Forecast 2018 — What Could Go Wrong?

Markets

If you take your cues from Consensus Trance Central — the cable news networks, The New York Times, WashPost, and HuffPo — Trump is all that ails this foundering empire. Well, Trump and Russia, since the Golden Golem of Greatness is in league with Vladimir Putin to loot the world, or something like that.

Since I believe that the financial system is at the heart of today’s meta-question (What Could Go Wrong?), it would be perhaps more to the point to ask: what has held this matrix of rackets together so long? After all, rackets are characterized by pervasive lying and fraud, meaning their operations don’t add up. Things that don’t comport with reality are generally prone to failure so sooner or later they have to implode.

Financial markets have been surging supernaturally on “liquidity” since 2009 — and by “liquidity” I mean “money” (digital credit from thin air) supplied by the Federal Reserve, in rotation with the other sovereign central banks, BOE, ECB, BOJ, PBOC, from whence it pings ‘round the world, wherever the lure of the main chance sparkles. Trillions wafted into the stock and bond markets, levitating them as a sort of stage-managed misdirection from the sickening spectacle of wobbling real stuff economies. In 2017, The Dow Jones Industrial Average recorded an astounding 5,000 point year-on-year upzoom, with 12 months of gains and no loser months, and a string of 71 record highs.

America’s central bank, the Federal Reserve, acted as if pumping up the stock markets was the only thing that mattered. The result was a Potemkin economy, a glittering Wall Street false-front with a landscape of “flyover” squalor and desolation behind. The Fed now works at cross-purposes with itself by raising the Fed Funds rate a quarter-point every few months, and supposedly “shrinking” (ha!) their balance sheet — dumping bonds onto the market plus “retiring” termed out bonds, which allows the Fed to disappear the principal paid by the borrowers, namely the US Treasury, or the quasi-governmental werewolf called Freddie Mac (The Federal Home Loan Mortgage Corporation), which bundles all kinds of janky mortgages into giant bonds the Fed buys in order to artificially pump up the real estate market. Did your eyes glaze over yet? That’s the great thing about finance: it’s bewildering, so that when shit goes wrong, nobody notices until its way too late.

What could go wrong with that program? Well, if you dump billions of bonds on the market, you will change the supply-and-demand equation in the direction of too much supply, and interest rates will have to rise when there isn’t enough bid from the demand side — especially if the US Treasury is creating ever more new bonds to make up for ever-greater deficit spending at the same time the Fed dumps bonds into the market. And if, for instance, the interest rate on the benchmark 10-year US Treasury bond goes up past 3.00 percent, well that may be all she wrote for the US government’s ability to service its monstrous debt. And it may be tits up for the real estate sector, too, because mortgage rates will rise, and fewer people will buy houses. The Fed’s latest actions boil down to a lame attempt to have some maneuvering room to once again lower interest rates and refill their balance sheet via a QE-4 orgy when the economy heads south in a way that even the US Bureau of Labor Statistics can’t obfuscate.

The ECB and the BOJ have already made noises about curtailing their vacuuming up of securities, so the liquidity rotation may end altogether. The new Tax Cuts and Jobs Act has at its centerpiece the lowering of corporate income tax from 35 to 21 percent. The hidden agenda may be to hope this can act as a substitute for the dwindling central bank liquidity injections. The tax cuts and other new gimmicks would increase the federal debt by at least $1 trillion over a ten year period (and, by unofficial estimates, probably much more) paving the road to national bankruptcy with good intentions. But, of course, quite a few wise men in this culture have declared that deficits don’t matter. My own view is that they don’t matter until they do, and then you’re pretty screwed.

In the background of all this is an array of perilous real world events playing out that include especially potential conflict around North Korea and the Middle East. China’s banking system is a fun-house of scams and dodges that don’t add up anymore than ours do. The whole wicked pottage of EU / Brexit issues simmers away, along with the EU’s fatal flaw of lacking any fiscal discipline among member nations, so government spending has no relation to sovereign borrowing. NATO’s aggressive military posturing on Russia’s borders is pointless, stupid, dishonest, and provocative. Nobody knows what kind of gambit Crown Prince Mohammed bin Salman of Saudi Arabia will try next. Iran demands to be recognized as the regional hegemon. And our dear exceptional nation, with its restless Deep State black box “assets,” is capable of all sorts of mischief at home and abroad.

Any of these things could shove American markets into criticality, as if they don’t have enough built-in fragility already. Manipulation of the markets by the Fed and its water-carrying Too Big To Fail partners have deprived the markets of their chief function: price discovery, the ability to discern what things are really worth. Markets are therefore functionally useless and their uselessness is a giant hazard. No society that depends on money can work for long if nobody knows the true value of things, including the value of money itself. The price of attempting to live in a culture of pervasive dishonesty is that a re-set is inevitable. When it happens, it will be hugely destabilizing.

I expect the DJIA to move down sharply before the third quarter, rebound a little, and eventually bottom at 14,000 or lower by this time next year. I’ll call the S & P to settle in under 1,000. The NASDAQ may be the weakest, since its FAANG members — Facebook , Amazon, Apple, Netflix, Google (aka Alphabet)— are among the most mis-valued stocks, and the most based on vaporous products and services. Call NASDAQ to land at 2,700. Calling for a US dollar index (DXY) of 79 by December. Calling for gold $2,500 and silver $60 twelve months from now. There it is, like so much meat on the table.

Bitcoin and other cryptos have a superficial appeal as a wealth safe haven supposedly out-of-reach of avaricious governments — if you don’t consider everything else that’s wrong with it. (Yesterday, Dec 31, Australia’s biggest banks froze the accounts of Bitcoin investors.) I think the safe haven idea will prove fallacious. Governments are already finding ways to interfere, using taxation schemes and shutting down exchanges. Bitcoin’s other claims on “moneyness” look bogus as well. It’s too unstable to be a medium of exchange, and too difficult to even access when need to sell, and you certainly can’t price anything in it as it shoots up and crashes every day. Bitcoin went way up because people — or maybe just algorithms — saw it going way up, so they hitched a ride. The rush to the exits will be brutal. Its final resting place will be zero, but perhaps not without a trip or two to nosebleed levels in 2018, especially as other markets wobble in the first half of the year. Bitcoin $50-K wouldn’t surprise me. But I’m not among the buyers. Enjoy the show.

2018 is the year that fragilities in the shale oil industry challenge the narrative of the “miracle.” The industry hasn’t made a net red-cent since it ramped up ten years ago. It’s been running on debt, a lot of it junk financing (high-yield, high-risk, covenant-lite). The producers have been fracking and pumping all-out for several years to maximize their cash flow to service their loans. But these shale wells deplete by 80 percent on average after the first three years, and have to be replaced by expensive new wells, which require ever more debt financing. The truth is that shale oil and other “unconventional” oils just don’t pencil out economically. Their success in recent years was part-and-parcel with the central bank credit flood. As that credit flow gets choked down in 2018, oil companies will go out of business at an impressive rate. If the price of oil goes up to $80-a-barrel, as a result, it will be very damaging to what remains of the US economy of real stuff.

US Politics

Donald Trump survived in office a whole year. Imagine that! After the 2016 election, I figured that the top military brass would give him the bum’s rush inside of three months, in short a coup d’état. Their action actually has been much more subtle: they just ring-fenced him with generals. Since he seems to regard them as his generals (“my generals”), then he’s apparently okay with that, like a boy in the nursery with his toy soldiers. And apart from the fact that the constitution calls for civilian control of the military and not vice-versa, I’m okay with that… for now. He’s got chaperones, at least. This is admittedly not the ideal disposition of American political power.

I did not vote for the Golden Golem, and I don’t esteem his abilities, but the incessant and rather hysterical attacks on his legitimacy, especially by members of Consensus Trance Central, display a mendacity out of George Orwell’s direst dreams. I never believed in the ludicrous Russian collusion fantasy, and find it difficult to believe that the editors of The New York Times do. So far, Special Counsel Robert Mueller has indicted two high-profile grifters (Manafort and Gates) on financial shenanigans involving business dealings in Russia dating from years before the 2016 election, plus one National Security Advisor (Michael Flynn) for speaking with the Russian Ambassador (who, exactly, are foreign ambassadors supposed to speak to if not government officials? And otherwise what are they here for?), and one entry-level foreign policy wonk (George Papadopoulos) who never even met Trump. I believe the grave and solemn Mueller is on a fishing expedition. Aficionados of DOJ tactics know that prosecutors can always fetch up the proverbial ham sandwich to indict, if there’s nothing else at hand.

Then there is the very troubling behavior of FBI employees (Peter Strzok, Lisa Page, Deputy FBI Director Andrew McCabe), plus some members of Obama’s inner circle (Susan Rice, Samantha powers) in the twilight months of his term. And remember, Robert Mueller has been the erstwhile James Comey’s mentor and true-blue friend going way back. It just looks flat-out like a bunch of Deep State lifers were out to get the Golden Golem. The so-called “optics” are terrible.

Since crashing stock markets are liable to turn Trump into a mad bull, at the same time that Mueller will have to put up or shut up, I predict that long about the vernal equinox Mueller will come up with some Mickey Mouse charges against Trump, or his people, and be promptly fired by the president. General Flynn and the baby foreign policy wonk will be pardoned, and perhaps others. Probably not Manafort and his chum (though their prosecution might fail.) Democrats will go apeshit and batshit both, with talk of impeachment and constitutional crisis, but I don’t think any of that will stick. Congress may have more to worry about with tanking markets and other symptoms of an incipient economic train wreck. The effort to dump Trump would aggravate the tanking markets.

It is also plausible after the disclosures of recent months that the Russian meddling investigation could blow back on Hillary, the Clinton Foundation, Clinton allies, and possibly even some of Obama’s people (maybe even the former president himself). The evidence for Obama-era FBI involvement in the Christopher Steele file is already out there. There is yet to be a satisfactory elucidation of the Loretta Lynch / Bill Clinton Phoenix tarmac meet-up, nor to the circumstances around HRC’s lost emails and private server, nor the Anthony Weiner laptop, nor to the Uranium One matter. The casual observer sees much more circumstantial criminality in these matters so far than any Trump collusion-with-Russia hypothesis provides.

I venture to predict that ex-DNC Chair Debbie Wasserman-Schultz resigns her House seat in disgrace as the case of her Pakistani grifter IT aide, Imran Awan, moves into the courts.

Trump firing Mueller will drive his Dem-Prog adversaries to new heights of hysteria but their wrath may be so ineffectual that they will fall back on their stock-in-trade, ginning up more sexual panic. This calls into question the pathetic state of the Democratic Party leadership. It’s so sclerotic these days that it makes the Whigs of 1856 look dynamic. They have no program for the compound emergencies the nation faces. The party machinery is in the hands of bought-and-paid-for errand boys, gender crybabies, and race hustlers. Their allies at The New York Times and CNN look ever more ridiculous peddling daily paranoid fantasies and styling themselves as advocates for “the Resistance.” Their cadres in the Ivy League outposts have turned into the most shamelessly illiberal gang of intellectual despots since Mao’s Red Guard roamed the earth.

I’m not persuaded that the Dems will necessarily stomp Trump’s Republicans in the 2018 congressional and state races, as seems to be widely assumed for the moment. I’ll predict, rather, that in 2018 we get the first stirrings of a new party forming to battle both tired old clubs. Trump now “owns” the fate of the stock market and the economy it wags, having bragged on it all year. He and the Republicans will be blamed if it falls out of bed. But my gut feeling is that the voters are even more sick of the Democrats and their victim-mongering. Their coffers are empty, despite jumping through every hoop that Wall Street held out for them. (Did all the money disappear into the maw of the Clinton Foundation?) Finally, on a personal note, I blame them for driving a stake through Garrison’s Keillor’s heart with their reckless sexual witch-hunting, and I don’t forgive them for that, no matter how many tits he may have tried to touch backstage.

Elsewhere on This Planet

Economic savant and international man-of-mystery James Rickards says that Trump and his generals are going to whap North Korea upside its big chunky head soon after the winter Olympics are concluded in South Korea on February 25. But as Trump averred in the election campaign, he is not inclined to state in advance exactly what we might do in a military situation. Maybe the rumor is true that we have interesting new weapons capable of turning Little Rocket Man into a Post Toastie without harming the mass of innocent North Koreans. I’d have to give 50 percent odds that whatever we do in Korea turns out to be an epic illustration of Murphy’s Law, since our track record in foreign military adventures since VJ day in 1945 is pretty scant in the “win” column. The Balkan War, maybe… Bush One’s Gulf War sort of… Grenada (for Godsake)… what else…?

Kim Jung-un may not be able yet to deliver an atomic blast to Rodeo Drive, but he can likely lob one into Tokyo on a five minute flight path. Look at the map. The Japanese must be nervous about it. They were once a world-class military power, in case you don’t remember the banzai era. Prime Minister Shinzo Abe wants to revise Japan’s pacifist constitution — engineered by US advisors during the post-war occupation — to allow for a robust military. I wouldn’t be surprised if something lethal jumps out of a lacquered black bento box in the direction of Pyongyang around the same time the US goes for that whap upside NK’s head.

And there’s Seoul, of course, less than 20 miles from the DMZ and within range of a supposedly huge array of North Korean heavy artillery. The theory is we have a slim window of opportunity to deal with this rascal before he equips himself to do some major mischief in the world. I don’t believe this is just a bunch of shuck-and-jive cooked up by the arms merchants and their friends. It’s real and existential and very messy. Something is going to happen there.

China has a pretty firm mutual defense treaty with North Korea, and perhaps reason to want to keep the regime up-and-running as a buffer zone. But do they really want to jump feet first into World War Three defending Kim? I guess we’ll find out. In the meantime, China’s president Xi Jinping has got enough on his plate trying to safely land the high-flying, but wobbling, debt-saturated Chinese economy. Odds are that it’s going to be a rough landing. In which case, maybe war is the answer, as a way of distracting the Chinese public’s attention. But what sort of war? Cyber-sabotage? EMP blackouts? Good old-fashioned mutual nuclear destruction? Grinding old-school land campaigns? Naval battles? It’s a dangerous game and Xi does not look like a risk junkie — more like prudent ole Uncle Xi. So I’ll predict that whatever blows on the Korean Peninsula, China will try to stay out of it, even if it makes faces and jumps up and down a bit.

Russia can only benefit from steering clear of war, though its recent offer to act as an intermediary between Kim and Trump was a smart move. (Maybe they remember how Teddy Roosevelt negotiated a peace settlement in the Russo-Japanese War of 1907.) They have little to lose and prestige to gain. Despite what you hear about the unholy thuggery of Vladimir Putin, it seems to me that what he wants most of all for his country is to attain the condition of a politically and economically normal nation — after the 75-year-long misadventure with communism. I suspect Putin and others in Russia would have liked the country to become more fully Europeanized in tone and style than it has been allowed to be, with NATO playing war games on Russia’s border, and US monkeyshines in Ukraine, and sanctions against it for really no good reason. So, Russia has been shoved back into its cubbyhole as a nation not quite of Europe, with sinister Byzantine overtones and ancient exotic Mongol influences.

This quasi-isolation has some benefits for Russia, for one, the imperative to develop businesses and industries for import-replacement, that is, for becoming more self-sufficient. Russia has a lot to work worth, with the world’s highest oil production, lots of ores and minerals, untold hydropower, and endless timber. It can make its own stuff, and Russian citizens are free to try starting businesses. The country may even benefit from climate change with expanded croplands. Russia is already approaching food self-sufficiency after the long catastrophe of soviet farm collectivization.

Meanwhile, Europe desperately needs Russia’s oil and natural gas, so they must know that using NATO troops and armor to make threats is a hollow gesture. Notice that Russia is stockpiling gold reserves, where the USA is just selling the stuff off. (China is stockpiling, too. Like mad.) When other currencies implode, there is reason to believe the world will be introduced to a gold-backed Ruble and Yuan, “money” backed by money. They’ll be able to buy stuff they need. Will we? Will a gold-backed currency shove aside the US dollar as world reserve currency? The precursor to that will be China’s effort to establish oil trade in its Yuan.

Europe has stumbled along economically for several years on Mario Draghi’s promise to “do whatever it takes” to keep the EU’s member nations from falling into the black hole of debt deflation, namely, buying every bond that the sovereign governments and corporations issue. That kept the game going, but the structural imbalances in EU banking are now so extreme that it is hard to see a way out besides an EU crackup. The Merkel-led immigration-and-refugee policy looked like a bad bet from the get-go and is liable to get worse when the whatever-it-takes liquidity dries up and the EU member countries fall into recession (or depression) and there’s no more money to pay for all those refugee settlement centers and the social services that have been provided. There won’t be enough gainful employment for Germans, Belgians, Frenchmen, and Swedes, let alone for immigrants and refugees.

I’ll predict that starting in 2018 we’ll see efforts to ramp up deportations of these newcomers. Racist? That will be the knee-jerk hue-and-cry. But the epithet is losing its punch as the effects of Merkel’s open door policy are felt on-the-ground in the obvious hostility, xenophobia, and aggression, displayed by Islamic settlers. The defeat of ISIS on the Middle East battlefields in 2017 suggests that they will be ramping up terror operations to Europe. European nationalism movements will grow in 2018 and gain intellectual respectability as the defense of European culture is taken seriously. Middle European states such as Hungary and Poland have not given in on the EU’s demand to accept immigrants and refugees from Islamic lands. Their example will be followed. Politicians in the rest of Europe will consider the “Just Say No” option.

The United Kingdom enters 2018 especially vulnerable to economic travail. The estimated cost of Brexit at tens of billions of pounds sterling, and the potential loss of business, especially banking, is one mighty headwind. The other, less talked about, is the dwindling of the UK’s oil and gas reserves. The equation is simple: fewer energy inputs equals lower economic activity. The only way around that is the popular central bank strategy of recent years: money-printing and accounting fraud. You can’t base an economy on that, and the truth will become painfully self-evident this new year in Great Britain.

Suddenly this last week of 2017, anti-regime demonstrations are busting out all over Iran. They are said to be protests over poor economic performance and the regime’s squandering of resources sponsoring mischief in other lands (Yemen, Syria, Lebanon, etc). Folks are getting killed in the streets. The Revolutionary Guard — the zealots who took our diplomatic personnel hostage in 1979 — have promised to squash the protest. Many Iranians must be good and goddam sick of mullahs and ayatollahs running the joint.

Otherwise, it’s beginning to look like Crown Prince Mohammed bin Salman (MBS) of Saudi Arabia (KSA) would like to rumble with Iran to beat back their influence outside their borders in the region. Iran has had plenty of opportunity to play with its military hardware in recent decades: in the Iran-Iraq War, arming Hezbollah to battle Israel, in support of Bashar al-Assad’s government in Syria, and lately in Yemen’s civil war. KSA, on the other hand, has been buying jet planes and bombs from the US for decades, with nary a chance to put them to use. MBS seems eager to test-drive this schwag.

A real dust-up between the principals would put a lot of the world’s oil supply at risk if oil tanker shipping in the Persian Gulf were interrupted. China and Japan would bear the brunt, but the whole world would feel it. Kicking the clerics out of government in Iran might tone down the unnecessary religious hostilities between Sunni and Shiites that has played such a big part in the creation of failed states throughout the Middle East and North Africa (MENA). Iran has plenty of economic problems inside its own borders.

The disarray in other areas of the vast MENA region will continue in 2018, whether regime change in Iran happens or not. Iraq, Libya, Somalia, Sudan are permanently failed states, with Egypt ever on the verge. Syria will stabilize as a much smaller economy, propped up by payments from Russia for hosting naval and air bases there. This part of the world has suffered ruinous population overshoot in the industrial age, especially the states that produced oil. The desert ecology can’t support all these people as the industry falters and shrinks. Even as the situation worsens, the swollen populations will generate more children. When they can no longer decant themselves into Europe, the real misery starts.

You may have forgotten there is a place called South America. Its many nations have been a pleasant political coma for a decade or so, except Venezuela, which is in cardiac arrest, organ failure, and brain death. There will be a bloody revolution there this year, and Venezuela’s oil industry will be crippled, adding to the world’s oil supply problems.

The Closing of the American Mind

2017 was a spectacular year for intellectual collapse among the political Left, but especially for its subsidiaries on campus. The trauma of Donald Trump’s election victory put this faction into a fugue state in which no opportunity for coercion and persecution of imagined enemies could be missed. The victim-oppressor politics spawned by the critical-theory-for-lunch-bunch has produced an ideology in which “inclusion” means segregated dorms, racially separate graduation ceremonies, and (at Harvard) closing down age-old men’s and women’s voluntary social associations. And “diversity” means as long as you express the exactly same ideas we do. The presidents, deans, and faculty of colleges around the country have turned into the most obdurate enemies of free thought since the Spanish Inquisition, a gang of cowards and villains who disgrace the meaning and purpose of higher Ed.

Highlights of the year in Social Justice Warrior Land include the violence around Charles Murray’s lecture at Middlebury, the Antifa riots at UC Berkeley, the “Day of Absence” ritual at Evergreen U in Washington State where white people were banished from campus, and the Lindsey Shepherd star chamber tribunal at Laurier University in Toronto (I know, that’s outside the USA). In all of these cases, college presidents, deans, and faculty acted contemptibly, supporting coercion, persecution, antipathy to due process of law, the willful betrayal of common decency, and a folio of shockingly stupid ideas — such as the proposition from the chair of the Purdue University Engineering Department (one Donna Riley) that academic rigor is a symptom of “white male heterosexual privilege.”

As it happens, higher education is approaching its own state of implosion, since college has become, most of all, a money-grubbing racket tuned to the flow of exorbitant student loans for exorbitant college costs. Higher Ed’s fate is tied to the financial sector, especially the bond market, since college loans are lately being bundled into janky bonds just like the NINJA mortgages of 2007 were. The entire US college industry has been in a hypertrophic blow-off for decades, and the gross expansion of facilities, programs, and costs has developedan inverse relationship to the value of a college education. I predict that a shocking number of small four-year colleges will go out of business this year. Students who had not completed their degree requirements will just be shit out of luck.

Concluding Thoughts

2018 will be a tumultuous year of shake-outs and loss. The watchword for the year should be “lean.” Individuals will be shoved into leaner modes of living. Companies will suffer despite the new lower tax. Financial rewards will be lean. Nations will have to seriously start planning to get by on less, to downscale, and jettison programs that don’t jibe with the mandates of reality. 2018 is the year that the world comes un-stuck from the past ten years of pretending that it’s possible to get something for nothing. For 2018, it’s full speed ahead into the long emergency.


New Paintings by JHK 2016 — 2017


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