growth in consumer spending (allegedly adjusted for inflation) and the second the savings rate – both implied and derived. Neither are actual.

And the savings rate…

BofA went on to point at 5 possible reasons for the trend change. The first is household deleveraging due to constraints in accessing credit. You regular readers know we are always hammering the credit data so we’re not going to do it here, but you’ve seen the charts of consumer credit. There was some deleveraging back in 2010, but that was it. From 2011 since, it has been business as usual with the swipe now, pay sometime in the future doctrine.

The second reason is reduced expectations for future real income growth given extremely slow wage growth. This we can sort of buy. There are many people who talk to us in a given week and almost all of them are saving. And most of their circle of acquaintances is saving also.

The third reason is concern about future entitlements and social safety nets given the unfavorable outlook for the US deficit. Not a chance, Ethan. If we were talking about the America of 30 or 40 years ago, sure. They were savers by nature, raised by people who experienced the First Depression firsthand. It is now getting very hard to find people with recollection of the First Depression, so the hardship has gone out of the national consciousness. Believing that the average beer-drinking football-watching American is concerned about the federal budget deficit is about the same as saying the Road Runner is worried about Wil E. Coyote catching him on one of those ACME rockets.

The fourth reason is greater income and wealth inequality, with a larger share of money going to the population with a greater tendency to save. That one, we’d say is about spot on. Dismissing the obvious attempt at creating class warfare by BofA’s note, America is in fact splitting. It has split to the point that the actions of the top 5%; 10% for sure can skew the aggregate data. It would be interesting to see quartile analysis of this data. Or even leaving off the top and bottom 10% from the aggregate numbers and analyzing them separately. It wouldn’t be much work, but it won’t be done because it would point out that the crony capitalism of the last half century and beyond has been making a few people very rich while making an awful lot of the rest treading water or sinking. This is not only an American trend either, but rather a global one.

The final possible reason given is an aging population, which increases the share of the population focused on building up retirement savings. Possible, in conjunction with reason #4.

Additional Analysis

Is it possible the consumer is becoming beleaguered? Is it possible that there is hesitation before the swipe? We know in many cases this is true. However, on the other hand, in conjunction with previous work, we can point out that someone has to be doing all this borrowing to keep consumer credit at a steady rate of growth. Where the possibility of the majority of the new wealth going to those with the propensity to save, we could offer the corollary of the lack of new wealth going in the direction of those with the propensity to borrow.

We offer again that the same skewness that is seen at the top could easily be seen at the bottom. There is quite a bit of anecdotal evidence to suggest this, just looking at credit card spending trends.

Given this likelihood, it is no wonder there is so much effort being put into fomenting class warfare both here in the US and abroad. It is also no wonder that so many race to embrace socialism, not knowing even a single thing about the danger they choose to dance with. Socialism in the media is portrayed as the great equalizer. If, for whatever reason, you don’t produce and as such don’t get to consume as much as you like, we’ll repossess the wealth of others to make you happy. Sounds like a winner, right? Wrong. What you end up with at the end of these stupid social experiments is a bunch of people who don’t want to do anything and the few productive economic actors figuring why bother. A great example of this occurred during the First Depression when the highest tax bracket was 90%. Incentive gone. Marginal cost exceeds marginal revenue and everything grinds to a halt.

Of course the socialists of that day knew this; it was no surprise to them, but they believed they could create a utopia by instilling laziness in an entire population. They failed in the 1930s, but by the time the 1960s rolled around, the bad memories of Depression I were largely gone, the country was ripe for the picking. And so here we are in 2016, further into a global socialist experiment than perhaps at any previous time in history. The experiment reeks of failure. $20 trillion in actual national debt, well over $200 trillion when the net present value of unfunded liabilities is factored in as is ought to be. $152 trillion in total global current debt according to the IMF. More than 2.5 times total global GDP. We’ve created generations of debt slaves in little more than a single generation. Welfare has become a career option in Europe and the United Stated. This has already led to the undoing of the scrofulous EU. It may still be there in name, but it is merely a shell. America is right on its heels. We haven’t heard the word ‘austerity’ yet, but it’s coming.

Conclusions…

This is the point in the cycle where the elites like to take nations to war. War is a great distraction from the thrashed economy and the 1.2% y/y growth in consumer spending lamented on so eloquently by Ethan Harris in his little note. It is a great distraction from the rapidly accumulating debt. It is a great distraction from the feeling many people have in their guts that things just aren’t right. War is seen as a means to eliminate imbalances, correct alleged wrongs, and the saber-rattling that is going on at the present time has many geopolitical analysts saying that tensions between America and the Russian Federation are higher now than during the Cuban missile crisis. Enter Syria as analyzed in 2013 and again at the outset of this article. Most importantly, war requires a bad guy and a good guy and since America is always the good guy (sic), enter Russia. There are plenty of people who remember the Cold War that never really ended and is now a mere fiber from becoming a hot war. Russia is an easy bad guy, even when it is only defending its interests. Were America prevented from doing the same things Russia is now doing, there would already be a hot war.

Just so nobody misunderstands our position: we love our country. We just happen to be totally and unequivocally opposed to this constant interference in affairs that have nothing to do with us. Given some of the numbers and situations posted above, you can be sure we have enough problems of our own to solve without creating new ones. Our message to the USGovt – back out of Syria. Stop funding ISIS or whatever you’re calling them this week. Give up on ExxonMobil’s deal for a pipeline; you are not their enforcement arm. It is none of your business. If we had statesmen instead of salesmen in government, maybe we wouldn’t be in such dire straits as a nation.

Graham Mehl is a pseudonym. He currently works for a hedge fund and is responsible for economic forecasting and modeling. He has a graduate degree with honors from The Wharton School of the University of Pennsylvania among his educational achievements. Prior to his current position, he served as an economic research associate for a G7 central bank.

By Andy Sutton

http://www.andysutton.com

Andy Sutton is the former Chief Market Strategist for Sutton & Associates. While no longer involved in the investment community, Andy continues to perform his own research and acts as a freelance writer, publishing occasional ‘My Two Cents’ articles. Andy also maintains a blog called ‘Extemporania’ at http://www.andysutton.com/blog.

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