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Politics

The Hutch Report

Trump News Network – The Master Plan

By | Media, Politics

The 2016 presidential campaign of Donald Trump was formally launched on June 16, 2015, at Trump Tower in New York City. However, some wonder if becoming president was Trump’s main goal all along. There have been a number of clues that have surfaced over the years that could lead us to believe that what Trump really was planning was to start his own international news network to rival that of CNN and others. Then something unexpected happened, he actually won. 

Although this has all the hallmarks of classic conspiracy theory, when Donald Trump is involved, we have come to learn that anything is possible so we decided to look into it a bit deeper. 

Reports surfaced throughout the 2016 election that Trump was reportedly considering overseeing the creation of a new news network if he had not won the election, that would focus on conservative perspectives and voices on current events. 

Back in August of 2016, The New York Times initially reported that Donald Trump’s son-in-law Jared Kushner had explored the possibility of either creating a media property or acquiring one, according to a person briefed on the discussions, who asked for anonymity to discuss private conversations.

The Financial Times then reported in October 2016 that Kushner had discussed the possibility of a Trump-branded television network with Aryeh B. Bourkoff, the chief executive of LionTree, a boutique investment bank that had helped advise media deals.

NBC news wrote in October of 2016, “The Donald Trump TV Network Could Be Just Three Months Away.”

Trump has been attacking CNN in particular since the beginning, claiming the network’s international operations represent the United States poorly. He tweeted most recently back in November 2018, “While CNN doesn’t do great in the United States based on ratings, outside of the U.S. they have very little competition,” “Throughout the world, CNN has a powerful voice portraying the United States in an unfair and false way.”

“Something has to be done,” he added, “including the possibility of the United States starting our own Worldwide Network to show the World the way we really are, GREAT!”

Trump has certainly not hidden his feelings about which networks he admires and those he despises. If Trump did launch his own network, “You could easily see Sean Hannity defecting from Fox News,” said NPR media correspondent David Folkenflik. 

It should therefore not be surprising that just yesterday, in a new piece for the New Yorker, investigative journalist Jane Mayer reported that a few months before the Justice Department filed its lawsuit, Trump pressured Gary Cohn, the former director of the National Economic Council, to tell the Justice Department to block AT&T’s Time Warner deal (Time Warner being CNN’s parent company).

Dr. Pippa Malmgren, who has previously served as Special Assistant to the President of the United States, George W Bush, for Economic Policy on the National Economic Council recently spoke on the Macrovoices Podcast and expressed the idea that Donald Trump never expected to win. He ran for President to pursue an ulterior motive. She went on to say, that a news network would provide Trump with “less constraints and freedom to tweet anything he wants.” Creating the Trump News Network (TNN) would help Trump transition into a global brand and enable him to have “more influence” than he has as president. She believes that for this reason, “Trump will decide not to run again,” instead, he will launch TNN and that he will wait just weeks before the election to announce this and thereby completely disrupt the whole process. The net result would drive massive attention to his cause.

Conspiracy theory? Maybe, but we will have to wait for the elections to see how this one turns out.  

The Hutch Report

Trump has a socialist agenda (when it benefits him)

By | Politics

Everyone who lives in a capitalist society wants capitalism to work for them, but when it doesn’t they scream for socialism support. This is not a bad thing. There are a number of programs such as medicare, social security and food stamps that people are thankful for when they can use the help (“socialism” is commonly applied as a term for using government programs as a social welfare state to help people who need assistance). 

However, if you are going to apply these programs then at least accept the hybrid economic model as is and don’t slam one against the other. 

Formal economies operate within limits of established and monitored policies and regulations. Informal economies do not and therefore include underground economies. Capitalism and socialism are considered formal economies. 

The major differences between capitalism and socialism are based on the role of the government and equality of economics. Capitalism allows for economic freedom, consumer choice, and economic growth. Socialism, which is an economy controlled by the state and planned by a central planning authority, provides for a greater social welfare and decreases business fluctuations. The truth is, there are elements of socialism in all capitalist economies, although many would not like to admit.

We can start with the Federal Reserve. The Federal Reserve is a “central” bank with centralised power over interest rates and the power to print money under the guise of financial system “stability.” Although one wonders what is meant to be stable in a capitalist society? Capitalism is inherently unstable and prone to boom/bust periods, or crises, even during a period of strong and stable growth. There is a history of recessions that prove it. However, lately the Fed is doing everything in their power to avoid recession.

Consider the two following statements;

“Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.”

Congress shall have power to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

The second statement comes from the United States Constitution, Article 1 Section 8. The first statement was written by Karl Marx and Friedrich Engels in 1848 in their infamous “Communist Manifesto.”

The Federal Reserve could never exist to operate the way it does in an open democracy. They have a strong recent history of socializing risks (making taxpayers responsible for bankers’ losses) and privatizing their profits (letting the bankers keep their bonuses) for the benefit of its members (the banks). An audit of the Federal Reserve uncovered details about how the U.S. provided an astounding $16 trillion in secret loans to bail out American and foreign banks and businesses during the crisis of 2008. This highlights that the Federal Reserve has to transform America to a socialist model in order to maintain its own growth and ultimate power which it has shown to do quite effectively.

Pro Publica has been tracking where taxpayer money has gone in the ongoing bailout of the financial system. Their impressive database accounts for both the broader $700 billion bill and the separate bailout of Fannie Mae and Freddie Mac.

How about the President? Where does he stand on the socialist agenda? He has had a lot of praise for many socialist leaders. Does this make him one? Probably not. This could be a simple mafia strategy of keeping your friends close and your enemies closers, or he actually has a real admiration for them. 

But how about his actions? In spite of his public distain for the socialist agenda, he recently announced that he is going to implement price controls (socialism) on prescription drugs.  Since he was elected, GM has got more than $600 million in federal contracts plus $500 million in tax breaks. Some of this has gone into the pockets of GM executives. Chairman and CEO Mary Barra raked in almost $22 million in total compensation in 2017 alone. As the Trump administration continues trade talks with China, the U.S. Department of Agriculture (USDA) has paid out a total of $7.7 billion in aid to farmers to offset the effects of tariffs. 

So, the US clearly has shown to exercise a socialist will on many occassions (and will most likely do so on a much bigger scale during the next economic downturn). Does this put it in the same category as Russia or China? Of course not, but don’t slam socialism ideals when you are taking advantage of them. 

The Hutch Report

The New Economic Hitmen

By | Economics, Finance, Politics

John Perkins original book, “Confessions of an Economic Hitman” and his current book, “New Confessions of an Economic Hitman” brought to light some of the strategies the US has used over the years in order to gain control of foreign reserves that American companies may want to seize, such as oil. 

According to Perkins, the method of achieving this end was to use external consultants such as the one he worked for. They would arrange large loans for those countries via the World Bank and its partner organizations. However, the governments in question never received the money. Instead, the money would be transferred, directly or indirectly, to American companies, including construction firms like Halliburton or suppliers like General Electric. These American entities would then launch infrastructure projects which may have included power grids, or industrial parks and highways. These projects generated huge profits. However, not surprisingly, those profits went to the American companies and a few rich local familes. In the end, these countries that were already weighed down by huge debts just saw their debts grow larger, which in turn pressured the already poor and middle class. 

Typically, a developed country with a dictator that sits on a perch makes for a soft target. Dictators are often propped up by failed systems like corrupt police force and military. They are usually the most eager to redeem their images so if you can take photos with them signing agreements about huge infrastructure projects it will help soften their soily images.  Therefore, they are happy to stand on the podium and tell their ill-informed, semi-literate populace about the development the government is bringing to their country. 

As an example, in the 70s, large loans were provided to build a power grid in Panama. The real goal was to force the then Dictator Omar Torrijos into a situation where he owed the US a lot of money in order to have something to blackmail him with because at that point, his bankrupt country would be beholden to them. As Africans would say, you hold both the yam and the knife. In 1977, Torrijos signed a deal with the US, which guaranteed that the government of Panama would have full control of the Panama Canal starting 1999. In 1981, he was killed in a car crash.

Omar Torrijos

Looking at the situation today with the number of sanctions and tariffs being thrown around one has to wonder who the principle targets of the current administration are. Russia? The truth is, Russia and the US have been playing spy games on each other for years. The real targets are the emerging economies. “I have no doubt that there are economic hitmen targeting emerging economies like Turkey’s,” Perkins said in an interview to the Turkish based Anadolu Agency. But Turkey is not the only country where the US has imposed sanctions and tariffs. Currently, sanctioned countries include the Balkans, Belarus, Burma, Cote D’Ivoire (Ivory Coast), Cuba, Democratic Republic of Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria, and Zimbabwe.

In today’s globalised world economic hitmen are no longer only US based. Today they may come from any number of other countries, including Russia and China. Globalisation has created huge opportunities for economic hitmen around the planet.

Trump’s administration sees infrastructure as one of the key areas to boost US economy. However, the recently published Infrastructure plan has been criticised for lack of money and is highly dependent on private capital. The US is already running large deficits and the national debt now currently stands at $21.8 trillion. 

China, with its strong infrastructure achievements and the largest amount of foreign exchange reserves (China has by far the largest foreign currency reserves with over two and a half times more than the second largest reserve holder, Japan. When China and Hong Kong reserves are considered together, the total is $3.6 trillion), is constantly looking for low-risk long-term investment projects to achieve asset preservation and appreciation. By targeting the US, China could balance its foreign exchange levels while accelerating the rejuvenation of American infrastructure. This would also transform China into a job creator in the US. 

The Hutch Report

The Hong Kong–Zhuhai–Macao Bridge, 55 kilometres long.

China is currently employing this strategy throughout Africa along with their One Belt, One Road initiative. China has been the largest trading partner of Tanzania for many years with some 350,000 Tanzanians doing jobs related to trade with China. Also Chinese companies have built a number of mega projects in Tanzania, including roads and bridges, creating about 150,000 jobs. 

Interestingly, on his last trip to the continent just before being replaced, Rex Tillerson said that African countries should be careful not to forfeit their sovereignty when they accept loans from China, the continent’s biggest trading partner.

Would Trump be open to outsourcing the development of the US infrastructure to Chinese firms? The short term boost to Trump’s reputation may blind him to the longer term complications. Could the US itself become a target of the economic hitmen?

The Hutch Report

Vancouver Real Estate – Is the bubble deflating?

By | Economics, Politics

“It is different this time,” “This is the place everybody wants to be,” has been the talking points when referring to the impressive rise of Vancouver and its real estate market. Unfortunately all markets that experience a rapid escalation of asset prices, as we have seen in Vancouver, eventually experience a painful contraction whereby, as macro investor Raoul Pal puts it, “The big uglies come out.” Are we starting to see what those big uglies are in the Vancouver real estate market?

Vancouver has been the victim of a number of economic events in the world that have culminated in the development of its current dangerous real estate bubble. Central bankers driving interest rates down to historic lows and keeping them there for years, the rapid rise of China’s economy along with the massive number of its newly printed Chinese millionaires, the rise of corruption in China, the exodus of this corrupt money along with Chinese government efforts to reign it in, are just a few of these events.

Life in Vancouver, where the talk of real estate riches and Vancouver suddenly becoming the place to be, has become the favourite subject among its residents, although they may not be aware that other regions in the world have experienced the same impact and will experience the same result. 

Top residential real estate brokerages in the US have been promoting US homes to investors in China for years. Brokerage firms in Canada, Australia, New Zealand, and other countries have done the same. They have set up units in China and have partnered with Chinese real estate portals, such as juwai.com. However, one place where the real estate bubble is most prevelent is in China itself. According to a recent report by Bloomberg, a fifth of China’s housing is empty. That’s 50 Million homes! 

This is what happens when rampant speculation in a market is not contained. Unfortunately when there is money to be made people disregard the splitting hangover that the all night party can bring. 

So what has the impact been in Vancouver?

For too long Vancouver disregarded the longer term risks and turned a blind eye to the massive amounts of corrupt speculative money that was pouring in from China. The low interest rates fuelled the building in Vancouver in order to satisfy the insatiable thirst for Vancouver real estate. (This was pretty much the same story in Australia and New Zealand). There was a rapid rise in prices pushed up by Chinese buyers, in addition to Vancouver residents rushing into the market for fear of missing out. The result was Vancouver real estate became quickly unaffordable to many of its own residents. 

Only recently has the government tried to halt the rise. In 2016, Vancouver became the first Canadian City to collect an empty homes tax, charging one per cent of the home’s assessed value if the owners are not living in it or are renting it out for less than six months. In addition, the government also imposed a 20% foreign property buyers tax.  

Elsewhere, New Zealand’s parliament banned many foreigners from outright buying existing homes in the country – a move aimed at making properties more affordable. New Zealand is also facing a housing affordability crisis which has left home ownership out of reach for many.

Canada, New Zealand and others are not the only ones taking measures to reign this in. China has begun cracking down. Over the last decade, an estimated $3.8 trillion in capital has left China. Net foreign direct investment over the same period of time has amounted to $1.3 trillion, leaving the country with a net loss. To reduce capital flight, the Chinese government has developed a complex system of capital controls, such as limiting transfers of $50,000. However, that has not stopped the Chinese from being creative. The CEO of a Chinese company moved $750,000 from China to Metro Vancouver for a real estate deal with the help of nine strangers who each brought $50,000 into Canada for “tourist purposes,” according to a B.C. Supreme Court judgment.

But in spite of these controls the damage has been done and now increasing interest rates may just be fuelling the fire as the news starts to trickle in. 

According to economists at the Royal Bank of Canada, owning a home in Vancouver is the most unaffordable it has ever been in any Canadian City. In fact, they found affordability to now be “at crisis levels” where it would take a record 88.4 per cent of one’s income to cover ownership costs. Statistics Canada reported that, “Credit market debt as a proportion of household disposable income increased to 169.1 per cent as growth in debt outpaced income. In other words, Canadians owed $1.69 in credit market debt for every dollar of household disposable income.”

Credit reporting agency TransUnion released data showing that Vancouver residents have the highest debts among those who are in major cities, owing an average of $38,753 in non-mortgage, consumer debt through the first quarter of 2018.

Vancouver residents, and Canadians in general, are growing increasingly anxious about their ability to handle higher interest rates, with a new survey showing a rising proportion of consumers fear they will be pushed over the brink. Rightly so, they are concerned mostly about their high-ticket items such as a mortgages and car loans.

As we began this article, the explanation for Vancouver’s real estate rise was its attraction as a city, at least according to many of its residents, its natural beauty and idyllic west coast location. Although in my opinion this is true (considering it is my home town) to a point. There is a difference between speculation and purchasing a home to live in. The first clue that we were dealing with speculators, as is the case in China, should have been the number of empty houses and condos in Vancouver (which was the reason the city eventually created the empty homes tax). 

What has been the effect of these controls on speculators?

Vancouver is now ranked as the worst place in the world for luxury homebuyers seeking a return on their investment, according to a global survey of 43 “prime residential” cities. The Knight Frank Prime International Residential Index found that, while luxury property prices globally were up an average of 4.2% in the third quarter, compared with the same period in 2017, they fell 11.2% in Vancouver, where luxury home sales have tanked. No other Canadian city made the list, and Vancouver ended up ranked No. 43.

For those in Vancouver who refuse to believe bubble talk and believe that the Chinese will keep purchasing and supporting the real estate market for years to come, they may want to rethink that. Beijing has warned of its zero tolerance for dual nationality. Now some foreign citizens who held on to their Chinese identity documents fear the consequences of returning, according to South China Morning Post. In addition, it is hard to believe that the Chinese will be rushing to give up their Chinese citizenship at a time in history when China promises to be the next great economic powerhouse. 

The problem with living through a bubble is often the most vulnerable get hurt, as we saw very clearly during the housing bubble and financial crisis of 2007 in the US. The same is most likely to be true for the Vancouver residents that extended themselves purchasing overpriced real estate that they could ill afford. The international speculators will move on as they continue their worldwide search for return. As in other locations, it is likely that they will not hang around long enough to see the real damage that remains once all the air has been taken out of the bubble. 

The Hutch Report

Welcome to the Jungle

By | Law, Media, Politics

Music is a powerful force in life. Not only is it a dominant art form, a form of entertainment that goes back to the beginnings of human history, it has also been used as a form of communication. The reason it is so effective as a communication tool is because it drives emotions and it is emotions that play a large part in our decision making process. 

Wherever you encounter a form of sales or commercialism of a product you are bound to find some kind of catchy music attached. There is a long history of branding campaigns that have become successful mainly because of the emotion and message communicated through the music. 

We make decisions everyday but some decisions have a greater impact than others. One of the most powerful decisions you make as a citizen is your power to vote. For this reason music has been an integral part of political campaigns and elections for years. The problem is that quite often the politicians prefer to choose music that conveys their message by just using popular music that has already created an impact in order to play it safe. The music is more often than not used without the consent or knowledge of the copyright holder. When they do this they ironically disregard copyright law (a law they are supposed to be upholding).

The true artist creates for the sake of creation. The work is the focal point. This is why whenever you find a piece of music or artistic expression used for any other purpose other than that for what it was conceived, a work of art, the artist becomes incensed. The artist knows that there is a danger that the use of their work for commercial purposes can forever change the association of that music with the listening public. 

Rihanna recently sent a cease-and-desist letter to Donald Trump, with the Anti singer deploying legal action after her “Don’t Stop the Music” was played at the president’s rally Sunday in Chattanooga, Tennessee. Trump is also experiencing a backlash from the likes of Axel Rose for his use of Sweet Child o’ Mine. Over the weekend, the controversial Guns N’ Roses frontman complained on Twitter that Trump had used the hit against the band’s wishes. He explained that a legal loophole allowed the president, whose administration he referred to as “s***bags,” to do it.

This is not isolated to the midterm elections or the Trump campaigns. The unlawful use of the popular song goes back much further. 

When Independent billionaire Ross Perot ran in 1992 in a three way race against Bill Clinton and George H. Bush. He was one of the most unconventional presidential candidates in American political history, so his choice of campaign song was Patsy Cline’s 1961 love song “Crazy.” It attracted attention because his critics dismissed him as such.

During his successful 2000 presidential campaign, George W. Bush picked Tom Petty’s 1989 hit “I Won’t Back Down,” to be played during his events.  Petty threatened to sue the campaign for its unauthorised use of the tune, and Bush stopped playing it.

When Sarah Palin ran as John McCain’s 2008 Republican presidential running mate she chose to play Heart’s 1970s hit “Barracuda” at campaign events. The band objected to the use of the song and got the campaign to stop playing it.  Ann and Nancy Wilson didn’t want the song to be associated with the views of Sarah Palin. During the same campaign, Jackson Browne won a suit against John McCain when the Republican presidential candidate played “Running on Empty” in an ad bashing Barack Obama on gas conservation.

Ex-Talking Head frontman David Byrne successfully sued Florida Republican Charlie Crist for using “Road to Nowhere” in a video to attack opponent Marco Rubio during a 2010 U.S. Senate campaign.

Of course, the opposite effect can happen. Mick Fleetwood, from the group Fleetwood Mac, recently said Bill Clinton’s campaign never requested permission for what became his iconic 1992 campaign anthem, “Don’t Stop,” but the band generally voted Democratic and didn’t object to the exposure. 

Legally speaking, copyright laws allow political candidates to use just about any song they want, as long as they’re played at a stadium, arena or other venue that already has a public-performance license through a songwriters’ association such as ASCAP or BMI. However, the law contains plenty of gray area and the artist does have the ability to protect their “right of publicity.” 

The Hutch Report

“Extremely Dangerous to Our Democracy”

By | Media, Politics

Another day, another day of mud slinging. The media is after Trump and Trump is after the media. Trump cries fake news on one hand, yet on the other he produces fake news. It doesn’t take much digging to discover the number of false or misleading statements he has made. The Washinton Post did a count of these statements throughout his first 100 days. However, this is not an attack on Trump, it is simply the process of making the sitting President accountable for his words and actions and has been done throughout the years with all administrations. When the voting public catches the President with his pants down (in reference to Nixon, not Clinton!) he is called to answer, which Nixon was and forced to resign. 

One of the problems we face today regarding the news is the facility of its distribution, especially in this era of social media. It is simple to write, simple to publish, simple to distribute and very cheap to do. This has pulled everybody who is anybody with an opinion into the news game. We looked into propaganda side of this during the Russia accusations.

At one time, the American population would get home from work to watch the Six O’Clock newscast. You would get your news for the day, which was a mix of mainly local news with a portion for national and international stories. That was it and that was enough. If you wanted something lighter or deeper and more informed there was a selection of magazines and newspapers. 

The big change came with news all day, all the time. What were once headlines with an overview to give the public a general idea have become stories with a team to analyze every word and every angle. CNN was the first but should not be considered the only one. All of these all day news networks are bombarding the public with the same headlines all day long. They put together round tables to beat the crap out of a story. They parse every word in hopes of making some discovery that may drive their ratings a little higher. The constant barrage of news and information also has additional detriments to our well being, as we posted here. 

To make matters worse, what used to be independent local news stations were eventually bought up one by one by conglomerates. For example, The Sinclair Broadcast Group is the largest owner of television stations in the United States, currently owning or operating a total of 193 outlets across the country in nearly 80 markets, ranging from markets as large as Washington, D.C. to as small as Steubenville, Ohio. The stations are affiliates of various television networks, including ABC, CBS, NBC and Fox as well as numerous specialty channels. Many stations are owned outright by the company, while others are owned by legally distinct companies but operated by Sinclair through a local marketing agreement. The Fox Broadcasting Company operates an American television network made up of 17 owned-and-operated stations and over 185 affiliates. Sinclair’s aggregate televised reach covers about 40 percent of the U.S.

Unfortunately, with this kind of power and control some members of the media use their platforms to push their own personal bias and agenda to control exactly what people think. How do we know? The nightly newscasts of all these affiliates are scripted. They are all told what to read each and every day, regardless of where they are located. 

A video compilation was published earlier this year on YouTube  that presents this idea perfectly. It shows dozens of news anchors at local affiliate stations owned by the Sinclair Broadcast Group reciting word-for-word the exact same message on “fake” news. The video shows CBS, ABC, NBC, and Fox affiliates sharing the message.

This is, as the anchors in the video clearly outline, ”Extremely dangerous to our democracy.” However, that it is up to each individual to decide. 

The Hutch Report

A Day of Carnage in the Trading Rooms

By | Economics, Finance, Politics

Thirty one years ago today, on Oct. 19,1987, the Dow Jones Industrial Average plunged 22.6%, its largest one-day percentage-point drop ever.

You may have noticed that the financial media has started to highlight the point drops as opposed to the percentages. To say the Dow lost 500 points makes better news than saying it lost 2%. In percentage terms though this years recent plunges pale in comparison to what “could” happen as we have seen in history.

Here are five of the worst stock market crashes in U.S. history, based on daily percentage losses (source: ajc.com):

Oct. 19, 1987

Percentage change: -22.61 percent

About: Known as “Black Monday,” this devastating crash began in Hong Kong, spread to Europe and then hit the U.S. hard.

Oct. 28, 1929

Percentage change: -12.82 percent

About the crash: The Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 started on Oct. 24 and signaled the beginning of the 12-year Great Depression. Black Monday, the fourth and worst day of the crash, saw a drop of 12.82 percent.

Dec. 18, 1899

Percentage change: -11.99 percent

About the crash: During the Panic of 1896, the U.S. experienced an acute economic depression caused by a drop in silver reserves and deflation.

Oct. 29, 1929

Percentage change: -11.73

About the crash:  Black Tuesday was the fifth day of the the Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 that started on Oct. 24 and signaled the beginning of the 12-year Great Depression.

Nov. 6, 1929

Percentage change: -9.92

About the crash: Just a week after the height of the 1929 Stock Market Crash, investors saw another dip.

As many often refer to these numbers when speaking about this event the real point of interest should be in what they were saying back then, which not many financial media tend to refer to. Ironically they were saying many of the things they say today.

We looked back at a Nightly News Broadcast of that time in order to gain a better understanding of the mindset of the time. You would be advised to watch the broadcast because in the words of Philosopher George Santayana, “Those who cannot remember the past are condemned to repeat it.” (See The Nightly News Broadcast October 19, 1987 at the bottom of the post)

The 1987 crash lost much more than the crash of 1929, and although (as they said at the time), “Conditions today are much better than they were then,” “today’s precipitate decline struck fear in hearts and pocket books of even Wall Street veterans.”

All the same actors showed up as they do today with the same speech tracks. New York Stock Exchange Chairman at the time, John Phalen, tried to be reassuring. “We are extremely fortunate today that the country is in a very strong position.”

The word of the Economists was that they were worried that the market plunge at the time could impact the psychology of even those that didn’t own stocks. They worried the consumer would stop borrowing and spending which could grind the economy to a halt. Compare those worries of the time to today. They are the same. The big difference is that today consumers are already heavily indebted. They are carrying mortgage debts, auto loan debts, student loan debts and credit card debts that are far higher than they were in 1987.

The broadcast pointed out that, “A week ago most economists were saying that the stock market decline was merely a correction.” This is also familiar territory. Of course it is always a correction until it isn’t, however making that judgement before the fact is just a guess. On October 19, 1987, that guess turned out to be very wrong. They went on to say that, “Today’s plunge was so huge, so shocking, that no economist, no Wall Street analyst was willing to predict where it would end.” Irony so thick you could cut it with a knife.

By the end of the day, everyone was looking to Washington for some action that may help stop the carnage. At the time President Ronald Reagan ignored the plunge and continued to “brag” about the Reagan recovery. This doesn’t sound to different to anything we would expect today. Although we can probably assume that no matter what kind of serious drop that the stock market may go through in the future, Trump will be quick to blame the Federal Reserve (however that will not stop him from taking credit it for it if it keeps moving up).

All in all, it is a fascinating 9 minutes to watch. We shouldn’t expect to hear anything different today than we did 31 years ago and that means we should have a pretty good idea of what to expect in the future.

The Hutch Report

Understanding the Face of China

By | Economics, Politics

The current Trump trade war with China and the fact that The Shanghai Composite Index is off roughly 24% for the year has placed a lot of the recent news focus on China. However, understanding the Chinese takes much deeper digging into the Chinese mindset as opposed to just looking at current economic numbers. The Trump administration strategy towards China may produce some short term benefits in terms of public support but the Chinese are working on a much longer timeline with which to accomplish their goals.

The best way to understand China is to be there and speak with those with whom we have business relationships, which is exactly how we gained the following insights.

In order to get to where China is today, they required expertise that they didn’t originally have. According to Professor Paul Gillis, a former head of PwC in China turned academic at Peking University’s Guanghua School of Management, and now the pre-eminent foreign analyst in China’s accounting industry, the then big eight western accounting firms clearly saw the opportunity developing in China back in the 1980s. 

“They began building up representative offices to advise foreign firms entering China, at first often working out of hotels. By 1992, they had won the right to audit, working with Chinese partners, and were helping to develop China’s accounting standards. They pulled in all manner of outside experts to help them understand the country.”

The domination of Chinese accounting by four foreign multinationals soon became a source of annoyance in the official halls of Beijing. Paul Gillis wrote that by 2006, Ding Pingzhun, director-general of the government-aligned Chinese Institute of CPAs (CICPA), spoke of the Big Four as firms that “lord themselves arrogantly across China”. 

These firms indirectly and or directly have under their tutorship approximately 60% of the Corporate sector in China. Because of this China knows that the US is intimately familiar with China’s business internal operations (shadow banking and corruption) and thinks they may be using this knowledge to form policy to secretly undermine them and weaken them.

For this reason, China believes that the US has been planning this attack using tariffs since 2000 from the Republican administrations. The expected George W. Bush to implement tariffs during his Presidential administration, however, the attack on New York on 9/11 most likely derailed the initial opportunity. The 2008 crash most likely took away the second opportunity for Bush to apply any meaningful tariffs against China. By the time Trump came along and implimented this strategy the Chinese were not surprised as they had been expecting such a move for some time. 

The Chinese understand the recent US moves to reduce corporate taxes in order to repatriate money offshore and induce these companies to return their manufacturing bases back to the US. The Chinese also realise that an agreement between North Korea and South Korea (with the US brokering) could create a much cheaper labor base. The threat is that this could take away a lot of labour intensive industries from China.

They believe that the tariff program was put in place to try and weaken or slowdown China’s growth in manufacturing and thus their world influence. It is not a secret that China has been going after markets in the Middle East, Africa and Central America spreading their influence in order to breakaway from any stranglehold that the US may currently have on them. In addition, to facilitate this in the future China has taken on the massive development of the One Belt, One Road initiative which if successful will change the face of international trade. 

China is playing on a much longer timeline so they are prepared for some pain and suffering. In China, Xi has now solidified his position for life. China knows that the US changes party power every 4 years and is betting that the democrats get back in and reverse the Trump plan.

In order to deal with the Chinese one has to understand some important character traits. 

Of all the idiosyncrasies of Chinese culture, the concept of “Face” is perhaps most difficult for Westerns to fully grasp. And because “saving face” is such a strong motivating force in China, it’s also one of the most important concepts in understanding the Chinese Mind. It goes back centuries and appears in many Chinese sayings and proverbs. 

“Men can’t live without face, trees can’t live without bark.”

(ren hou lian, shu hou pi)

“A family’s ugliness (misfortune) should never be publicly aired”

(jai chou bu ke wai yang)

A traditional insult is to say that someone “has no face”.

(mei you mianzi)

Similarly, one of the worst things is to “lose face”.

(diu lian)

The management of “Face” goes much deeper than just impression management (or “protecting and enhancing your ego”) in the Western sense. Although nobody, regardless of culture, wants to look bad or have their ego bruised, the Chinese concept goes beyond the narrow Western concept of face (and is perhaps closer to the Arab concept of “honour”).

While an American businessperson might be respected back home for his frankness and being a “straight-shooter,” he would likely be viewed in China as uncultured, overbearing, and rude.  President Trump’s remarks against the Chinese on the world stage do not, by any means, go unnoticed by the Chinese public.

The Hutch ReportDuring Hu Jintao’s 2006 visit to the US, there were a large number of missteps on behalf of the Bush administration that were believed to be an intentional campaign to make China lose face on the international stage. If this was truly the case, the Chinese have not forgotten. 

The Hutch ReportThe current trade war should be looked at as an economic battle that could drag on for some time and not as a short term tactic on behalf of the Trump administration. They have opened up Pandora’s box. According to a recent article in the Washington Post, the tough tone on behalf of the US effectively ties Xi’s hands. 

“James Zimmerman, former chairman of the American Chamber of Commerce in China stated, 

“Getting the Chinese to the bargaining table should be all about face-saving — not a chest-thumping exercise, Xi has no choice but to stand firm and stand tall.”

Trump’s bravado approach to try to win concessions from Beijing has provoked a public fury that could ultimately derail his efforts. Although the Trump administration believes that a trade war can be won and that they are in a position to win against China, it should be perfectly clear that today’s China is a much stronger adversary on the economic, military and cyber front, than they ever were. If their back is against the wall it will only be a matter of time before “Xi hits the fan.”

The Hutch Report

The Ghostly Budget

By | Economics, Finance, Politics

It appears that the dark halls of the US Military Complex could teach Trump, Cohen and Manafort  a few things about shadow budgets and hiding money.

Anybody reading this may have come across a story that grazed a few pages a year ago. However, surprisingly it didn’t seem to make more noise among the public than it did at the time. The story involved some unsupported adjustments, or spending by the US army that amounted to roughly $21 trillion. That number is not a typo. If true, it would mean that the US army had spent an unauthorized amount that would equal the current sum of the national debt. Even though the story may not have created a very large public disturbance, it did put a few people in the Pentagon into action. We wanted to find out where the trail was leading. 

For those not familiar with the case, it all started when Dr. Mark Skidmore, a PH.D. in economics and Professor and Morris Chair in State and Local Government Finance and Policy at the Michigan State University, was listening to an interview with Catherine Austin Fitts, former assistant secretary of Housing and Urban Development. In the interview as Skidmore explained “Fitts refered to a report that had come out in 2016 by the Office of the Inspector General (responsible for providing some accountability and tracking of financial activity of the Federal Government).” The report indicated that in fiscal 2015, the US army (with a budget of roughly $122 billion) had adjustments of $6.5 trillion. Because of Dr. Skidmore’s experience and knowledge base, he had some serious doubts about the quoted figure and assumed they must have meant $6.5 billion. He looked at the report himself and to his surprise found that it was not an error. 

This prompted Dr. Skidmore to suggest to Fitts to investigate the issue further.  So during the summer, two MSU graduate students searched government websites, especially the website of the Office of Inspector General (OIG), looking for similar documents dating to 1998. What they found was far beyond what they expected to find. They found documents indicating a total $21 trillion in undocumented adjustments over the 1998-2015 period, of which $11 trillion were directly linked to the US Army.

Dr. Skidmore’s work was able to show that there was something very broken within the budget process. By October 5, 2017 they suddenly discovered that the link to the original OIG report “Army General Fund Adjustments Not Adequately Documented or Supported” of July 26, 2016 had been disabled. Within several days, the links to other OIG documents that had been identified in their search were also disabled. However, Dr. Skidmore and his team had the foresight to copy the July 2016 report and all other relevant OIG-reports in advance and re-post them (The original government documents and a report describing the issue can be found here).

On December 7, 2017, Pentagon officials announced that the Defence Department was beginning the first agency wide financial audit in its history, 

By June 2018, Dr. Skidmore wrote the following update:

“In late May 2018, a graduate student at Michigan State University found on the OIG website the most recent report for the DoD, which summarizes unsupported adjustments for fiscal year 2017. However, this document differs from all previous reports in that all the numbers relating to the unsupported adjustments were redacted. That is, all the relevant information was blacked out.”

So is this situation just over exaggerated with hyperbole and blacked out documents for more dramatic effect? Governmental departments are extraordinarily inefficient organizations. It often requires a number of documents to be signed off before one can order some additional pencils. 

Could such an inefficient department have the smarts and tools to be able to disguise such a massive amount of money from the taxpayers eyes? Well here are some other incidents which shows they never stop short of giving it their best try. 

December 5, 2016, The Washington Post reported that the Pentagon had buried an internal study that exposed $125 billion in administrative waste in its business operations amid fears Congress would use the findings as an excuse to slash the defence budget.

February 5, 2018, a leading accounting firm said in an internal audit obtained by POLITICO, that one of the Pentagon’s largest agencies couldn’t account for hundreds of millions of dollars’ worth of spending, (curiously just as President Donald Trump was proposing a boost in the military budget.)

On August 13, 2018, President Donald Trump signed a military budget boosting the Pentagon’s spending by $82 billion in the next year—a spending increase that dwarfs the entire military budgets of most other nations on Earth. (Russia, for example, will spend an estimated $61 billion on its military this year). With the increased spending included in this year’s National Defense Authorization Act (NDAA), the Pentagon will get to spend more than $700 billion next year. The budget hike was a priority for Trump and was approved by Congress as part of a March spending deal that saw spending on both defense and domestic programs hiked by about $165 billion—smashing through Obama-era spending caps.

On September 17, 2018, it was reported that the Pentagon had massively overestimated, for the second fiscal year in a row, how much its new retirement system would cost.

All that is required is a quick search of the Pentagon and their funding requirements to discover that this is a game that has gone on for a long time. There seems to be a budget for some and a black budget for others in the government.  In the end, it is the taxpayers that are flipping the bill for all the spending. In a Dec. 8 Forbes column that he co-authored with Laurence Kotlikoff, Skidmore said the “gargantuan nature” of the undocumented federal spending “should be a great concern to all taxpayers.”

The fact that these previous reports along with the revelations of Dr. Skidmore and Catherine Austin Fitts have not caused people to become enraged is surprising. This just seems to show that the general public view towards the current levels of greed and corruption are still complacent.  Although the US dollar as a reserve currency may allow the government to get away with many of their spending habits and shadow budget operations for the moment, the day it’s removed will cause some serious repercussions. 

We can already see many signs of the international community getting frustrated with strong arm tactics by the US and adjusting appropriately in order not to be held hostage anymore by the US dollar reserve status.

Reuters recently reported, 

“The U.S. dollar’s share of currency reserves reported to the International Monetary Fund fell in first quarter of 2018 to a fresh four-year low, while euro, yuan and sterling’s shares of reserves increased.” 

It is no longer a matter of if, but when.

The Hutch Report

Is a strong middle class the key to a strong economy?

By | Economics, Politics

In our previous article titled “Where did the US go off track?” The article was meant mainly to revisit Bernanke’s planned wealth effect from quantitative easing and indicate that it was an ill advised idea that put many into deeper trouble than before. The title was a general statement of wonder as opposed to identifying where the US did go off track.

This time we look at where the US went off track by identifying when the US was at its strongest and why. If we can understand where it really went off track then we can look for solutions or at least understand what kind of solutions are required.

Economies have ebbs and flows. In spite of what they teach you in economics 101 nothing is ever in equilibrium. There are just too many parts as well as internal and external influences although there are times when activity is stronger than others.  The US built one of the greatest economic powerhouses on earth after World War II, however it was already well on its way from the 1800s as it built out its infrastructure and put many to work. There was a time when the US consumed the majority of what it produced as a nation and then exported the remainder. Who was responsible for the consumption? It was the middle class. The middle class made up the majority of the population. They had jobs and respectable salaries. So what happened?

According to a research report by the Pew Research Center in 2012, “The Lost Decade of the Middle Class”they state:

“For the half century following World War II, American families enjoyed rising prosperity in every decade—a streak that ended in the decade from 2000 to 2010, when inflation-adjusted family income fell for the middle income as well as for all other income groups, according to U.S. Census Bureau data.”

The above graph shows that the 50s and 60s had the strongest middle class. In 1950 and 1951 the US had successive years of 8% GDP growth. The report also highlights how the net worth of middle income families—that is, the sum of assets minus debts— took a hit from 2001 to 2010 from the Federal Reserve’s Survey of Consumer Finances. Median net worth fell 28%, to $93,150, erasing two decades of gains. So we have a situation where consumer debt has increased over the years and incomes have fallen. There are a large number of reasons for this. The manufacturing base has shrunk as companies chose to produce goods in other countries in order to take advantage of cheap labour so they could give themselves pricing advantages. There is, what has become to be known as the “Walmartization” of America. Author John Atcheson writes, “If you want to know why the middle class disappeared and where they went, look no further than your local Walmart.  People walked in for the low prices, and walked out with a pile of cheap stuff, but in a figurative sense, they left their wages, jobs, and dignity on the cutting room floor of the House of Cheap.” Driving prices lower and lower is just a race to the bottom that erodes everyone’s quality of life.

This is just scratching the surface. There is also the invention of the 401k. We hold a total of $17.5 trillion in retirement funds – the single biggest source of money the big banks, Wall Street, and assorted other speculators use to play with.

The power of capitalism has been the freedom for entrepreneurs to create and provide value to others which has in turn provided jobs and increased wealth. However, we are now seeing that there are limits to that. The Economist recently revisited some of Karl Marx’s thinking regarding capitalism:

“Marx argued that capitalism is in essence a system of rent-seeking: rather than creating wealth from nothing, as they like to imagine, capitalists are in the business of expropriating the wealth of others. Marx was wrong about capitalism in the raw: great entrepreneurs do amass fortunes by dreaming up new products or new ways of organising production. But he had a point about capitalism in its bureaucratic form. A depressing number of today’s bosses are corporate bureaucrats rather than wealth-creators, who use convenient formulae to make sure their salaries go ever upwards. They work hand in glove with a growing crowd of other rent-seekers, such as management consultants (who dream up new excuses for rent-seeking), professional board members (who get where they are by not rocking the boat) and retired politicians (who spend their twilight years sponging off firms they once regulated).”

What country currently resembles the US of the 1950s with roughly 8% GDP growth? You probably guessed right, China. Aside from the fact that China has been handed every manufacturing job in the world from others, the result has been a growing middle class which will soon become larger than the population of the US. According to a study by consulting firm McKinsey & Company, 76 percent of China’s urban population will be considered middle class by 2022. That’s defined as urban households that earn US$9,000 – US$34,000 a year. (That might not sound like a lot, but adjusted for prices, it delivers a roughly comparable “middle class” existence to other countries.) In 2000, just 4 percent of the urban population was considered middle class.

So if building the middle class back up is to make the US stronger once again, what are some solutions? Providing better paying jobs for Americans by bringing back the manufacturing base to the US? Prices may increase but if your job is providing you a salary that enables you to afford it you may not mind. That would mean forcing US companies back to the US. That would mean providing them incentives in the form of tax breaks. We have already seen that those tax breaks are turning into stock buybacks. This is just exacerbating the situation, meaning, the government will forgo potential revenue that could have come in the form of those taxes. The tax breaks are not being used for capital investment, which would flow into the economy. The result is a larger national debt burden. How about incentivizing foreign companies to move their manufacturing to the US? Forget the financial engineering of the economy, the focus has to be on developing enterprises, but only to a point.

Companies like Amazon and Walmart have destroyed many small and medium sized companies by driving prices lower at the expense of putting many out of work. We have seen no evidence that Amazon and Walmart have created more jobs than they have destroyed. Google and Facebook have essentially taken over the advertising industry. So would it make sense to cap how large a company could grow? There are laws against monopolies and oligopolies however their political capital has become so strong that they can easily avoid these laws. However, it may make sense to break these companies up.

We can follow Marx and reduce the number of corporate bureaucrats that are sponging off the system, many of whom are found in banks. Banks are now much larger than the too big to fail era. Now they are way too big to fail. Breaking them up is currently being discussed. In fact, investment banks should be completely separated from commercial banks, or better yet community banks. Banks that serve only their communities. In this way, if investment banks makes bad decisions they are penalised by their investors, as opposed to sucking money out of their commercial counterparts in turn penalising the depositors (beware the coming bail-ins during the next financial crisis)! Regardless of the solutions implemented, it has to be accepted that they will not please everyone.