Month: January 2017

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IntelDigest

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JANUARY 25 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

 

After the discussion last week of the “Trump Doctrine,” we continue with matters of ideology in this issue of IntelDigest.  Next week, and for the ensuing few issues, we will return our focus to The Economy and Investing in the “New World Order.”

Today, we will tackle Nationalism.  Most people see the successes of the Brexit and Trump campaigns as Nationalist victories.  But, what does that mean?  How did we get to this point?  Where are we headed?

 

 

The simple explanation for the rise of Nationalism in the United States is this:   economic dysfunction has political consequences.

 

 

In the wake of the 2008 financial crisis, long-held support for Internationalism … which has held sway since the end of World War II … has crumbled among the middle classes. Economic stagnation has persisted in most advanced industrial nations, while instability and insecurity are widespread in export-dependent countries.

Internationalism begat Globalization and Free Trade.  We discussed Trade Policy in our November 16 issue, which you can access in the IntelDigest Archive on our websites. Free Trade, as a world-wide policy, gained prevalence in the decades following the carnage of World War II;  traditional Protectionism now gains momentum.

The balance between Free Trade and Protectionism has been a point of contention throughout the history of the United States.  Today, exports account for only 12-13% of our Gross Domestic Product, so it is less of an issue in our country than in others.  However, the financial crisis has brought the subject to center stage, and opened the door to re-evaluation of our trade policy.

Controversy over trade policy ties into complaints over declining purchasing power and standard of living, job losses, stagnant wages, and loss of market share for U.S. products.
Political debate in the U.S. still revolves around the dichotomy of Left  vs.  Right, Liberal  vs.  Conservative. However, around the world, the political divide is more often Internationalist vs. Nationalist … those who deem essential the system of  alliances, mutual responsibility, free trade, and transcultural life which has developed since World War II   vs.   those who abhor the globalist perspective and prefer to hold dear their nation, culture, class.

 
Post World War II

Most would acknowledge that Internationalism was largely successful in the decades following World War II.  The world had been ravaged by conflict, the origins of which included the rise of Nationalism in Germany, exacerbated by the pre-war economic crisis.  The Great Depression featured the collapse of international trade because of Protectionism, represented in the United States by the Smoot-Hawley tariffs.

Post-war economic development depended on economic cooperation and opening up trade among the affected nations.  The United States encouraged European integration and free trade, and led the formation of the International Monetary Fund and World Bank.

The dangers of Nationalism and the necessity of international cooperation were the lessons which came out of World War II.  The result was an Internationalist system moving toward increased political, military, and economic integration in the West.  The collapse of the Soviet Union only validated this thinking;  the West had defeated the Soviets because of superior military and economic systems produced by international integration.

This encouraged world leaders to expand the Internationalist ideology.  Greater interdependence among nations would foster common interests and reduce the chance of conflict.  Greater integration would lead to greater prosperity.  More prosperous nations would encourage liberal democracy and respect for human rights.

Conservative advocates of free markets and liberal advocates of social justice embraced Internationalism;  one group seeing it as a path to prosperity through trade, and the other seeing rising standards of living and liberalization of political behavior.

 
Unequal Benefits

Internationalism has been largely successful around the world, but Nationalists charge that only part of the population has enjoyed the wealth, while cultural identity has suffered in many places.  Some would acknowledge that Internationalism is hostile (or, at least, tone-deaf) to cultural identity, and that is a weakness which has become more prevalent since the 2008 financial crisis.

 

 

 

Vulnerabilities

Interdependence can also be the Achilles Heel of Internationalism.  In a Nationalist environment, the barriers between nations … tariffs, currencies … act as moderating forces when a financial crisis hits another country.  But, the 2008 financial crisis was felt around the world like a contagion.  The integrated world banking system … which had been designed to facilitate the free flow of capital … instead quickly spread the financial virus everywhere.

Because of the high level of financial integration and the vast network of trade relationships among nations, significant damage was done to American finance and Chinese exporting and European markets, which, in turn, has undermined the oil market.

But, even the prior successes of Internationalism had been sowing seeds of discontent in some quarters, as economic growth increasingly benefited certain classes at the expense of others, and vast interrelated systems caused individuals to feel that they, and their native countries, had lost control of their own destinies.  Economic Elites could be satisfied with following capital around the world, but the homeland mattered to the Common Man.

This problem became more prevalent after 2008.  It became clear that middle classes in some countries were hurt when companies moved production overseas to take advantage of lower wages.  While people with wealth or position still had freedom of movement, many people, especially among the middle- and lower-classes, weren’t going anywhere, in both literal and metaphorical senses.

 
Rise of Nationalism Overseas

The breaking point was immigration.  Many in the middle- and lower-classes … in countries around the world … felt imperiled by an influx of thousands of immigrants or migrants, threatening their cultural foundations and their ability to earn a living.  They saw their own government as indifferent to their plight and complicit in disrupting their world.  They saw immigration as a burden placed particularly on them.

Nationalism is more prevalent in Europe than the U.S.  The European Union (E.U.) had put forward regulations and policies which prioritized the success of the E.U. at the expense of national interests.  This created conflicts within the bloc and among the member states.  This was exacerbated by the 2008 financial crisis, when member states experienced an economic crash while their hands were tied by the E.U. apparatus in Brussels.

 

 

 

Nationalism in America

In the United States, the defining economic problems today are decline in the purchasing power and living standard of the middle class.  One of the key affected groups is the white working class.  While it remains the single largest ethnic and social group in the U.S., many white workers felt disenfranchised, and were ready to turn on the party in power, the Democrats.

Donald Trump astutely tuned in to this demographic, and used it as his base to win the election.  Any of the other candidates … either Democrat or Republican … would have had a strong candidacy if they had addressed the issues important to this group.  Only Bernie Sanders came close.
Has Nationalism Reached Its Zenith?

Many people … in many countries … have turned to Nationalism after suffering through the 2008 crisis, because they came to view Globalization and Free Trade and Internationalism as ineffectual in solving the political and security and economic crises around the world.  People will seek the path providing the best advantage, and, today, Nationalism looks increasingly attractive.

However, it is still unlikely that nationalist parties will win majorities in any European countries.  The greatest concern in Europe is the threat of E.U. members attempting their own Exit from the Union;  the jury is still out on this question.  We will write more about the European Union in the Spring.
The situation is quite different in the U.S., and American Nationalism may have reached its high point.  There is significant push-back against the nationalist policies of the Trump Administration, and soul-searching among Democrats (and other Internationalists around the world).

The Brexit and Trump earthquakes of 2016 are likely to spur renewed efforts in 2017 to attend to disenfranchised groups, especially in the U.S., and reinvent international institutions to smooth out disparities in the global economy.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

JANUARY 18 , 2017

Contact Richard Power with comments or questions.  IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

Is there a “Trump Doctrine” on foreign relations?  If so, does anyone know what it is?

We look abroad in this issue of  IntelDigest.  On the eve of a presidential inaugural, we try to divine the outline of a foreign policy in the new administration.  Does the incoming president have a sense of where he wants to take the country internationally?  Or, will this be a “seat-of-the-pants” operation?  Is Donald Trump’s “unconventional” behavior a carefully-considered stratagem meant to keep allies and competitors overseas “on their toes?”  Or, is he simply feeling his way in an area where he has no prior experience?

Will The Trump Doctrine be based on economic nationalism?  Or militarism?  Or a rejection of liberal internationalism?  Or, will Donald Trump and his team simply react to international events?

 
Points of View

There is actually a parallel to Barack Obama’s assumption of office eight years ago.  Obama, too, had very little foreign policy experience.  However, the demeanor and personality of the president-elect is such a polar opposite to President Obama that the parallel ends there.

Barack Obama, as president, has been a realist.  He understood that his victory in the 2008 Election was attributable, in great measure, to his campaign promise to bring home American military men and women who were engaged in extended Middle East conflicts.  He considered it his mission to re-balance the projection of American power, and reduce our involvement in wars in the Islamic world.

The Obama philosophy of foreign affairs was characterized primarily by Restraint and Civility, and he took the long view.  He pivoted the U.S. focus toward the Far East, where the U.S. now has more economic interest than in the Middle East.  And, he has tried to re-boot the long-standing strife with Cuba and Iran in order to set our relationships with those countries on a more productive path going forward.

 

 

President Obama has been a forward-thinking Internationalist.  Although he encouraged our allies to pay a greater share of the costs of security, he never threatened to take away the U.S. security umbrella.

To Obama, foreign trade was a means of building alliances and containing conflicts;  however, when protectionist measures were required, the U.S. led G-20 countries in carrying out discriminatory-trade measures on certain industries, such as metals.  He saw that technology was changing the world, upsetting familiar manufacturing practices and taking away jobs everywhere.  He understood that companies had to change their business operations in order to survive;  workers would be left behind unless they adapted and upgraded their technological understanding.

For Obama, the long-term impact of climate change was a much more existential threat to this country than short-term threats posed by the Islamic State.

Barack Obama took the long view.  It may have been to his own detriment, and that of his party.  But, that didn’t make him wrong.

 
By contrast, Donald Trump presents himself as a Nationalist.

Based on data drawn from his campaign rhetoric, his post-election Twitter posts, and his Cabinet nominations, we have a preliminary picture of his views on foreign affairs.

Trump’s narrower, more nationalistic viewpoint may tend to be more myopic in assessing threats from overseas.  He has expressed a disdain for long-held collective security arrangements, such as the North Atlantic Treaty Organization (NATO).  He seems to be more interested in bilateral, rather than multi-lateral, treaties and trade deals.

His proposed solution for displaced American labor is to punish foreign trade partners, rather than to retool the U.S. workforce to adapt to demographic and technological change.  Climate change concerns will certainly take a back seat to more immediate desires to ease regulations on business.

His negative comments on China trade and currency, along with the kerfuffle over relations with Taiwan, indicate an intent to deal harshly with China.  Meanwhile, his “bromance” with Vladimir Putin and staunch defense of Russia against U.S. intelligence agencies indicate that he has strong views on relations with Russia.

Perhaps he sees the One-China policy and contentiousness with Russia to be relics of the Cold War, and he intends to turn those situations on their heads.

Most Americans would welcome better relations with Russia, especially on our terms.  However, one may be concerned that short-term conflicts with Beijing over trade and Taiwan could cost the U.S. a much bigger strategic advantage with respect to greater China issues, such as cyberspace and open sea lanes.

 

 

Negotiation As Strategy

Evidently, Trump sees Russia more as a business competitor than as a dangerous enemy requiring Cold War-era collective security commitments.  And, he may have a point (notwithstanding Russia’s 7,000 nuclear warheads).

Russia is far-removed from the Soviet empire trying to spread a Communist ideology around the world.  Instead, Moscow is focused on basic tasks:  forging a national identity in a very large land mass encompassing hundreds of disparate cultures and ethnicities;  insulating the state and its borderlands from Western encroachment, such as the Euromaidan revolution in Ukraine;  maintaining pension, social welfare, and military salary payments in an economy in severe recession;  anticipating greater domestic turmoil in its far-flung provinces over these issues.

The incoming administration sees an opening to develop a new understanding with Moscow, settle the issues in Crimea and eastern Ukraine, and work together with respect to Syria and the Islamic State.  Perhaps a new relationship would lead to the end of sanctions against Russia, new investment in Russia, and a new nuclear arms treaty.

 
Keeping the World on Its Toes

Donald Trump’s biggest advantage is his unpredictability.  He makes people uncomfortable, and generates a feeling of chaos.

Whereas President Obama had been criticized as overly cautious in his foreign policy, and thus too much of a known entity for U.S. adversaries;  Donald Trump gives the impression that he is willing to throw caution to the wind and rely on instinct in shaping foreign policy.

This may have the effect of keeping both our allies and adversaries “on their toes.”  At the beginning of the Trump Administration, there could be value in keeping others off-balance, at least until the government can settle in and craft a cogent strategy and foreign policy.

 
Trump’s Core Beliefs

Perhaps we can discern The Trump Doctrine by looking at the President-Elect’s core beliefs, as far as we can identify them:

Trump prizes business acumen and a “killer” instinct for managing affairs

Trump believes in tough deal-making – identifying sources of leverage and showing a willingness to use them

Trump sees Nationalism as the natural and rightful path for every country, including the United States, in protecting its interests.

Trump believes that the United States is losing its competitiveness, and blames that on globalism and Obama’s Internationalist foreign policy

Trump believes that U.S. foreign policy has become too predictable, stuck in a quagmire of international diplomacy

Trump believes that it is better to “tell it like it is” — and call out institutions and conventions that have outlived their usefulness.

 
Foreign Policy Options

So, The Trump Doctrine could go one of several ways.  It could be a doctrine of Militarism.  This would probably be the choice of General Flynn, the incoming National Security Advisor, who sees the Islamic State as an existential threat to the United States.  Flynn would urge a Global Crusade against Radical Islam.  But, Trump the Deal-Maker would not be inclined to go this way.

It could be a doctrine of Isolationism — America First.  This would certainly be agreeable to Trump, but contrary to his deal-making tendencies.

We expect that The Trump Doctrine would be one of Economic Nationalism, where President Trump can be Businessman Trump with enormous amounts of power.  Trump would want the opportunity to flex his negotiation muscles on a larger stage — to “Get the Best Deal” for the country.

As a businessman, Trump has lived by certain maxims:  Maximize Options;  Eliminate Costly Competition;  Use Leverage against adversaries and to motivate allies.

We believe that Economic Nationalism is a doctrine which is most in keeping with the espoused beliefs of the incoming President, and one which he would be excited to apply on a global stage.

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

JANUARY 11 , 2017

Contact Richard Power with comments or questions.  IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

We begin a New Year at  IntelDigest, a year of new challenges and opportunities in the global economy.  Old problems persist into 2017;  are there new solutions to these problems?  We will see if new policies of a unified Republican government can overcome long-standing economic trends which threaten to plunge America into recession, or worse.

Ours is still the leading economy in the world.  We may no longer dominate the world economy as we did in the post-war (WWII) years, but American business and industry still leads, and the American government still carries the greatest influence around the world.  For all their economic strength, China and Japan and the European Union stand in second place to the United States.

The performance of the American economy in the next few years has the potential to “lift all boats” in the global economy, or allow Moby Debt to sink the fleet.   (Too dark?).

Today, we discuss the transition from the Old to the New.  In coming weeks, we will delve into the myriad issues facing our country and our society:

Policy Issues, such as Tax Reform, Infrastructure Development, Trade Policy and Offshoring, healthcare and retirement, a Trump Doctrine in foreign affairs, the National Debt, Fiscal Responsibility

Societal Issues, such as Nationalism, The Future of Work, survival of the American Middle Class, Technological Advances and their impact on productivity and employment, Fake News and Fake Economics

Geopolitics, such as our relations with our allies around the world and with China and Russia, the status of the European Union, struggles in the Islamic world

Investment in Gold and Silver, the Trump Trade, direction of the markets, investing in China, robotics and automation, a rebound in commodities

As they say in Television, stay tuned …..

 

 

Transition

For much of the last 15 years, world economies have been dominated by monetary policies of The Federal Reserve and other major central banks. These policies can most kindly be referred to as “experimental.”  In the most radical experiment ever undertaken by central banks, interest rates were brought lower and lower until they hit Zero (and below).

By manipulating the “price of money” to unheard-of levels, the central banks have altered all the global economies and distorted prices and values.  This manipulation has encouraged massive borrowing, by both governments and corporations.  As explained in the December 14 issue of IntelDigest:

 

U.S. corporations now carry on their balance sheets the highest level of financial risk in our history.  Companies took advantage of the historically-low interest rates served up by The Federal Reserve and other central banks, and borrowed unprecedented amounts of money.  In every year from 2010 through 2015, U.S. corporations borrowed at least a Trillion Dollars.

Did this borrowing spur growth in the economy?  It did not.  Many companies used the funds to buy back shares rather than increase capital expenditures, productivity and sales.

 

Individuals have had their savings accounts devastated by this manipulation.  Although some have taken advantage of ultra-low rates to borrow for real estate speculation and personal expenditures, the vast majority of individuals and families have endured stagnant savings while reaping no benefit in the credit markets.

It is telling that … despite the lowest cost of borrowing in history … the home ownership rate in the U.S. is at its lowest level in 45 years!

 

 

With a new administration about to take office, it now appears that monetary policy will share the spotlight with some aggressive new fiscal policies.

Opinions on Donald Trump are as divided as the American electorate, and it is difficult to predict what policies and pronouncements may come from The White House (via Twitter) after Inauguration Day.  However, it is likely that an unorthodox presidency will “shake things up” in the federal government and the economy.

As we discussed in the November 23 issue of IntelDigest:

 

…. the broad markets have rallied in the short-term … and will probably do so into early next year … on the expectation that a Trump presidency will be good for business. The President-Elect has vowed to lower taxes (especially on corporations), commit Hundreds of Billions of Dollars to infrastructure spending, and reduce government regulation. Investors are encouraged, and have piled into equities since Election Day.

 
A unified Republican government is already seen as pro-business, which should continue to buoy the markets in the short-term.  Aggressive fiscal policies … if the President-Elect and Congress follow through on promises … would be viewed as a welcome change of pace from the years of domination and experimentation by the Federal Reserve.

Indeed, lowering corporate tax rates and encouraging repatriation of profits from overseas is likely to be near the top of the agenda for the new administration.  This is a policy which can pass the Congress with less controversy than other proposals likely to come up in the first 100 days.

The Trump Agenda also focuses on substantial … some would say “dramatic” … public works and infrastructure projects, taking advantage of the historically-low interest rates to rebuild roads, bridges, ports, airports, et al.

Democrats have long favored such a program, but the Republican-controlled House and Senate blocked Obama Administration proposals. The Trump Administration will probably be able to push at least $500 Billion of projects through Congress.

From an investor’s viewpoint, Infrastructure spending would favor industrial companies, the construction sector, and materials.  While corporate tax reforms would provide a boost across most markets.  Market movement in the Spring and Summer of this year will be tied to the success or failure of the new administration.

Will Trump and the Republicans succeed in pushing such an agenda forward?  If they do, will it actually help to grow the economy faster and start to work off our vast National Debt?  Will The Fed throw a monkey wrench into the works?

 

 

In upcoming issues of  IntelDigest, we will survey those new policy proposals which are likely to become law, and examine their impact on the economy and markets.  We will discuss the “Trump Trade,” which is expected to be inflationary, and follow the reactions of the Federal Reserve to the economic initiatives of the Congress and the President.

There will be much to discuss over the course of this New Year, and we hope that you will find value in our work.