Showing posts with label Reality. Show all posts
Showing posts with label Reality. Show all posts

Sunday, December 24, 2017

So Which Is It?

(As a reminder, you can get free, real-time crypto charts in SlopeCharts).


Forty thousand dollars per bitcoin. One hundred thousand. Three hundred thousand. The predictions are as numerous as the people making them.


I don"t pretend to know which one is going to be reality, and neither should anyone else. I do find the simplified presentation of price movements during manias to be an interesting road map, however. We all know that last week cryptos went crazy, with some losing more than half their value. On Friday, and into this weekend, they are beginning to strengthen, and I suspect many crypto-bulls have heaved a sigh of relief and are comforted by the fact this was just another one of those scary downturns. They don"t say HODL for nothing, you know.


phases


The zealots, I imagine, would point to the green tinted area I"ve highlighted above as the current state of affairs. That is, we"re still in the "awareness phase", and, yeah, there was a sharp, scary selloff, but all it"s going to mean is that the pantywaists aren"t going to stick around for the man-sized gains.


Maybe. Maybe not.


To my mind, it"s also plausible that what we saw was more along the lines of the cyan-tinted zone. What happens to cryptos this week might be an important "tell" in that respect.


If prices continue to stabilize and eventually bolt past the lifetime highs we saw not long ago, it will simply egg on the crypto crowd, because it will be the umpteenth example that selloffs are temporary and, for the bold, buying opportunities. They can all get back to the game of seeing Who Can Utter The Most Outlandish Prediction.


On the other hand, if the cryptos can"t muster their way past those highs - - if, instead, they stall out, start to weaken and.......gasp.......slip before the selloff levels we witnessed late last week, it"s going to stoke the flames of fear flickering from Friday.


btc


I"m somewhat in the "Post-New Paradigm" camp, myself, and would humbly suggest comparing the price chart above (and its tint) to the earlier diagram.

Saturday, December 23, 2017

Facebook Handing Over More Info To US Government: "This Is What Facebook Was Designed To Do"

Authored by Mac Slavo via SHTFplan.com,


Every year, Facebook gets tens of thousands of requests for data from governments worldwide, including search warrants, subpoenas, or calls to restrict certain kinds of content. And, according to a new report, those requests are increasing at an alarming rate.



According to QZ.com, in the United States, the requests rose by 26% from the last six months of 2016 to the first six months of 2017, while globally, requests increased by about 21%. Since 2013, when the company first started providing data on government requests, the US number has been steadily rising - it has roughly tripled in a period of four years.


This is alarming many and causing a concern about privacy.  Joe Joseph, from the Daily Sheeple, isn’t sugarcoating the reality of Facebook either.  “Duh. This is exactly what Facebook was designed to do,” says Joseph.



“You have to remember that Zuckerberg had “seed money” and that seed money came from CIA front companies that put a lot of resources into this and…basically think about it as like, sowing seeds; if you will. They knew that Facebook was gonna bear fruit.


 


I don’t think they realized just how big it would become. But I can tell you that they get so much information and intel from social media:  I don’t think that it would go away even if we wanted it to.”



The government keeps requesting the information, and Facebook continues to comply with the government’s demands. 


In the first six months of 2013, it granted the government - which includes the police - 79% of requests (“some data was produced” in these cases, the company says); in the first six months of 2017, that share rose to 85%. “We continue to carefully scrutinize each request we receive for account data — whether from an authority in the U.S., Europe, or elsewhere — to make sure it is legally sufficient,” Chris Sonderby, the company’s general counsel, wrote in a post. “If a request appears to be deficient or overly broad, we push back, and will fight in court, if necessary.”


But Joseph thinks Facebook is just trying to pacify the easily manipulated sheeple of society.


“This is pretty troubling when you think about what you put out there, what they collect, and Facebook only being one of the many avenues that they have,” Joseph says.


 


“The United States is collecting your data. Whether you like it or not. They are scooping up everything. And they’re taking it and they’re storing it in their facility at Bluffdale, Utah which has the capacity at this time to store every communication on the face of this earth for the next one hundred years.”


 


“It’s unbelievable,” Joseph continues.  “This is stuff that is unacceptable to me, but I’m sure, to a lot of you. And these companies have really gone too far…they can reconstruct your life and make anyone they want a patsy.”










Wednesday, December 20, 2017

Exodus Starts: Millennials Ditch City Life

The urban revival of America’s core inner cities has been a decades-long failed experiment, as deindustrialization coupled with failed liberal policies have created a growing problem of inequality and violent crime. Middle-class advancement was once localized in the core of America’s cities, but that is not so much the case today, as those areas are labeled a “barbell economy,” divided between highly-paid professionals and low-skill service workers.


Brookings Institution notes as early as the 1970s, middle-class income in the inner cities started to shrink more than anywhere else. Today, in most US inner cities, the cores are more unequal than their surrounding suburbs, noted geographer Daniel Herz.


As the failed American inner city experiment nears the latter stages before a collapsing point, a new report from Time could be the final nail in the coffin for some American inner cities, as the article suggests “cities have already reached ‘Peak Millennial’ as young people begin to leave.” 



According to the latest Census data, after years of growth, the population of millennials in Boston and Los Angeles have declined since 2015, as a mass exodus from city life starts to take shape. Other cities such as Chicago, New York, and Washington, D.C., are experiencing similar issues but not as severe while growth rates of millennials plateau.


Dowell Myers, professor of demography at the University of Southern California, called the peak of the millennial population in major U.S. cities back in 2015, with the largest birth group of the cohort turning 27 this year. To note, Myers could be a far better forecaster than Dennis Gartman, but we’ll leave that for another conversation.


Myers said at the critical age of 27 and above, that is the time when the millennial generation will participate in, what we call, ‘millennial flight’ to the suburbs. Such a trend could be the final nail in the coffin for some American inner cities, who were expecting the millennial generation to lead the charge in the revival process, as what we’ve learned from Myers– that may not be the case.


The Times explains how Myers coined the term— ‘peak millennial’. Interesting, the plateauing of millennial populations are occurring in East Coast cities, while the West Coast is still drawing in young people.




To see which cities have reached “peak millennial” — a term Myers coined —we analyzed a decade of Census data through 2016. We found that while tech hubs like San Francisco and Seattle are still drawing young people, large East Coast cities, like New York and D.C., are fast approaching peak millennial, with plateauing populations of those born between 1980 and 1996.


 


And then there are cities like Boston, which already appear to have reached their peak. Boston lost roughly 7,000 millennials in 2016, after a record high of 259,000 the previous year.




In the explanation of millennial flight from America’s inner cities, Jim Rooney, president of the Greater Boston Chamber of Commerce said, “they’re doing what every generation does — they get married, start a family and think about having a backyard and looking at school systems” in the suburbs.


While that is definitely true, and what we’ve mentioned above, millennials tend to live in core inner cities, where inequality and violent crime are sometimes out of control. Also, many millennials are becoming priced out of real estate in these areas, as wage stagnation is drowning many millennials into more and more debt, on top of their already ballooning balance sheet of liabilities. Think student loans….


In Boston, the millennial peak was confirmed in 2014 through 2015, as it appears it’s all downside from here. Rooney’s findings conclude millennials in the region are being priced out of homes with the median home in Boston around $561,000, according to Zillow.



In Chicago, the millennial plateau occurred in 2014 through 2015, hitting a high of 814,000 millennials in 2015 and falling by a few hundred in 2016. Jack Lavin, president of the area’s Chamber of Commerce said millennials are moving to the suburbs to start a family— ditching urban areas. Nevertheless, the article does not mention— the out of control homicides adding to the fear of city life.



In Los Angeles, the millennial peak was confirmed in 2015, which saw a decline of about 2,500 millennials in 2016. “It’s hard for millennials to achieve a middle-class lifestyle that they think they deserve”, said Myers. With that being said, millennials are moving out.



Bottomline: The ruling elite and their inner-city playground planners who were expecting the millennial generation to revive their decades-long failed experiment are about to come to harsh terms with the reality of a millennial exodus.









Monday, December 18, 2017

Poland"s New PM Wants To "Make Europe Christian Again"

Authored by Andrew Korybko via Oriental Review,


Poland’s new Prime Minister Mateusz Morawiecki shared his dream to make Europe Christian again.



The newly appointed premier replaced Beata Szydlo and symbolizes that Poland is taking a more combative posture towards the West than in the past. While Prime Ministers undoubtedly have a very important domestic role to play too, it’s important not to overlook the international implications of Morawiecki’s appointment, especially given what he shared in his very first interview after the announcement when he said that


My dream is to re-Christianize the EU since unfortunately, in many places, people no longer sing Christmas carols, the churches are empty and are turning into museums, and this is very sad.


 


In responding to the interviewer’s comment about how the EU might cut off funding for Poland, Morawiecki proudly said thatI do remember one former president telling us earlier this year ‘you have values, we have funds.’ Well, I would love to help the West with proper values.



Rhetoric such as this would have been unimaginable a few years ago, but it just goes to show how far the intra-EU split has gone ever since Brussels and Berlin teamed up to pressure the bloc to accept the forced relocation of civilizationally dissimilar migrants.


It also speaks to the growing confidence that Poland feels nowadays in officially introducing a conservative-religious ideological vision to challenge the EU’s liberal-godless one, demonstrating how it plans to lead the “Three Seas Initiative” and advance its EuroRealist agenda. Moreover, Morawiecki’s words prove just how strongly Poland and its ruling Law & Justice Party, popularly known by its Polish abbreviation PiS, have been influenced by Hungarian Prime Minister Viktor Orban and his Fidesz party. Hungary may have been the ideological heart of the EuroRealist movement and Orban its first national figurehead in the EU, but Poland is now carrying the torch through Jaroslaw Kaczynski’s “grey cardinal” stewardship because this Central European country is actually big enough to make a real difference.


It was one thing for a landlocked nation of less than 10 million people to have this continental outlook, and another for the leader of the regional “Three Seas Initiative” and its 40 million-strong country to promote this perspective, which makes Poland an EU-wide force to be recognized because of how ideologically different its worldview is from Germany’s.


Whereas Berlin will continue pulling the purse strings and exercising its influence through economic means, Warsaw is flexing its soft power muscle by appealing to what matters most to many of the people in Central and Eastern Europe, and that’s the national identity that they fear is under threat because of Germany’s aggressive EuroLiberalism. If Poland can succeed in winning hearts and minds in the region through its religious-conservative EuroRealist ideology, then the next natural step will be to tighten the trading bonds between its “Three Seas” partners in order to generate a stronger economic basis for turning their vision into a reality.


With the right combination of soft and economic power, Poland can return to becoming one of Europe’s Great Powers, but this time with a sway that extends across the strategic “Three Seas” space and enables it to shape the continent’s 21st-century geopolitics.









Newsweek: “U.S. Government Planned False Flag Attacks to Start War”

Mainstream Media Admits that False Flags Are Real


Last month, Newsweek ran an article headlined (all caps in original Newsweek title):


U.S. GOVERNMENT PLANNED FALSE FLAG ATTACKS TO START WAR WITH SOVIET UNION, JFK DOCUMENTS SHOW



The article notes:


The U.S. government once wanted to plan false flag attacks with Soviet aircraft to justify war with the USSR or its allies, newly declassified documents surrounding the assassination of President John F. Kennedy show.


 


***


 


False flag attacks are covert operations that make it look like an attack was carried out by another group than the group that actually carried them out.



The mainstream media is finally catching up with what historians have long documented ...


After all, influential royal advisors have been advocating false flag attacks for more than 2,000 years ... and false flag attacks are so common that U.S. officials commonly discuss them.


Indeed, there are now so many admissions by government officials of false flag terror that only the willfully ignorant still doubt the reality of the concept.

Sunday, December 17, 2017

"Look At That Thing!" - The NYT Reveals The Pentagon"s Mysterious UFO Program

When tinfoil-hat-wearing conspiracy theories cross paths with massive "defense" budgets and excited politicians, "stranger things" happen.



Welcome to The Advanced Aerospace Threat Identification Program.



As The New York Times exposes, within the $600 billion annual Defense Department budgets, the $22 million spent on the program was almost impossible to find.


Which was how the Pentagon wanted it.


For years, the program investigated reports of unidentified flying objects, according to Defense Department officials, interviews with program participants and records obtained by The New York Times. It was run by a military intelligence official, Luis Elizondo, on the fifth floor of the Pentagon’s C Ring, deep within the building’s maze.


The Defense Department has never before acknowledged the existence of the program, which it says it shut down in 2012. But its backers say that, while the Pentagon ended funding for the effort at that time, the program remains in existence. For the past five years, they say, officials with the program have continued to investigate episodes brought to them by service members, while also carrying out their other Defense Department duties.


The shadowy program — parts of it remain classified — began in 2007, and initially it was largely funded at the request of Harry Reid, the Nevada Democrat who was the Senate majority leader at the time and who has long had an interest in space phenomena.


Most of the money went to an aerospace research company run by a billionaire entrepreneur and longtime friend of Mr. Reid’s, Robert Bigelow, who is currently working with NASA to produce expandable craft for humans to use in space.


And while the clapping of crony capitalism screams alod from those two last sentences, one watch of the following video (just one of many), suggests the boondoggle may be based in some kind of reality after all... (the footage from a Navy F/A-18 Super Hornet showing an aircraft surrounded by some kind of glowing aura traveling at high speed and rotating as it moves. The Navy pilots can be heard trying to understand what they are seeing. “There’s a whole fleet of them,” one exclaims. Defense officials declined to release the location and date of the incident.)



Mr. Reid, who retired from Congress this year, said he was proud of the program.


“I’m not embarrassed or ashamed or sorry I got this thing going,” Mr. Reid said in a recent interview in Nevada.


 


“I think it’s one of the good things I did in my congressional service. I’ve done something that no one has done before.”



While not addressing the merits of the program, Sara Seager, an astrophysicist at M.I.T., cautioned that not knowing the origin of an object does not mean that it is from another planet or galaxy.


“When people claim to observe truly unusual phenomena, sometimes it’s worth investigating seriously,” she said.


 


But, she added, “what people sometimes don’t get about science is that we often have phenomena that remain unexplained.”



Read more here...









Debunking The Myths About An Attack On North Korea

Submitted by The Saker,


First, the bragging dummies


Trump and Haley are still at it.  They want to force China to take action against the DPRK by threatening to take North Korea “into their hands” if China refuses to comply.  Haley said, “But to be clear, China can do more, (…) and we’re putting as much pressure on them as we can. The last time they completely cut off the oil, North Korea came to the table. And so we’ve told China they’ve got to do more. If they don’t do more, we’re going to take it into our own hands and then we’ll start to deal with secondary sanctions.”


First, let’s reset this scene in a kindergarten and replay it.


Kid A has a fight with Kid B.  Kid A threatens to beat up Kid B.  Kid B then tells Kid A to go screw himself.  Kid A does nothing, but issues more threats.  Kid B keeps laughing.  And then Kid A comes up with a brilliant plan: he threatens Kid C (who is much much bigger than Kid B and much much stronger too!) by telling him "if you don’t make Kid B comply with my demands, I will take the issue in my own hands!".  The entire schoolyard erupts in hysterical laughter.


Question: how would you the gauge the intelligence of Kid A? Anyway...


This would all be really funny if this was a comedy show.  But what this all is in reality is a slow but steady progression towards war.  What makes this even worse is the media’s obsession with the range of North Korean missiles and whether they can reach Guam or even the USA.  With all due respect for the imperial “only we matter” (and nevermind the "gooks"), there are ways “we”, i.e. the American people can suffer terrible consequences from a war in the Korean Peninsula which have nothing to do with missile strikes on Guam or the USA.



Image via The Saker


The lucrative target: Japan


This summer I mentioned one of the most overlooked potential consequences of a war with the DPRK and I want to revisit this issue again.  First, the relevant excerpt from the past article:


While I personally believe that Kim Jong-un is not insane and that the main objective of the North Korean leadership is to avoid a war at all costs, what if I am wrong?  What if those who say that the North Korean leaders are totally insane are right? Or, which I think is much more likely, what if Kim Jong-un and the North Korean leaders came to the conclusion that they have nothing to lose, that the Americans are going to kill them all, along with their families and friends?  What could they, in theory, do if truly desperate?  Well, let me tell you: forget about Guam; think Tokyo!  Indeed, while the DPRK could devastate Seoul with old fashioned artillery systems, DPRK missiles are probably capable of striking Tokyo or the Keihanshin region encompassing Kyoto, Osaka and Kobe including the key industries of the Hanshin Industrial Region.  The Greater Tokyo area (Kanto region) and the Keihanshin region are very densely populated (37 and 20 million people respectively) and contain an immense number of industries, many of which would produce an ecological disaster of immense proportions if hit by missiles.  Not only that, but a strike on the key economic and financial nodes of Japan would probably result in a 9-11 kind of international economic collapse.  So if the North Koreans wanted to really, really hurt the Americans what they could do is strike Seoul, and key cities in Japan resulting in a huge political crisis for the entire planet.  During the Cold War we used to study the consequences of a Soviet strike against Japan and the conclusion was always the same: Japan cannot afford a war of any kind.  The Japanese landmass is too small, too densely populated, to rich in lucrative targets and a war would lay waste to the entire country. This is still true today, only more so.  And just imagine the reaction in South Korea and Japan if some crazy US strike on the DPRK results in Seoul and Tokyo being hit by missiles!  The South Koreans have already made their position unambiguously clear, by the way. As for the Japanese, they are officially placing their hopes in missiles (as if technology could mitigate the consequences of insanity!).  So yeah, the DPRK is plenty dangerous and pushing them into their last resort is totally irresponsible indeed, nukes or no nukes.



Yet, for some reason, the western media rarely mentions Japan or the possible global economic consequences on a strike against Japan.  Very few people know for sure whether the North Koreans truly have developed a usable nuclear weapon (warhead and missile) or whether the North Korean ballistic missile truly can reach Guam or the USA.  But I don’t think that there is any doubt whatsoever that North Korean missile can easily cover the roughly 1000km (600 miles) to reach the heart of Japan.  In fact, the DPRK has already lobbed missiles over Japan in the past.  Some red blooded US Americans will, no doubt, explain to use that the US THAAD system can, and will, protect South Korea and Japan from such missile strikes.  Others, however, will disagree.  We won’t know until we find out, but judging by the absolutely dismal performance of the vaunted US Patriot system in the Gulf War,  I sure would not place my trust in any US made ABM system.  Last, but not least, the North Koreans could place a nuclear device (not even a real nuclear warhead) on a regular commercial ship or even a submarine, bring it to the coast of Japan and detonate it.  The subsequent panic and chaos might end up costing even more lives and money than the explosion itself.


Then there is Seoul, of course.  US analyst Anthony Cordesman put is very simply “A battle near the DMZ, directed at a target like Seoul, could rapidly escalate to the point at which it threatened the ROK’s entire economyeven if no major invasion took place."


[Sidebar: Cordesman being Cordesman, he proceeds to hallucinate about the effects of a DPRK invasion of the ROK and comes up with sentences such as “Problems drive any assessment of the outcome of a major DPRK invasion of the ROK, even if one only focuses on DPRK- ROK forces. The DPRK has far larger ground forces, but the outcome of what would today be an air – land battle driven heavily by the overall mobility of DPRK land forces and their ability to concentrate along given lines of advance relative to the attrition technically superior ROK land and air forces could inflict is impossible to calculate with any confidence, as is the actual mix of forces both sides could deploy in a given area and scenario“.  Yup, the man is seriously discussing AirLand battle concepts in the context of a DPRK invasion of the South!  He might as well be discussing the use of Follow-on-Forces Attack concept in the context of a Martian invasion of earth (or an equally likely Russian invasion of the Baltic statelets!).  It is funny and pathetic how a country with a totally offensive national strategy, military doctrine and force posture still feels the need to hallucinate some defensive scenarios to deal with the cognitive dissonance resulting from clearly being the bad guy.]



Why does Cordesman say that?  Because according to a South Korean specialist “DPRK artillery pieces of calibers 170mm and 240mm “could fire 10,000 rounds per minute to Seoul and its environs.”   During the war in Bosnia the western press spoke of “massive Serbian artillery strikes on Sarajevo” when the actual rate of fire was about 1 artillery shell per minute.  It just makes me wonder what they would call 10,000 rounds per minute.


The bottom line is this: you cannot expect your enemy to act in a way which suits you; in fact you should very much assume that he is going to do what you do not expect and what is the worst possible for you.  And, in this context, the DPRK has many more options than shooting an ICBM at Guam or the USA.  The nutcases in the Administration might not want to mention it, but an attack on the DPRK risks bringing down both the South Korean and the Japanese economies with immediate and global consequences: considering that rather shaky and vulnerable nature of the international financial and economic system, I very much doubt that a major crisis in Asia would not result in the collapse of the US economy (which is fragile anyway).


We should also consider the political consequences of a war on the Korean Peninsula, especially if, as is most likely, South Korea and Japan suffer catastrophic damage.  This situation could well result in such an explosion of anti-US feelings that the US would have to pack and leave from the region entirely.


How do you think the PRC feels about such a prospect?  Exactly.  And might this not explain why the Chinese are more than happy to let the USA deal with the North Korean problem knowing full well that one way or another the USA will lose without the Chinese having to fire a single shot?


The terrain


Next I want to re-visit a threat which is discussed much more often: North Korean artillery and special forces.  But first, I ask you to take a close look at the following three maps of North Korea:





These full-size maps can be downloaded from here.


What I want you to see is that the terrain in North Korea is what the military call “mixed terrain”.  The topography of North Korea article in Wikipedia actually explains this very well:


The terrain consists mostly of hills and mountains separated by deep, narrow valleys. The coastal plains are wide in the west and discontinuous in the east.  Early European visitors to Korea remarked that the country resembled “a sea in a heavy gale” because of the many successive mountain ranges that crisscross the peninsula. Some 80 percent of North Korea’s land area is composed of mountains and uplands, with all of the peninsula’s mountains with elevations of 2,000 metres (6,600 ft) or more located in North Korea. The great majority of the population lives in the plains and lowlands.



Being from Switzerland I know this kind of terrain very well (it’s what you would see in the Alpine foothills called “Oberland” or “Préalpes”) and I want to add the following: dense vegetation, forests, rivers and creek with steep banks and rapid currents.  Small villages and *a lot* of deep, underground tunnels. There are also flat areas in North Korea, of course, but, unlike Switzerland, they are composed mostly of rice fields and marshes.  In military terms this all translates into one simple and absolutely terrifying word: infantry.


Why should the word infantry scare so much? Because infantry means on foot (or horses) with very little airpower (AA and MANPADS), satellites (can’t see much), armor (can’t move around), gunships, submarines or cruise missiles can do.  Because infantry means “no lucrative targets” but small, dispersed and very well hidden forces.  Company and even platoon-level warfare.  Because infantry in mixed terrains means the kind of warfare the US Americans fear most.


The adversary


And with that in mind, let’s repeat that besides its huge regular armed forces (about a million soldiers plus another 5 million plus in paramilitary organizations) the DPRK also has 200,000 special forces.   Let’s assume that the Western propaganda is, for once, saying the truth and that the regular armed forces are poorly equipped, poorly trained, poorly commanded and even hungry and demotivated (I am not at all sure that this is a fair assumption, but bear with me).  But spreading that amount of soldiers all over the combat area would still represent a huge headache, even for “the best and most powerful armed forces in history” especially if you add 200,000 well-trained and highly motivated special forces to the mix (I hope that we can all agree that assuming that special forces are also demotivated would be rather irresponsible).  How would you go about finding out who is who and where the biggest threat comes from? And consider this: it would extremely naive to expect the North Korean special forces to show up in some clearly marked DPRK uniforms.  I bet you that a lot of them will show up in South Korean uniforms, and others in civilians clothes.  Can you imagine the chaos of trying to fight them?


You might say that the North Koreans have 1950"s era weapons.  So what?  That is exactly what you need to fight the kind of warfare we are talking about: infantry in mixed terrains.  Even WWII gear would do just fine.  Now is time to bring in the North Korean artillery.  We are talking about 8,600 artillery guns, and over 4,800 multiple rocket launchers (source).  Anthony Cordesman estimates that there are 20,000 pieces in the “surrounding areas” of Seoul.  That way is more than the US has worldwide (5,312 according to the 2017 “Military Balance”, including mortars).  And keep in mind that we are not talking about batteries nicely arranged in a flat desert, but thousands of simple but very effective artillery pieces spread all over the “mixed terrain” filled with millions of roaming men in arms, including 200,000 special forces.  And a lot of that artillery can reach Seoul, plenty enough to create a mass panic and exodus.


Think total, abject and bloody chaos


So when you think of a war against North Korea, don’t think “Hunt for Red October” or “Top Gun”.  Think total, abject and bloody chaos.  Think instant full-scale FUBAR.  And that is just for the first couple of days, then things will get worse, much worse.  Why?


Because by that time I expect the North Korean Navy and Air Force to have been completely wiped-off, waves after waves of cruise missiles will have hit an X number of facilities (with no way whatsoever to evaluate the impact of these strikes, but nevermind that) and the US military commanders will be looking at the President with no follow-up plan to offer.  As for the North Koreans, by then they will just be settling in for some serious warfare, infantry-style.


There is a better than average that a good part of the DPRK elites will be dead.   What is sure is that the command and control of the General Staff Department over many of its forces will be if not lost, then severely compromised.  But everybody will know that they have been attacked and by whom.  You don’t need much command and control when you are in a defensive posture in the kind of terrain were movement is hard to begin with.  In fact, this is the kind of warfare where “high command” usually means a captain or a major, not some faraway general.


You might ask about logistics?  What logistics I ask you? The ammo is stored nearby in ammo dumps, food you can always get yourself and, besides, its your home turf, the civilians will help.


Again, no maneuver warfare, no advanced communications, no heavy logistical train – we are talking about a kind of war which is much closer to WWII or even WWI than Desert Storm.


[Sidebar: as somebody who did a lot of interesting stuff with the Swiss military, let me add this: this kind of terrain is a battlefield were a single company can stop and hold an entire regiment; this is the kind of terrain where trying to accurately triangulate the position of an enemy radio is extremely hard; this is the kind of terrain where only horses and donkeys can carry heavy gear over narrow, zig-zagging, steep paths;  entire hospitals can be hidden underground with their entrance hidden by a barn or a shed; artillery guns are dug in underground and fire when a thick reinforced concrete hatch is moved to the side, then they hide; counter-battery radar hardly works due to bouncing signals; radio signals have a short range due to vegetation and terrain; weapon caches and even company size forces camps can only be detected by literally stepping on them; underground bunkers have numerous exits; air-assault operations are hindered by the very high risk of anti-aircraft gunfire or shoulder-fired missiles which can be hidden and come from any direction.  I could go on and on but I will just say this: if you want to defeat your adversary in such a terrain there is only one technique which works: you do what the Russians did in the mountains in southern Chechnia during the second Chechen war – you send in your special forces, small units on foot, and you fight the enemy on his own turf.  That is an extremely brutal, dangerous and difficult kind of warfare which I really don’t see the Americans doing.  The South Koreans, yes, maybe. But here is where the number game also kicks in: in Chechnia the Russians Spetsnaz operated in a relatively small combat zone and they had the numbers.  Now look at a map of North Korea and the number of North Korean special forces and tell me – do the South Koreans have the manpower for that kind of offensive operations?  One more thing: the typical US American reaction to such arguments would be “so what, we will just nuke them!".  Wrong.  Nuke them you can, but nukes are not very effective in that kind of terrain, finding a target is hard to begin with, enemy forces will be mostly hidden underground and, finally, you are going to use nukes to deal with company or platoon size units?!  Won’t work.]



If you think that I am trying to scare you, you are absolutely correct. I am.  You ought to be scared.  And notice that I did not even mention nukes.  No, not nuclear warheads in missiles.  Basic nuclear devices driven around in common army trucks.  Driven down near the DMZ in peacetime amongst thousands of other army trucks and then buried somewhere, ready to explode at the right time.  Can you imagine what the effect of a “no-warning” “where did it come from?” nuke might be on advancing US or South Korean forces?  Can you imagine how urgent the question “are there any more?” will become?  And, again, for that the North Koreans don’t even need a real nuclear weapon.  A primitive nuclear device will be plenty.


I can already hear the die-hard “rah-rah-rah we are number 1!” flag-wavers dismissing it all saying “ha! and you don’t think that the CIA already knows all that?”.  Maybe they do and maybe they don’t – but the problem is that the CIA, and the rest of the US intelligence community, has been so hopelessly politicized that it can do nothing against perceived political imperatives.  And, frankly, when I see that the US is trying to scare the North Koreans with B-1B and F-22s I wonder if anybody at the Pentagon, or at Langely, is still in touch with reality.  Besides, there is intelligence and then there is actionable intelligence. And in this case knowing what the Koreans could do does not at all mean know what to do about it.


Speaking of chaos – do you know what the Chinese specifically said about it?


Can you guess?


That they will “not allow chaos and war on the peninsula."


Enter the Chinese


Let’s talk about the Chinese now.  They made their position very clear: “If North Korea launches an attack that threatens the United States then China should stay neutral, but if the United States attacks first and tries to overthrow North Korea’s government China will stop them."  Since there is no chance at all of a unprovoked North Korean attack on the South or the USA, especially with this threat by the Chinese to remain neutral if the DPRK attacks first, let’s focus on the 2nd part of the warning.



What could the Chinese do if the US decides to attack North Korea?  There basic options depend on the nature of the attack:


  1. If the US limits itself to a combination of missile and airstrikes and the DPRK retaliates (or not), then the Chinese can simply provide technical, economic and humanitarian aid to the DPRK and denounce the US on a political level.

  2. If the USA follow up with a land invasion of some kind or if the DPRK decides to retaliate in a manner which would force the USA into a land invasion of some kind, then the Chinese could not only offer directly military aid, including military personnel, but they could also wait for the chaos to get total in Korea before opening a 2nd front against US forces (including, possibly, Taiwan).

That second scenario would create a dangerous situation for China, of course, but it would be even far more dangerous for US forces in Asia who would find themselves stretched very thin over a very large area with no good means to force either adversary to yield or stop.  Finally, just as China cannot allow the USA to crush North Korea, Russia cannot allow the USA to crush China.  Does that dynamic sound familiar?  It should as it is similar to what we have been observing in the Middle-East recently:


  1. Russia->Iran->Hezbollah->Syria

  2. Russia->China->DPRK

This is a very flexible and effective force posture where the smallest element is at the forefront of the line-up and the most powerful one most removed and at the back because it forces the other side to primarily focus on that frontline adversary while maximizing the risks of any possibly success because that success is likely to draw in the next, bigger and more powerful adversary.


Conclusion: preparing for genocide


The US has exactly a zero chance of disarming or, even less so, regime changing the DPRK by only missile and airstrikes.  To seriously and meaningfully take the DPRK “in their hands” the US leaders would need to approve of a land invasion.  However, even if that is not the plan, if the DPRK decides to use its immense, if relatively antiquated, firepower to strike at Seoul, the US will have no choice to move in ground forces across the DMZ.  If that happens about 500,000 ROK troops backed by 30,000 US military personnel will face about 1 million North Korea soldiers backed by 5 million paramilitaries and 200,000 special forces on a mix terrain battlefield which will require an infantry-heavy almost WWII kind of military operations.  By definition, if the USA attacks the DPRK to try to destroy its nuclear program such an attack will begin by missile and air strikes on DPRK facilities meaning that the USA will immediately strike at the most valuable targets (from the point of view of the North Koreans of course).  This means that following such an attack the US will have little or no dissuasive capabilities left and that means that following such an attack the DPRK will have no incentive left to show any kind of restraint.  In sharp contrast, even if the DPRK decides to begin with an artillery barrage across the DMZ, including the Seoul metropolitan area, they will still have the ability to further escalate by either attacking Japan or by setting off a nuclear device.  Should that happen there is an extremely high probability that the USA will either have to “declare victory and leave” (a time-honored US military tradition) or begin using numerous tactical nuclear strikes.  Tactical nuclear strikes, by the way, have a very limited effectiveness on prepared defensive position in mixed terrain, especially narrow valleys.  Besides, targets for such strikes are hard to find.  At the end of the day, the last and only option left to the USA is what they always eventually resort to would be to directly and deliberately engage in the mass murder of civilians to “break the enemy’s will to fight” and destroy the “regime support infrastructure” of the enemy’s forces (another time-honored US military tradition stretching back to the Indian wars and which was used during the Korean war and, more recently, in Yugoslavia).  Here I want to quote an article by Darien Cavanaugh in War is Boring:


On a per-capita basis, the Korean War was one of the deadliest wars in modern history, especially for the civilian population of North Korea. The scale of the devastation shocked and disgusted the American military personnel who witnessed it, including some who had fought in the most horrific battles of World War II (…).  These are staggering numbers, and the death rate during the Korean War was comparable to what occurred in the hardest hit countries of World War II. (…)  In fact, by the end of the war, the United States and its allies had dropped more bombs on the Korean Peninsula, the overwhelming majority of them on North Korea, than they had in the entire Pacific Theater of World War II.


“The physical destruction and loss of life on both sides was almost beyond comprehension, but the North suffered the greater damage, due to American saturation bombing and the scorched-earth policy of the retreating U.N. forces,” historian Charles K. Armstrong wrote in an essay for the Asia-Pacific Journal.  “The U.S. Air Force estimated that North Korea’s destruction was proportionately greater than that of Japan in the Second World War, where the U.S. had turned 64 major cities to rubble and used the atomic bomb to destroy two others. American planes dropped 635,000 tons of bombs on Korea—that is, essentially on North Korea—including 32,557 tons of napalm, compared to 503,000 tons of bombs dropped in the entire Pacific theatre of World War II.”  As Armstrong explains, this resulted in almost unparalleled devastation.  “The number of Korean dead, injured or missing by war’s end approached three million, ten percent of the overall population. The majority of those killed were in the North, which had half of the population of the South; although the DPRK does not have official figures, possibly twelve to fifteen percent of the population was killed in the war, a figure close to or surpassing the proportion of Soviet citizens killed in World War II.”


 


Twelve to fifteen percent of the entire population was murdered by US forces in Korea during the last war (compare these figures to the so-called ‘genocide’ of Srebrenica!).  That is what Nikki Haley and the psychopaths in Washington DC are really threatening to do when they speak of taking the situation “in their own hands” or, even better, when Trump threatens to “totally destroy” North Korea.  What Trump and his generals forget is that we are not in the 1950"s but in 2017 and that while the Korean War and a negligible economic impact on the rest of the planet, a war the middle of Far East Asia today would have huge economic consequences.  Furthermore, in the 1950"s the total US control over the mass media, at least in the so-called “free world” made it relatively easy to hide out the murderous rampage by US-lead forces, something completely impossible nowadays.  The modern reality is that irrespective of the actual military outcome on the ground, any US attack on the DPRK would result is such a massive loss of face for the USA that it would probably mark the end of the US presence in Asia and a massive international financial shock probably resulting in a crash of the currently already fragile US economy.  In contrast, China would come out as the big winner and the uncontested Asian superpower.



All the threats coming out of US politicians are nothing more than delusional hot air.  A country which has not won a single meaningful war since the war in the Pacific and whose Army is gradually being filled with semi-literate, gender-fluid and often conviction or unemployment avoiding soldiers is in no condition whatsoever to threaten a country with the wide choice of retaliatory options North Korea has.  The current barrage of US threats to engage in yet another genocidal war are both illegal under international law and politically counter-productive.  The fact is that the USA is unlikely to be able to politically survive a war against the DPRK and that it now has no other option than to either sit down and seriously negotiate with the North Koreans or accept that the DPRK has become an official nuclear power.


 









Wednesday, December 13, 2017

How GDP Became A Joke, In One Chart

For all the rhetoric about above-trend US growth, one month ago UBS shattered the narrative of surging GDP by showing just one chart, which revealed that excluding contributions from energy investment, which are about to hit a brick wall now that the price of oil has peaked and is reverting lower once again, US growth for the past 2 years has been slowing.



On the other hand, things get even more complicated thank to a chart released yesterday by UBS" global chief economist Paul Donovan who makes a point we have repeatedly underscored over the past decade, namely that economic data is largely worthless, and any instant snapshot reveals more about the political and "goalseeking" climate of the agency releasing the "data" than about the underlying economy itself.


As Donovan shows, here are the no less than 6 answers one gets to the question of "how fast was the US growing at the start of 2015?."


By way of context, recall that this was the quarter when the US was blanketed by deep snow, and when every "expert" was rushing to convince those who bothered to listen that the economy would suffer a sharp slowdown as a result of the weather and nothing but the weather (and yes, that included UBS). And when the number was first reported, that was indeed the case: with Q1 2015 GDP reportedly growing only 0.2%. The problem is that within just over a year, that 0.2% initial GDP print turned to -0.7%, before subsequently surging to 2% and ultimately 3.2%!



Here is the sarcastic take of UBS" own chief economist on this GDP travesty, which is even more sarcastic  - and ironic - considering his entire job is to predict the exact number associated with said travesty:








Economic data is not very precise. Economists are trying to hit a target that is moving rapidly. Economic data is being revised more often, and the revisions are larger than in the past. The following chart shows annualized US GDP growth in the first quarter of 2015.


 


Growth was initially reported very weak, below consensus and barely moving. Then the data was revised to show the US economy was shrinking – and shrinking a lot (the number was –0.7% annualized). Then it was revised to show the economy was shrinking a bit. Then it was revised to show the economy was growing, but a long way below trend growth.


 


The growth number was then revised to be basically in line with trend growth. Now, US growth at the start of 2015 is thought to be 3.2%.


 


So which number in the range of –0.7% to 3.2% is the economist supposed to be forecasting? An economist predicting 3.2% growth when the data was first released would have been ridiculed. According to the latest information we have, that economist would have been right.



In other words, that terrible weather which at the time was used to justify why the economy ground to a halt - when in reality it was all a function of China"s credit impulse crashing - would eventually serve as a the catalyst to grow the economy at a pace that has been recorded on just a handful of occasions in the past decade.


No wonder then economists - especially those who work at the Fed but all of them really - their predictions and their analyses have become the butt of all jokes; and by implication, no wonder traders and algos no longer respond to economic "data."









Sunday, December 10, 2017

Pentagon To Undergo First Ever Audit After Decades Of Sloppy Accounting And Missing Trillions

After decades of waste, overpayments, trillions of missing or improperly accounted for dollars, and most recently losing track of 44,000 US soldiers, the Pentagon is about to undergo its first audit in history conducted by 2,400 auditors from independent public accounting firms to conduct reviews across the Army, Navy, Air Force and more - followed by annual audits going forward. 



Secretary of Defense Jim Mattis speaks with DoD Comptroller David L. Norquist, June 15, 2017


The announcement follows a May commitment by Pentagon comptroller David Norquist, who previously served as the CFO at the Department of Homeland Security when the agency performed its audit. "Starting an audit is a matter of driving change inside a bureaucracy that may resist it," Norquist told members of the Armed Services Committee at the time when pressed over whether or not he could get the job done at the DHS. 


According to the DoD release








The audit is massive. It will examine every aspect of the department from personnel to real property to weapons to supplies to bases. Some 2,400 auditors will fan out across the department to conduct it, Pentagon officials said.


 


"It is important that the Congress and the American people have confidence in DoD"s management of every taxpayer dollar," Norquist said. -defense.gov



The Pentagon is no stranger to criticism over serious waste and purposefully sloppy accounting.  A DoD Inspector General"s report from 2016 - which appears to be unavailable on the DoD website (but fortunately WAS archived)- found that in 2015 alone a staggering $6.5 trillion in funds was unaccounted for out of the Army"s budget, with $2.8 trillion in "wrongful adjustments" occurring in just one quarter.


In 2015, the Pentagon denied trying to shelve a study detailing $125 billion in waste created by a bloated employee counts for noncombat related work such as human resources, finance, health care management and property management. The report concluded that $125 billion could be saved by making those operations more efficient. 


On September 10th, 2001, Secretary of Defense Donald Rumsfeld announced that "According to some estimates we cannot track $2.3 trillion in transactions," after a Pentagon whistleblower set off a probe. A day later, the September 11th attacks happened and the accounting scandal was quickly forgotten.


And twenty years before that, DoD analyst Franklin C. Spinney exposed what he called "accounting games," saying "Those numbers are pie in the sky. The books are cooked routinely year after year." In a 2002 testimony before the House Committee on Government Reform, Spinney laid out the DoD"s accounting quagmire of un-auditable books and budget projections which don"t match reality. 



Franklin Spinney, 2002


Finally, those of us old enough to remember the 80"s, let"s not forget the bombshell report on overpayments the Pentagon made for simple items, such as $37 screws, $7,622 coffee makers, and $640 toilet seats which Sen. William Roth Jr (R-DE) was able to whittle down to $200


The announcement of the audit comes amid a looming government shutdown battle which was given a two-week extension last week until December 22. If this occurs, military personnel would report to work as usual, but the DoD would not pay them until the shutdown ends. 


 "I cannot emphasize too much how destructive a shutdown is," Norquist said. "We"ve talked before about the importance of maintenance on weapons systems and others, but if it"s not an excepted activity, there"ll be work stoppage on many of those maintenance functions."


With both parties standing to lose more than gain from a shutdown, that is unlikely to happen. Meanwhile, with decades of lost confidence in the Pentagon"s accounting practices, we eagerly await the results of this "massive" audit to see exactly how much dirt - and where - previous administrations have swept under the rug.









The Zealous Pursuit Of State-Sponsored Collapse

Authored by EconomicPrism"s MN Gordon via Acting-Man.com,


When Bakers Go Fishing


Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.



From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]


 


Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window.  The grease shines and smells of something fierce.  The layers of government grime also drip and ooze into every crack and crevice of the economy.


These days, for example, it is impossible to carry out a simple private transaction with your barber or barista without some form of government interference.  Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line?  Has your barista’s espresso bean grinder passed city health inspection?


Is the hot Cup of Joe served in a paper cup of appropriate recycled material composition?  Did the hot beverage exceed the legally accepted temperature standard?  Did state and local governments receive their tax exaction upon payment?


 



The licensing racket – left panel: the basic definition of the racket; middle panel: how long it takes and what it costs to obtain licenses for assorted jobs in the US; right panel: the inexorable growth of rules and regulations. One shouldn’t be surprised that the pace of real economic growth has steadily declined since peaking in the late 19th century (or if one wants to focus on the modern era, since it peaked not too long after WW2). From money supply inflation to regulatory inflation, Leviathan has undermined the economy at every turn by inflating all the stuff we definitely don’t need more of. The pretense is that this is needed to “protect” us (for instance, last year the police courageously protected the citizens of Georgia from the dangers of an unlicensed lemonade stand by arresting its 14-year old female proprietor). Let us be clear: No-one will be allowed to terrorize the community by running an unlicensed lemonade stand or engaging in the high crimes of dispensing unlicensed manicures and haircuts. [PT] – click to enlarge.


 


When it comes to more complicated matters, where real money’s on the line, government interference is an absolute disgrace.  Did you know that it costs 10 times more to have an appendectomy in the United States than in Mexico?  Is the procedure 10 times better?


Obviously, this is nothing new.  Governments have been regulating and impressing their fingerprints all over commerce since society first granted its leaders the opportunity.  People are so accustomed to it that they accept government intervention as necessary to better their lives.


When it comes to price fixing, wage controls, and dictating oil production, things quickly go haywire.  This is because prices, wages, and resources have their own independent relationships beyond what can be legislated.


When the price of a certain good or commodity is artificially fixed below its natural equilibrium, scarcity and shortages follow.  In short, when the price of bread is decreed below the cost of the wheat that goes into it, bakers go fishing.



The scourge of occupational licensing [PT]


 


Credit Market Intervention


Perhaps the most nefarious of all government intervention, is that which directly affects a nation’s money stock.  Many people don’t recognize its occurrence.  But they do misdiagnose its effects.


Wage stagnation, for instance, is often blamed on greedy executives off-shoring their production.  In reality, this is merely a consequence of a forced monetary regime that inhibits genuine capital formation and earned savings in favor of asset price inflation. Of course, only a complete killjoy would bother scratching below the surface to uncover such minutiae.


Without question, the last decade has brought forth some of the craziest monetary policy experiments in human history.  If you recall, the Federal Reserve dropped the federal funds rate to near zero in December 2008, and kept it there until December 2015 – exactly seven years.


Since then, the Fed has hiked the federal funds rate four times – 0.25 percent each time – bringing the federal funds rate up to 1.25 percent. The Federal Open Market Committee (FOMC) meets on December 12 and 13, and will likely raise the federal funds rate another 0.25 percent.


It is also anticipated that the Fed will raise rates three times in 2018, assuming financial markets and the economy don’t break down before they can accomplish this.


 



Broad true money supply TMS-2 and the federal funds rate – a mountain of money was created, and it is an apodictic certainty that is has not made us one iota more prosperous – quite the contrary. [PT] – click to enlarge.


 


Concurrent with the Fed’s interest rate raising efforts, they’ve also begun to reduce their balance sheet.  They’re selling some of the roughly $3.6 trillion in Treasury and mortgage-backed securities purchased as part of their Quantitative Easing program. This reversal of the Federal Reserve’s Quantitative Easing program reduces the pool of available credit in the financial system.


It doesn’t take much imagination to visualize the effect this will have on an economy and financial markets that are wholly addicted to cheap and abundant credit.  So where does the GOP’s tax bill fall within this landscape?


 


The Zealous Pursuit of State-Sponsored Collapse


Here we turn to David Stockman, former Director of the Office of Management and Budget under President Reagan.  Stockman’s more than four decades of in-the-trenches experience, study, and contemplation of taxes, budgets, and deficits, and how these all influence and affect the economy, is unrivaled. As he explains:


“All tax cuts are not created equal.  Their impact for good or ill depends on: (1) which taxes are cut; (2) how the revenue loss is financed; (3) when they occur in the business cycle; and (4) how they impact that nation’s underlying fiscal posture.


 


“Our point today is that the GOP gets an “F” on all four components of the test.  That’s because a deficit-financed tax cut is never a good idea, but is especially counter-productive if done late in the business cycle in the face of a structural deficit that is high and rising (owing to inexorable demographic pressures on entitlement spending); and in the teeth of an unprecedented cycle of monetary contraction, which is exactly what the Fed’s interest rate normalization and balance sheet shrinkage (QT or quantitative tightening) amounts to.”



 



David Stockman, former budget director in the Reagan administration – which he quit when it ignored his admonishments on its massive spending. [PT]


 


To clarify, if you’ve been out of school for a while, “F” stands for fail.  Most notably, financing tax cuts with money borrowed from the future is doomed to fail.  Hence, the great GOP tax cuts represent but another fail milestone in the zealous pursuit of state-sponsored collapse.


 



As an aside, since last week, when we declared buying bitcoin above $11,000 to be an action for idiots, bitcoin has spiked up above $19,000.  That represents more than a 70 percent increase in just one week.  Nonetheless, we stand behind our claim.  We also stand behind our claim that sometimes idiots get rich – click to enlarge.


 


We should point out that the spike to $19,000+ in BTC was confined to the Coinbase exchange, where a huge premium developed during the trading day. It was not replicated at any of the other exchanges, where BTC peaked just below $16,000. This is mainly a sign of inefficiencies at said exchange (BTC routinely trades at a premium there, but it is usually much smaller). It took a while for arbitrageurs to bring the premium back down, but they succeeded eventually. [PT]


 









Thursday, November 30, 2017

Meanwhile, South Korean Industrial Production Crashes

With South Korean stocks soaring in the face of nukes from their northern neighbor and a credit-crunching China, it appears the South Korean economy just caught down to reality...


South Korean Industrial Production crashed 5.9% YoY in October - the biggest plunge since Feb 2013 - driven by a 17.5% collapse in auto production.



Economists had forecast a 3.0% surge in IP this month.


Of course, for the rampant buyers of South Korean stocks, none of that matters...










Corporate Tax Cuts: "The Seen & The Unseen"

Authored by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,


Since Donald Trump was elected President, the S&P 500 has rallied over 21% or nearly 500 points. In our opinion, a good portion of the gain is attributable to his promise, as well as congressional efforts, to reform the tax code. In particular, the proposed sharp reduction in the corporate tax rate has the equity market’s attention. At first blush, the simple logic driving equity investors appears reasonable.


Appearances, however, can be deceiving, and history is littered with failed investors that banked on a faulty thesis. As such, instead of tripping head first into that same category, we decided to assume nothing and look at the proposed reduction in the corporate tax rate and historical data to better understand how the legislation might affect the economy and corporate earnings.


Corporate Tax Rates


The graph below highlights the statutory and effective corporate tax rates since 1947.



Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)


The statutory tax rate is the legally mandated rate at which corporate profits are taxed. As shown above, the rate has been consistent over the last 75 years except for one significant change as a result of the Tax Reform Act of 1986.


The effective corporate tax rate is the actual tax rate companies’ pay. One can think of the statutory rate as similar to the MSRP sticker price on a new car. It provides guidance on cost but consumers always pay something less. The effective tax rate, like the “discounted” price one pays for a car, is the actual percentage of profits that corporations remitted to the government. This rate is calculated by dividing a company’s tax payments by their pre-tax profit. Deductions of all sorts reduce the pre-tax profit, thus creating a difference between the statutory and effective tax base and therefore the amount paid. For purposes of this article, we aggregate corporate tax receipts and corporate profits to calculate an effective rate for all corporations.


From 1947 to 1986 the statutory corporate tax rate was 49% and the effective tax rate averaged 36.4% for a difference of 12.6%. From 1987 to present, after the statutory tax rate was reduced to 39%, the effective rate has averaged 28.1%, 10.9% lower than the statutory rate.


Based on this simple analysis thus far, it is easy to understand why equity investors are giddy over a sizeable reduction in the corporate tax rate. If the statutory rate is reduced to 20% as proposed, and the effective rate remains 10% lower, the amount of money corporations pay in taxes will be reduced sharply. Based solely on this assumption, corporate after-tax profits, in year one alone, should increase by almost $200 billion while federal corporate tax receipts will be reduced by the same amount. Such a boost in corporate earnings would increase the forecasted internal rate of return (IRR) on the S&P 500 by approximately .90%.  Holding everything else constant this equates to a price increase of 285 points for the S&P 500 or an 11% gain from today’s level. It is impossible to assess how much of the gain since the election is due to tax reform expectations and how much is due to other factors, but we wager a good portion of it has been based on the promise of tax reform.


History


While the math and logic above seem sound, we can turn to historical data to understand the relationship between taxes and economic growth and profits. In doing this, we can better forecast the actual effects that lower corporate taxes might have on economic growth and corporate profits.


The graph below compares the effective corporate tax rate to the running three-year average GDP growth rate. The dotted trend lines smooth the data to allow for a clearer comparison.



Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)


As is clearly observable, GDP has trended lower at a very similar pace as the effective corporate tax rate. The graph below puts the data in a scatter plot format to evaluate the statistical relationship between corporate tax rates and economic growth rates.



Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)


The R² shown above (.3552), a statistical measure of correlation, is far from perfect, but there is a reason to believe that lower effective tax rates may partially explain the weakening trend in GDP growth.  Based on statistical regression, every 1% decrease in the effective tax rate should diminish GDP growth by 0.12%. 


The President, his economic team, and lawmakers are selling the tax bill with claims that a reduction in corporate taxes will boost economic growth. Based on data from the last 75 years, that has never been the case. In fact, the average annualized GDP growth rate in the five years before the major statutory tax reduction in 1986 was 3.90%. In the five years following the tax cut, the average annualized growth was reduced by more than half to 1.93%.


Next, we show a scatter plot comparing effective tax rates to corporate profits.



Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)


As measured by a R² of .051, the graph above shows that over the last 75 years, there has been no measurable relationship between effective corporate tax rates and corporate profit growth.


Who Pays


The historical evidence above tells a different story than the bill of goods being sold to citizens and investors.


 Corporate tax rates are positively correlated with economic growth which means that lower corporate tax rates equate to slower economic growth. Further, there is strong evidence that corporate profits are largely unaffected by tax rates.


Investors buying based on the benefits of the tax proposal appear shortsighted. They value the benefits of corporate tax cuts, but they are grossly negligent in recognizing how the tax cuts will be funded.  


The tax bill, as it is currently proposed, will increase the deficit by $1.5 trillion over ten years. As such, the government will borrow an additional $1.5 trillion on top of current projections of approximately $1 trillion per year.


When the government borrows money to fund a fiscal deficit they effectively crowd out investment that could have funded the real economy. Said differently, the money required to fund the government’s deficit cannot be invested in the pursuit of innovation, improving workers skills, or other investments that pay economic dividends in the future. As we have discussed on numerous occasions, productivity growth drives economic growth over the longer term. Therefore, a lack productivity growth slows economic growth and ultimately weighs on corporate earnings.


A second consideration is that the long-term trend lower in the effective corporate tax has also been funded in part with personal tax receipts. In 1947, total personal taxes receipts were about twice that of corporate tax receipts. Currently, they are about four times larger. The current tax reform bill continues this trend as individuals in aggregate will pay more in taxes.


As personal taxes increase, consumers who account for approximately 70% of economic activity, have less money to spend.


Summary


As is often the case in economics and investing, there is a “seen” and an “unseen.” The “seen” is widely visible and, right or wrong, generally represents a consensus agreement about reality. The “unseen,” while equally important, largely goes under-appreciated. In time, it is the “unseen” that will affect economic growth rates and corporate earnings. It is the “unseen” that investors must grasp if they are to be successful. In this case, the “unseen” is the massive federal deficit. Its burden on the economy prevents traditional forms of stimulus from having their desired effects.


Given the historical evidence regarding the implications of corporate tax cuts, we are left questioning the so-called “Trump bump.” We would argue that a market rally based on that premise is incoherent, and the market should be discounting prices and valuations due to the tax cuts not inflating them.