THE TUCHFARBER REPORT

Accurate Facts, Analysis, and Forecasts

In-Brief

1. Kim and Trump are surprisingly quiet as negotiations move closer.
2. China’s total societal debt, as a percentage of GDP, is larger than that of the US and is growing rapidly. It is a serious threat to China and the global economy.
3. Question of the day…does Trump want a trade war or are the steel and aluminum tariffs just a negotiating ploy? Free-trader Larry Kudlow just replaced another free-trader as Trump’s chief economic advisor. What gives?
4. The Democrats probably won the special election in PA-18 and definitely won the bragging rights. But, that race changes little about the handicapping of the fall elections.
5. Does Hillary Clinton have a political death wish for herself and her party? Seems so.

In-Depth

What’s Important

Trump and Kim Negotiating about Negotiating

After President Trump’s dramatic agreement, two weeks ago, to negotiate directly with Kim, things have been remarkably quiet on that front. Where is all the normal bluster from the two of them? Both are verbal bomb-throwers, but they have gone mostly silent. That is a good sign both are serious about making a deal.

The N Korean Foreign Minister was in Sweden a few days ago to discuss the negotiations. Sweden represents the US in N Korea because the US and N Korea never officially ended the Korean War and are technically just in a truce. The US has continued to emphasize its policies but added nothing new that would derail the talks. Kim has been remarkably quiet.

I’m not going to put odds on whether the talks even occur, or if they will succeed, but, so-far so-good.

And, always recall what really matters…those are the fundamental motivations and goals of Kim Jong-un and Donald Trump in the negotiations.

Kim has three major priorities…to stay alive, to keep his luxuries, and to continue his family’s dynastic rule. Nuclear weapons had seemed to be the sine qua non of such goals. That is no longer clear.

Trump’s over-riding goal is to de-nuclearize N Korea soon and permanently, resulting in a de-nuclearized Korean peninsula. This would eliminate an existential threat to US cities, Japan, S Korea, and US troops in East Asia. A diminution of N Korea’s conventional military threat would be good, but is not essential as a first step in a process that will take many years, even if successful.

Although not actually at the table, China will be a major force in the negotiations; they are the only country that can make economic sanctions really work.

S Korea and Japan will also be important, but the whole strategic calculus changed radically when N Korea’s missiles appeared close to being able to target US cities. Whereas S Korea previously had a veto over US actions, that is probably no longer the case. The Chinese also need to adjust to that fact. Perhaps that is why they are pushing the Kim regime so hard.

Elections

PA-18 Special ELECTION – A Plus for the Democrats

We don’t yet know who won the PA-18 special election. Democrat Lamb is unofficially ahead by 700 votes or so, but some votes are still being counted and others are being contested.

Regardless of the official result the special election must be counted as a victory for the Democrats.

But, that victory tells us little about the crucial November congressional elections.

PA-18 is a suburban and semi-rural district in southwest PA, south of Pittsburgh. Democrats have a 70,000-voter registration advantage, but Trump won the district by about 20%. It is white working-class territory. The Democratic candidate, Conor Lamb, is a perfect candidate for the blue-collar district—he is a former Marine, prosecutor, and political moderate. He is young and articulate.

Rick Saccone, the R candidate, is older, a veteran, and a state legislator. He is a mediocre fundraiser and campaigner. He was a poor choice by the Rs…they need to take that lesson to heart.

The main reason I say the election tells us little about the fall elections is that Lamb ran on Republican-like credentials and policies.

Very publicly, he ran as pro-tariff, pro-gun, pro-military, and for the tax cuts every D in the House and Senate voted against.

He ran against his party leader Nancy Pelosi and her radical progressivism. Lamp promised to defy Pelosi. He did not emphasize attacking Trump.

There will not be more than a handful of Democrats like him running in the fall. The party has moved well to the left, as the Rs moved to the right in recent years. Lamb is an anachronism in his own party.

Democratic candidates around the country are moving to the left, not toward the center or toward moderate liberalism. Democrats to the left of Lamb are being challenged by energized Democrats, especially women, determined to move the country toward socialism. You don’t have to believe me…just pay close attention to the Democratic primary battles upcoming.

In 2006, Rahm Emanuel, now Chicago’s mayor, was the strategist charged with finding ideal candidates for the Democrats to run against the Republicans and George W Bush. Emanuel was successful in finding candidates similar to Lamb and the Democrats won a smashing victory. Today, such a strategy is impossible as democratic-progressives increasingly dominate the party.

On a broader note, candidates with good political skills and good fits to their districts or states usually win in competitive races. Candidates with weak skills, like Roy Moore, Rick Saccone, and Hillary Clinton, often lose.

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 so. Only seldom will it be so and you can usually ignore it.

The DemocratsPolitical Death Wish by Hillary?

Does Hillary Clinton have a political death wish for herself and the Democratic Party?

In 2016, she famously called half of Trump’s supporters “deplorables”, giving Trump a major messaging advantage. That message helped get Trump elected. Republicans will use it against Democrats for years, if not decades. It reeks of elitism and distain for Middle America.

Clinton doubled down last week, in, of all places, Mumbai India. Speaking about white women who voted for Trump, Clinton is quoted as saying white women gave into…” ongoing pressure to vote the way that your husband, your boss, your son, whoever, believe you should.”

That begs some questions.

Are white women weak and minority women strong?

Does Hillary follow Bill’s orders?

Do today’s feminists agree with Hillary’s statements?

Many Democrats are aghast, as well they should be. Like it or not, most Americans still see Hillary as a leader of the Democratic Party.

Trump and Clinton could both use some filters…

Tuchfarber global political- economics

China Watch

The Chinese Debt Bomb

Since 2012, I have been predicting that, before the end of this decade, China’s enormous and rapidly growing debt-load would cause a serious economic collapse. It will be much like the Japanese collapse in the early 1990s. More recently, I argued that “Emperor” Xi would be forced to deal with such a collapse by the end of 2019. I stand by both predictions and the analysis underlying them.

As foolish US public policy led the world into the Great Recession and credit crisis of 2008-9, China’s leaders judged they could not take the political risk of China being swept-up in that economic disaster. They decided to borrow their way out of the threatening economic and financial crisis. They have done so ever since.

In 2008, according to multiple international finance sources, China’s total debt—government, corporate, and household—was about 1.35 times their GDP of approximately $5T. At the end of 2017 it was about 2.65 times their GDP of $12T. [Other credible international sources say it is over three times GDP.]

Over the same period the US debt load has decreased slightly, going from a 2.56 debt to GDP ratio down to a 2.49:1 ratio. Also note that the US has a far more robust and “deep” financial system than does any emerging market economy, including China.

The Chinese debt-load ratio has been increasing by about eight percent per year and is still growing.

Consider a smattering of the numerous recent analyses of China’s financial risks from high-level institutions and individuals:

• Last December, the WSJ reported…” Chinese banks may have insufficient capital to weather potential losses from rapidly mounting credit risks, the International Monetary Fund said, in a broad review of China’s financial system.” “The IMF’s review said local-level Chinese government policies have propped-up non-viable firms…”
• In January, CNBC reported that the Institute for International Finance identified China as a serious risk to the international financial system.
• In December, Reuters ran a lengthy article titled…” China’s leaders fret over debt lurking in the shadow banking system…The complex lending hidden in the shadow banking system compounds the threat posed by China’s rapid accumulation of debt.” The story goes on to describe the systemic risks of China’s huge “wealth management” product industry.
• Yin Zhongqing, deputy director of the National People’s Congress Financial and Economic Affairs committee, this month warned that Beijing’s official figure for local government debt of $2.6T, may be excluding more than $3T or more in additional debt, including public-private partnerships.

Chinese corporate debt is dangerously high, local government debt is high and risky, and the shadow banking-wealth management industry is an opaque, risk-filled mess. The latter is adjusting and expanding faster than government regulators can keep up—a process we’ve seen frequently before major financial melt-downs around the world.

The reasons I forecast the economic and financial crisis will be well underway by the end of 2019 are both financial and political.

Financially, debt can be stacked on top of debt for only so long. China’s escalating debts, and inadequate regulatory reactions virtually assure the house of cards will collapse before long. Also, the longer you wait, the worse the problem gets if you add more debt each year.

It is, however, politics that has created this crisis. The 2008-9 Chinese political decision to buy their way out of the West’s financial crisis should have been a short-term fix. It has, however, never abated much, even though a few modest attempts were made, only to be reversed when growth slowed too much. China has been riding the back of a “debt tiger”.

President Xi will be wise to climb off the tiger as soon as possible. His power will never be greater than now. It is virtually unlimited within China at this time.

Waiting makes the problem worse and the risks higher. Thus, my analysis is he will move this year and next.

Expect to see major policy changes and institutional re-structuring as the crisis is addressed. Expect the debt and real estate bubbles to deflate in a long, slow hard-landing like Japan experienced 30 years ago. Japan’s deflation started in the December 1989 stock market crash and played out through the 1990s and beyond. [More on Japan’s experience in future weeks.]

Important Political & Economic Measures

POLITICAL MEASURES

1. Right Direction-Wrong Track— This measure is widely used by pollsters, asking if things are going well or badly in the US. It has proven to be a good indicator if the party “in-power” was going to do well or badly. If the “wrong-track” reading is 62% or higher, it bodes ill for them. If 58% or lower, they do well. THIS IS MY MOST-PREFERRED ELECTION PREDICTION MEASURE. I use many, but this one seems to strip out a lot of extraneous noise. “Wrong-Track” is now at 56%, unchanged from last week.
2. Generic Congressional Ballot—Also used by many pollsters, this indicator measures the current preferences of voters for which party they prefer in US House races. The polls I’m averaging are now at 46% D and 39% R, a slight narrowing of the margin. Historically, Ds need a solid lead on this measure to win a House majority.
3. Presidential Approval—Trump’s approval rating, using my measure is now 43%, up 2%. It is at a below average level for recent Presidents. But, because of his unique and often disruptive style, the Gallup organization and others, including myself, believe this measure underestimates his real approval ratings by 5% or more. I will report his approval rating, but will use it for trend analysis, not election predictions.

ECONOMIC MEASURES

4. U-3 official unemployment rate—The current level is 4.1%, a 17-year low. Low or falling levels of this measure are a positive for the “in” party. It is low and falling now, down from 4.8% a year ago. The February jobs report saw a huge increase in jobs created and in Americans returning to the job market, both very positive signs.
5. U-6 unemployment rate [broadest measure, including under-employment]—The current level is at 8.2%. This is a very low level and fell from 9.4% a year ago.
6. GDP GROWTH—Growth last quarter was 2.6% which is significantly higher than the average growth over the last eight years.

WAR

7. The jobs issue and war issue are the 500-pound gorillas of American public opinion. If the economy is bad or there is a major unpopular war, the party in power is in trouble. Unpopular wars, like Vietnam and Iraq, shatter their support. Small wars, like Afghanistan and Syria are nearly always underway and usually do not have major effects unless they grow substantially in the cost in US lives.

ANALYSIS

Among the Political Punditry, the conventional wisdom for months has been that a Democratic Wave was building that would gain them the House majority and minimize their losses in the Senate, where they have many vulnerable seats.

I have disagreed and the predictions in the next section quantify that. I’ve demurred because my preferred metric [right direction-wrong track] is in territory that predicts relative success for the Rs. In addition, the economic situation is excellent, and there is no major war.

The measures above could change, but if they stay where they are, the Democrats will make only modest gains in November. If the indicators change, so too will my predictions.

Predictions

Changes this Week

Election Predictions

• CHANGED TO 80-90%: the probability the Rs will lose seats in the 2018 House elections. [CHANGE FROM 70-80%: because of multiple factors.]
• 10-20%: the probability that the Rs will lose control of the House in 2018
• 90-95%: the probability that the Rs will still control the Senate in 2019
• 90-95%: the chance that the Ds will lose seats in the 2018 Senate elections
• 50%: the chance the Republicans will gain five or more Senate seats in the 2018 elections.
• 90-95%: the chance that Donald Trump will be the 2020 Republican nominee unless he decides not to run.
• 80-85%: the chance that Trump will be re-elected in 2020

Policy & legislative predictions

• There is more than a 60% chance pressure on the DACA–“Dreamer” issue will force the Democrats to negotiate a deal with President Trump on the border wall and other immigration issues by this spring.
• The chance that Donald Trump will be impeached and removed from office by the Congress in the next three years is less than 1%. *
• The chance that Trump will be removed from office by the Congress in the next seven years is less than 5%.

*NOTE: Remember that after being impeached by a Republican controlled House in 1998, not one Democratic Senator voted to remove Bill Clinton from office. It takes 67 votes and is more of a political process than a legal one. NO President has ever been impeached and removed. Richard Nixon resigned before the House and Senate could impeach and remove him from office.

Musings

The Tuchfarber Report is grounded by facts rather than advocacy or wishful thinking. But there are times when a little speculation is appropriate, which is why I periodically include this Musings section.

Free-trader, Protectionist, or Negotiator?

Is Trump a free-trader or a protectionist?

Last week he replaced Gary Cohn, a Democrat and free-trader, as his chief economic advisor, with Larry Kudlow, also a free trader, but a staunch Republican. He did it immediately after announcing his steel and aluminum tariffs, which both Cohn and Kudlow oppose.

Trump and Kudlow are good friends, have been for many years. He is a respected economist and a financial journalist with excellent communication and advocacy skills. He will be very loyal to Trump, but not afraid to take him on vigorously in internal debates.

But, what is Trump’s strategy?

A KEY TO UNDERSTANDING TRUMP ON THIS ISSUE AND OTHERS IS…HE IS ALMOST ALWAYS SETTING UP A NEGOTIATION WITH THE EXTREME POSITIONS HE TAKES IN ADVANCE.

Kudlow knows this full-well and joins the administration with no delusions.

There is NO GUARANTEE the President will successfully execute his strategy, but he has one that is much more nuanced than he is given credit.

Also departing the administration is Secretary of State Tillerson. Trump and Tillerson clashed on both style and substance. Tillerson is an incrementalist “win-win” negotiator while Trump is a bomb-thrower making outrageous opening demands. Importantly, Trump does know that the final deal must be a compromise.

On substance Tillerson and Trump were especially far apart on the Iran treaty, but on many other areas of policy as well. The differences were too wide to tolerate and Tillerson will be replaced by CIA director Mike Pompeo, with whom Trump is very much in sync.

Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati

Al.Tuchfarber@gmail.com
Tuchfarber Political-Economics LLC, Inc.

Dr. Tuchfarber founded the Ohio Poll, one of the nation’s most accurate, while directing the social science Institute for Policy Research from 1975 to 2004. He also founded and directed the Institute for Health Policy from 1996 to 2004. He is an engaging and dynamic speaker and has published over 100 articles and papers about politics, society, and research methods.