In Brief
- As claimed by Trump, the Trump-Russia collusion case was based on fake news. Turns out it was paid for by the Clinton campaign and the DNC according to their own lawyer. The collusion now appears to be between Clinton and the Russians both in 2016 and throughout Clinton’s Secretary of State tenure.
- President Xi of China has decreed, in effect, that China will now be a totalitarian-socialist state. This is a dramatic shift from the authoritarian- capitalist state it has been since 1979. The change will have massive effects in China and across the globe.
- If things go on schedule the Republican tax package and legislation will be released this Wednesday and be enacted before the end of the year. There will still be a great deal of negotiating and severe doubts about passage in the House because of battles over state and local taxes and other issues. Momentum is there but disputes abound.
- A new Pew research report shows political polarization in the US to be very high. Few Democrats or Republicans are, respectively, to the right of the average Republican or left of the average Democrat. Don’t expect that polarization to wane anytime soon, perhaps not for decades.
In-Depth
What’s Important
Trump-Russia Collusion becomes Clinton-Russia collusion
In an astounding about face, the Russia collusion story has reversed from Trump-Russia to Clinton-Russia. This is the case in both 2016 and during Hillary Clinton’s years as Secretary of State.
The lawyer for both the Democratic National Committee and the Clinton campaign testified the two groups paid Fusion GPS, an opposition research company, to make-up the so-called Trump Dossier and then to shop it around to the media. This dossier is one of the reasons the FBI opened an investigation into Trump-Russia connections in the first place. It was clearly a Clinton-DNC scam instead of anything of substance.
A British spy, with ties to Russian officials, was paid to compile the dossier. This is of note as paying foreign agents to participate in a US election campaign is illegal.
Those are the basic facts in the 2016 story and vastly more will come out in future weeks as trails of lies, corruption and perjury unravel.
A separate Uranium One story is about how a Russian company, Rosatom, with ties to Putin, ends up controlling 20% of US uranium reserves. This event took place in the first term of the Obama administration and during the Clinton State Department watch.
Canadian businessman Frank Giustra, a long-time friend of the Clintons, made billions in uranium deals and contributed almost $150M to the Clinton Foundation as well as sitting on its board.
All of this took place during the Obama-Clinton-Holder-Lynch administration and required their approval.
Furthermore, the FBI and DOJ under Mueller, Comey and Rosenstein had active fraud, racketeering and other investigations underway during this period involving players related to the uranium deals.
Again, the facts are cascading out and we’ll have to see where it all goes.
And don’t be surprised if questionable characters like Paul Manafort and General Michael Flynn, whom Trump should have never hired [poor vetting], end up with serious legal problems.
Let’s allow the facts to emerge, which they will, before we come to firm conclusions.
Stay tuned…and, expect more shocking revelations.
Long-Term
An authoritarian China becomes totalitarian and Goes back to the future.
China is going backwards…toward a future that failed it miserably before and will do so again. I won’t bother to define socialism or market-based capitalism, but will describe the difference between an authoritarian regime and a totalitarian one. Totalitarian governments control almost all aspects of human life in a country. They control the politics, press, police, social-media, education, the economy, military, investing, religion…just about everything. An authoritarian regime controls substantially less and especially lets markets and investing operate mostly freely as well as allowing a modicum of political dissent and free public opinion. Totalitarians do not usually allow dissent even in the ruling party, while authoritarians often do. Examples of it are Mao’s China, Hitler’s Germany, Soviet Russia and N Korea.
At the just-ended Communist Party Congress, Party Secretary /President Xi essentially proclaimed his absolute rule and a commitment to a totalitarian-socialist regime.
A bit of history. From the time Mao took over all of mainland China in 1949 until his death in 1976, “Red China” experienced abject poverty. It was brutally totalitarian and socialist/communist. It was an economic, political and social disaster.
The beginning of China’s assent to its current world power status traces to the leadership of Deng Xiaoping and his theory embraced in 1979 that economic markets [capitalism] are a good thing and it is good to get rich. Market economics has proven to be China’s ticket to becoming the world’s #2 economic power. Deng led a state with Communist Party authoritarian political, one-party rule but left the economy and other aspects of society to individual choices—not all, but many.
Xi Jinping, now China’s absolute dictator and emperor in all but name, has proclaimed that China will be a totalitarian socialist country. The Party and he are to control virtually everything.
Investors are now being told if and when they can sell stocks. Private companies have been publicly informed the state will invest in them, share profits, hold board seats and help with management. That has long been the case for the low profit, highly indebted Chinese state-owned companies. Imagine Alibaba, Tencent and Baidu in such a condition as it may be in the cards.
Dissent is not now permitted inside or outside the Party with jail as the threat. Hong Kong has become much less free and that trend will accelerate. The politics is clever with promises of redistribution of wealth as well as less pollution. So too, the rich coastal provinces are to subsidize the poor interior provinces. The military, police, press and social media are all now controlled by Xi. This is 1984 in action.
As I have written often, Xi knows debt and economic bubble generated chaos is near. He is re-asserting totalitarian power in an attempt to control the chaos. He is seeking his survival, that of the Party and the thousands of “princelings”—the rich off-spring of former and current party leaders.
Most in the West, including those who should know better, will say China is strong and will muddle through. Many will also say socialism isn’t so bad. After all, Bernie Sanders proclaims himself a democratic-socialist and Jeremy Corbyn appears to be a plausible British prime minister even though socialism is his mantra.
How soon we forget that totalitarian, top-down socialism and fascism like those in the Soviet Union, Nazi Germany, Maoist China, Kim’s N Korea and Communist East Germany are all doomed to fail.
I’ll report regularly on developments in China including what is pre-ordained to be a long slow decline like Japan’s from 1990 on.
Elections
2017 virginia elections
Earlier this year, both before and after the special elections for congressional seats nationwide, I downplayed them being important political predictors.
I will not do the same with the Virginia Governor’s race or the 100 races for the Virginia House of Delegates because they may well be predictive.
Virginia has been trending heavily toward the Democrats with Clinton beating Trump there by almost 6%. Northern Virginia has become D territory because of all the growth around DC in government jobs and contracts.
Ralph Northam, the D candidate for Governor, had a comfortable 7-8-point lead until the last few weeks over Ed Gillespie, the R candidate. That lead has disappeared into the polling margin of error.
One election doesn’t usually tell us a whole lot as political blunders can defeat someone who should win and several blatantly racist moves by Northam have hurt him. But there are also 100 legislative races to watch.
Now the Rs hold a 64-36 margin in the House of Delegates. If Virginia is moving permanently toward the Ds they should gain 5-10 seats this year. Failing that, the Rs can claim victory.
Turnout is also important as Democrats are counting on anger with Trump to bring out large numbers of voters. If that does not occur on the doorstep of DC, the Democratic model for 2018 election victories is in question.
We’ll follow the outcome with interest.
Major Legislation and Policies
2018 federal budget and tax reform
The Republican tax bill moved an important step closer to success with the House’s close R victory on the budget resolution. The tax bill now needs just 51 votes in the Senate to pass.
Many difficult issues remain to resolve but the Republicans almost all believe they MUST pass a tax bill to get back into the good-graces of their own voters. Nevertheless, there is a great deal of wheeling and dealing and horse-trading underway.
As I have said before, don’t get too exercised about specific provisions until you see what passes and see the effect of all the changes on your taxes. Some changes will raise your taxes and others cut them.
The total bill is what counts.
Trump and the White House
Contretemps among the Republicans
Trump versus McCain, Corker, Flake, Bush and Bannon. It is hard to tell which is most childish and arrogant as all six all are at times. McCain, Bush, Corker and Flake are of the Never Trump school and have lost power over the party they once led.
Bannon is an alt-rightist claiming to be Trump’s ally but actually doing damage to the country, Trump and the emerging middle-class Republican party.
Trump is Trump…he is what he is…some good…some not so good.
Much has been made of Flake dropping out of the AZ Senate race with breathless speculation the Ds could take that seat. Flake was unlikely to get that nomination anyway and probably would have lost the seat in the general election as his own party’s voters dislike him.
Now other Republicans are likely to enter the race and the race is a toss-up or leans R.
As often happens in politics one party’s most wished-for outcomes helps the opposite happen. In 1998 the Republicans in the House impeached Bill Clinton but the Senate did not convict and remove him. In the November elections that year, a 2nd term off-year election where the incumbent White House party usually gets crushed, the voters punished the Republicans and took away R House seats for their over-reach in trying to remove Clinton.
The Democratic hysteria to impeach Trump is cementing Trump’s base of voter support to him and many independents will view it as dangerous for the country.
Democrats on the Democrats
This is a new approach the analyzing the situations in the two parties. For both the Democrats and, separately, the Republicans these sections will report what party official, politicians, or partisan analysts are saying about their own party…WITH WHICH I AGREE. For example, many Democrats recognize the internal battle going on now in the party between the progressive wing and the mainstream wing. Almost all Republicans recognize the internal conflicts between the Trump wing, the Never Trumpers, the Bannon alt-right, and with the Tea Party folks.
Herbal Tea Party for the Democrats
Political wags have named the progressive wing of the Democratic Party the Herbal Tea Party.
They are attempting to take control of the party and nominate candidates more to their liking than most current Democratic elected officials. Such contests will be widespread, but the first major one is the attempt to oust Senator Diane Feinstein, who isn’t partisan and progressive enough for some California Democrats.
At this point in the 2010 Congressional elections, when the Tea Party Republicans were battling the party mainstream, about 200 candidates were raising serious money to run for an R nomination to a House seat. That was up from a more normal 50 or 60.
Now, almost 400 Democrats are raising serious money to run for a D nomination to a US House seat. That was up from a more normal 100 or so such Democrats.
The Republican Tea Party movement did partially succeed and move the party to the right, elect some more conservative politicians and move more Tea Party folks into positions of power in the Party.
The also nominated some ideologically pure candidates who lacked the political skills to win or whom drove away independents with issue positions too far outside the mainstream. Senate races in DE, IN, MO and NV come to mind.
Expect similar outcomes for the Herbal Tea Party Progressive- Democrats and a bruising battle for the 2020 Presidential nomination.
Forecasts
THERE ARE NO changes this week
Political Forecasts – Elections
- The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
- The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
- The chance the Republicans will still control the Senate after next year’s elections is 90 to 95%.
- The chance the Ds lose three or more of their 48 Senate seats in ’18 is 85 to 90 percent. [Up from 2 or more Senate seat losses previously.] The change is due to increased likelihood of major tax cuts and reform.
- The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
- The chance that Trump will win a 2nd term is 80 to 85 percent.
Policy and Legislative Forecasts
- There is an 80-90% probability the Congress will pass and Trump sign major tax reform and tax cuts for most by fall 2018. [Up from 70-80%] The change is due to support for budget resolution, a key pre-cursor of passing tax package with just 51 votes.
- There is a 50-50 probability that Obamacare Repeal and Replace will be passed and become law by fall 2018. [This issue will not go away as Obamacare is self-destructing with high premiums, increasing state costs and insurance company losses.]
Media
Don’t forget the Tuchfarber 30 Day test—when you get upset about something in the news ask if it is likely to be IMPORTANT IN 30 days or soOnly seldom will it be so and you can usually ignore it.
China’s Politics and Economy
Economic Change
China’s politics and economy are so important to the global economy and the general situation around the globe I am adding a regular section on it to the newsletter. The section will periodically include detailed articles on specific things but will also list each week evidence that suggest an economic soft landing for China—a controlled slowdown to “normal” economic growth levels—or a hard-landing—a more rapid, extended and dangerous bursting of China’s asset bubbles.
I WILL ADD AND DELETE ITEMS TO THIS SECTION AS RELEVANCE DICTATES. “NEW” ANALYSES WILL BE SO LABELLED AND REVISED SECTIONS WILL BE LABELLED “CHANGED”.
New or Major Evidence for Soft Landing
- The WSJ reports that Chinese regulators removed emergency measures they put on the Chinese stock exchanges in support of equities following crashes in 2015 and 2016. This is a sign of confidence and stability.
- The political leadership, including President Xi, and the financial regulators have promised to rein in excessive speculation and credit growth. [We’ve been promised that for many years and the debt has continued to sky.]
New or Major Evidence for Hard Landing
- NEW—For years the Chinese government has set very specific economic growth goals …7%, 10%…and then managed the economy, mostly through lending/debt… to meet those goals. It has stimulated the economy with $3-4T in debt each year since the 2008-9 Great Recession with total debt currently over $35T…300% of GDP. Now that President Xi has consolidated virtually all power in his hands, Xi’s senior economic advisor has announced in a press conference, a shift from quantity targets for growth to quality growth…” growth with quality, efficiency and dynamism” …said Yang Weimin. TRANSLATED THAT MEANS SLOWER GROWTH AND LESS DEBT CREATION. But, note that less debt creation doesn’t solve the already staggering debt problem.
- China’s central bank chief, Zhou Xiaochuan, warned repeatedly over the last week that China faces the risk of a “Minsky Moment”. Named after economist Hyman Minsky, such an event is a sudden market sell-off driven by an over-leveraged asset. In other words, an asset like real estate, stocks, or commodities whose prices are much too high, often because of speculation. It is remarkable that Zhou made his comment during the 19th Party Congress where the past and future successes of China are to be celebrated. Zhou cites corporate debt in China being too high corporate and household debt rising very fast.
- In an under-reported Chinese initiative, the government is demanding partial ownership and substantial control of China’s private companies, especially the big successful ones. That is almost surely a prelude to sharing profits with the government. China already owns and runs most of the older major companies in the country and fears the wealth being gained by Jack Ma of Alibaba and other tycoons. One simple way to understand what is happening is to imagine the US government telling Apple that it is “buying” into the company, will have multiple seats on the board, will name some managers, will share in the profits and will do what is best for the country, not the company or its shareholders. Governments have proven to be bad managers and terrible predictors of winners and losers.
- The WSJ headlines…” Consumer Loans Fuel China Housing”. Short-term consumer loans have grown at an astounding 100% rate in the last year but not for retail spending whose growth is little changed. Rather it is for investments in housing extending the housing bubble and adding more debt.
- Party Secretary/President XI continues to purge opponents and those offering him only weak support so as to have almost complete control of the levers of power when the economic/financial crisis starts to bite. On Oct 18 every 5-year Party Congress starts. Expect major news at the end of it and for months to come.
- S&P has joined Moody’s and Fitch in downgrading China’s debt because of excessive and growing levels of that debt.
- Two quotes from separate stories in a recent WSJ accurately describe where things are with China’s economy. “China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets right ahead of the twice-a decade Communist Party leadership shuffle kicking-off in mid-October.” “An all-powerful leadership can likely keep the forces of disruption at bay for some time. But they haven’t disappeared…”
- A WSJ story reads— “…China has been reeling in some of its biggest deal makers on mounting concerns about capital leaving the country and debt loads posing a risk to its economy.”
- The WSJ’s Heard on the Street [Sept 8] wrote…” This doesn’t mean China’s bad loan problem has gone away, it just has been swept under a convenient nearby rug.”
- WSJ article points out that the yield curve in China has flattened—the prices of 3-year bonds are essentially the same as 10-year bonds. Such flattening is often, but not always, indicative of an economic slowdown on the horizon.
- Weeks ago, the IMF raised its projections for Chinese growth but sternly warned that rapidly increasing Chinese debt will hit 300% by 2022. Others like the Institute for International Finance [IIF} asserted in June that Chinese debt already totaled over 300% of GDP, a high percentage for a developing country.
- China is now officially and publicly instructing its companies that they must stop foreign investments in areas like insurance, hotels, other real-estate, gambling facilities, etc. Foreign investments are to be directed to two areas. The first is into strategic areas, as defined by the government, such as technologies where the intellectual property gained fits with government plans for China to become a major, worldwide competitor in various fields. [Sound like Japan in the 1970s and 80s?] The second area is into investments consistent with China’s One Belt-One Road strategy to tie it more completely with all of Asia as well as Europe and Africa.
These all indicate concern that economic, financial and political risks are rising.
Tidbits, Insights and Facts
Extreme Political Polarirization in US
Many have noted how politically polarized the US is now. A Pew Research Center report, just out, quantifies its extent.
In 1994, less than 2/3rds [64%] of Republicans were to the right of the average Democrat on a metric derived from answers to 10 contested policy issues. Today 97% of Rs are to the right of the average D.
Similarly, in ’94, 70% of Ds were to the left of the average R. Now it is 95%.
I am asked repeatedly if a new centrist party will emerge and succeed in the US. It didn’t happen when there were many more Americans in the center. It will be tried now but is highly unlikely to succeed.
Opinion and Commentary
Fear in China
The extent of Xi Jinping’s totalitarianism and the palpable fear it has engendered throughout China is illustrated by the ridiculous praise published this week in the Barron’s Other Voices section. The authors are Andrew Sheng, former chairman of the Hong Kong Securities and Futures Commission, and Xiao Geng, president of the Hong Kong Institution for International Finance.
They write…” Much like Mao Zedong and Deng Xiaoping, Xi Jinping has established a strategy for transforming China into a ‘prosperous, strong, democratic, culturally advanced, harmonious and beautiful’ country over the next decades. The key to success will be the balance between modernity and CCP-led [Communist Party of China] socialism.”
PLEASE READ THAT PARAGRAPH SEVERAL TIMES AND TEST IT AGAINST WHAT YOU KNOW ABOUT ECONOMIC HISTORY.
It is drivel. It is propaganda.
Mao kept China’s people in abject poverty with his Chinese brand of socialism and starved or murdered an estimated 50,000,000 of his people. That is an interesting description of success.
By contrast, Deng Xiaoping was a visionary and is responsible for China’s staggering growth and progress because he embraced market based capitalism for the country starting in 1979. Now, Xi is turning back to totalitarian-socialism which has never worked …not inChina, the Soviet Union, N Korea, East Germany or anywhere.
Everyone across the planet now needs to understand that Xi’s totalitarian, socialist state will be a disaster in the long-run. It will not be democratic, harmonious, beautiful or make China richer.
Officials in the public and private sector like Sheng and Geng cannot tell the truth, even in Hong Kong, because they know to do so means ruined careers and even jail.
It is astounding the Barron’s published such tripe.
Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati