Author: Alan Yerushalmi

Alan is a senior management professional that has consulted for several fortune 500 companies in areas of finance and telecommunications over the course of a 20 year career. His articles focus on the interrelationship between finance and geopolitics. He can be found at News with Chai
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Tariffs, Tax Cuts and the FED – The US Strategy to Defeat China

China Petrodollar

The current trade war underscores China’s role as the number one geopolitical competitor to the U.S. The Trump administration, with the support of the Federal Reserve Bank (FED), has embarked on a plan to economically defeat China. Back in April, President Trump could not deny that in the midst of a trade war that ‘there won’t be a little pain’ but predicted the U.S. will ‘have a much stronger country when we are finished’. But, at a rally last week in Montana, President Trump confidently stated ‘The war was lost on trade many years ago… but now we’re gonna win it and because we have all the cards’. This was somewhat puzzling as China has been slowly devaluing the yuan over the past two months and has withheld implementing its biggest card (the sale of its U.S. treasury holdings).

Tariffs
Last year, the U.S. posted a $375.6 billion deficit in goods with China with a large segment due to computer and electronics imports. In addition, an often-overlooked cause of this trade deficit is the manner in which China acquired its technology. A recent internal investigation found Chinese theft of American intellectual property costing between $225 billion and $600 billion annually. American trade officials cited the Chinese government’s method for acquiring valuable trade secrets as motivation for additional tariffs. The NY Times outlined how China stole designs from Micron Technology to enable it to build a $5.7 billion microchip factory. President Trump has effectively stopped prior administration’s ‘sellout’ policy of allowing Chinese purchases of strategic U.S. assets. While the Chinese government currently owns approximately $1.18 trillion of U.S. treasuries, any chance to swap this debt to equity and effectively colonize the U.S. is virtually zero.

Tax Cuts
The Tax Cuts and Jobs Act of 2017 signed into law by President Trump last December has met optimistic expectations as revenues from federal income taxes were $76 billion higher in the first half of this year, compared with the first half of 2017. It may be why President Trump recently hinted at a second phase of tax cuts that would involve a further reduction in the U.S. corporate tax rate and more stimulus for the middle class. One of the consequences of this tax cut have been greater budget deficits. While undoubtedly a long-term concern, the short-term results have yielded great benefits.

The FED
Large budget deficits, a trade war with China are being coordinated with the policies of the Federal Reserve. As summarized by a report from Palisade Research:

  • The always-rapidly-growing U.S. deficit requires constant funding from foreigners. But with the Federal Reserve raising rates and unwinding their balance sheet through Quantitative Tightening (QT) – meaning they’re sucking money out of the banking system.
  • These two situations are creating the shortage abroad. The U.S. Treasury’s soaking up more dollars at a time when the Fed is sucking capital out of the economy.
  • Not to[o] mention the strengthening dollar and higher short-term yields are making it more difficult for foreigners to borrow in dollars. Especially at a time when Emerging Market’s are imploding.

Clearly, the Trump administration views China as a greater threat to US interests than the Federal Reserve Bank at this time. As a candidate, President Trump had harsh words for Wall Street such as ‘I know Wall Street. I know the people on Wall Street…. I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us.’ and ‘I don’t care about the Wall Street guys… I’m not taking any of their money.’. He even tweeted about the importance of auditing the FED. To date, his administration has not matched his prior rhetoric as they openly sided with banks and waived punishment over prior crimes. While some would question any type of coordination with a central bank, the President obviously does not share any such rigid ideology to constrain him. Still, alliances can be transitory and there is nothing to preclude the Trump administration from shifting policy at a later date.

China’s Options
We learned a few weeks ago that in fact Russia sold off half of their U.S. treasury holdings in the month of April. This coincided with a spike of 35 basis points on 10-year treasury bond yields. Perhaps, this was a test in preparation for a larger future sell-off. A treasury sale by the Chinese government could potentially have a devastating impact on the U.S. economy. Note that seven out of nine previous yield curve inversions have preceded a recession.

While China has launched the heavily anticipated yuan oil futures contract, it has not been implemented by Saudi Arabia as of yet, thereby delaying the death of the petrodollar.

Conclusion
So, the immediate goal for the U.S. is to starve China of US dollars until it makes satisfactory concessions. There have been reports of China’s economy slowing. Historically, the initiation of trade wars is bad economic policy. However, this unconventional strategy may be the only way for the U.S. to economically defeat China.
If this plan does not work as well as the President thinks it will, it could spur more people to question the current system of debt and centralized banking. The answer to what replaces the current system is anyone’s guess.

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Sotah and the Nazir: Today’s Spiritual War

In Parashat Nasso, we learn of the importance of teshuva (repentance). The Rambam writes that if a person intentionally or unintentionally transgresses any of the mitzvot of the Torah (either a positive command or a prohibition), they are required to verbally confess before H-shem. As found in the book of Bamidbar (Numbers), Chapter 5, verse 6, the phrase לִמְעֹל מַעַל (Lim-ol Ma-al) Ba’H-shem means to act treacherously against H-Shem. In addition, we can interpret those words as trespassing or stealing from H-shem.

How is this possible? According to our sages, when each Jewish child is born, an angel makes them swear that they will be a tzadik (righteous person). So, during a person’s life, every time they commit an aveira (sin), they are breaking the vow and therefore in violation of that oath. We can infer that his/her body does not belong to themselves but to H-shem for the purpose of doing mitzvot. If a Jew commits an aveira, they are therefore obligated to perform teshuva.

One verse discusses how in a similar manner to the thief’s transgression against H-shem, a wife transgresses against her husband. In verse 12, the phrase וּמָעֲלָה בוֹ מָעַל (Uma-ala Vo Ma’al) refers to this. From here, we learn of the sotah, a suspected adulteress who was seen going into seclusion with another man despite a warning. As part of the process to determine if she is guilty of the aveira, the woman (who denies any impropriety) is brought to the Temple and drinks a cup of holy water. If she indeed willingly committed adultery, she explodes. If she is unharmed by the water, she is cleared of any suspicion.

The next verse discusses the nazir, a person that abstains from wine and grape products, allows their hair to grow, and who may not come in contact with a human corpse. The connection between the sotah and the nazir is apparent. Our sages stated that one who saw the sotah explode should become a nazir, even if they were distraught. This witness would have an understanding that the event may have been triggered by overindulgence. By becoming a nazir and taking on the restrictions for 30 days, he created a protection for himself against that possibility. He also took on certain holiness and enhanced his spiritual character.



Since we don’t have the ceremony of the sotah today, one may ask how we can apply the lessons from the Torah. Years ago, the primary cause of the indiscretion may have been wine. Today, there are vastly different influences. While ongoing political and economic wars are relevant, perhaps the most important war is one that is spiritual in nature. The media and entertainment industry have been incredibly successful in polluting culture, destroying souls and discouraging any sort of critical thinking. A morally bankrupt society that glorifies those in the entertainment industry isn’t one that can sustain itself. Although I am still hopeful that this glorification will end, our society at large does not clearly comprehend that they are engaged in this war. For if they were to understand, this war could easily be won. Like the nazir, we can be extra vigilant to protect ourselves against these negative forces and look past what are merely distractions. Instead of pointing fingers at others, we should first point them to ourselves.

Originally posted on News with Chai.

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In a New Era of Peace, the US and Israel Can Resolve the Iran Problem

The recent summit between North Korea and South Korea was as much historic as it was surreal. After 65 years in a state of war, both leaders agreed to work together to ‘denuclearize’ the Korean peninsula, potentially heralding a ‘new era of peace’. Fortunately, it looks doubtful that a forecast by Rabbi Nachmani (23 years ago) of an end of days war initiated by North Korea will occur.

We learn from our sages that Moshe Rabbenu (Moses) was the transmitter of G‑d’s word, the Torah, which is known as truth. But, his brother Aaron HaCohen was focused on bringing peace between husband / wife, friends, nations, etc. He would even ‘bend the truth’ if it meant achieving constructive outcomes. We also learn that Avraham Avinu was known for his kindness whereas his son Yitzchak Avinu was known for strength / rigidness in following commandments. These concepts represent the different paths toward conflict resolution. While both paths were tried with the Koreas, we can optimistically assess that peace triumphed over truth and kindness over rigidity for the greater benefit of world civilization.

Conversely, tensions between Israel and Iran have risen to new heights and appear headed toward resolution via a different path. Israel has taken aggressive measures to thwart the Iranian presence in Syria. Over the weekend, Israel bombed a munitions facility in Syria, killing Iranians. Also, Israeli Prime Minister Netanyahu dramatically asserted earlier today that the Iranian government lied for years about its nuclear program which was not solely intended for peaceful purposes. Interestingly, it is unclear how Israel fared against the much-heralded Russian S-300 air defense system. Either Israel had a side agreement with Russia to hold back its use or Israel has developed a way to neutralize the capabilities of the system.

Iran Background

The Iranian regime can hardly be described as a flourishing democracy. The political dynamics pit a middle class who want less religious restrictions and more economic opportunity against a poorer class who are more religiously inclined. The leadership in Iran holds what amount to mock elections to give the population the illusion of democracy while the mullahs hold the power. Unfortunately, as of today, the divergent economic and religious interests in Iranian society are too wide to allow both sides to team up and overthrow the regime.

Although most people are familiar with the theocratic divide between Sunnis and Shiites, an even more relevant one is between Arabs and Persians. Deeply rooted prejudices exist as many Persians view Arabs as having a lower status in society. Iranians widely believe that their government should not spend money on Hamas or Hezbollah as they have absolutely no interest in the Arab Israeli conflict.

US – Israel Relations

President Trump was elected on a mandate to forge a new foreign policy direction away from building up other nations at the expense of US interests. During his inauguration, he stated the US would ‘seek friendship and goodwill with the nations of the world’ and ‘not seek to impose our way of life on anyone’. While the US will not initiate any kind of Iranian invasion via military force, it has strongly allied itself with Israel. The threat of annihilation to South Korea from North Korea was not acceptable and can be applied similarly. Israel should not be expected to live in fear of an Iran that intrudes towards its borders and funds terrorist groups. Regrettably, a new US administration has not swayed the mullahs attitude toward Israel or the US. Iranian Major General Qassem Soleimani, who is the commander of foreign operations for Iran’s elite Revolutionary Guards, even refused to open a letter from then CIA Director Mike Pompeo saying, ‘I will not take your letter nor read it and I have nothing to say to these people’.

As we approach the move of the US embassy to Jerusalem, we can conclude that President Trump has been a strong supporter of Israel. His latest moves elevating Mike Pompeo as Secretary of State and John Bolton as National Security Advisor, both very pro-Israel, reinforce this fact. While a deal maker by trade, President Trump does realize that one cannot negotiate with entities that are sworn to its destruction.

Conclusion

In summary, we have a US administration that strongly supports Israel lined up against a fanatical Iranian theocracy that does not act in the best interests of its citizens. While close monitoring of the Iranian power structure is required, there appear to be cracks in the regime. There was an unverified report over the weekend that Iran’s Supreme Leader Ali Khamenei may remove General Soleimani over differences between him and other commanders. Signs of a potential currency crisis have been evident in recent weeks. This would have dire consequences on the Iranian economy as further economic stress would likely cause businesses to ‘pack up and leave again’.

Generally, I do not put much thought in Israel’s security. As we know, it is a complete miracle that Israel exists as a nation. Israel has overcome insurmountable odds in numerous wars over thousands of years. There are long standing rumors that Israeli wars (of the past 70 years) are never taught at West Point. The mullahs in Iran will soon come to that realization. If the mullahs had an ounce of intelligence, they would realize what they are up against and change course. If Israel’s destruction was their true goal, their best move would be make peace with Israel and pray to Allah that the Jews forsake their G-d. Fortunately, that won’t happen any time soon.

Originally Posted in News With Chai.

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Americans Acknowledge Deep State as Public Disclosure of Crimes Looms

A stunning poll from Monmouth University revealed how a clear majority of Americans have woken up to the concept of a ‘deep state’.

 ‘Few Americans (13%) are very familiar with the term “Deep State;” another 24% are somewhat familiar, while 63% say they are not familiar with this term. However, when the term is described as a group of unelected government and military officials who secretly manipulate or direct national policy, nearly 3-in-4 (74%) say they believe this type of apparatus exists in Washington. This includes 27% who say it definitely exists and 47% who say it probably exists. Only 1-in-5 say it does not exist (16% probably not and 5% definitely not).’

This poll validates the genuineness of the ‘great awakening’ facilitated by President Trump (and his close associates). Every day, thousands of Americans achieve awareness of the unbelievable level of corruption in the political system. I have covered how, in the past, a number of politicians alluded to this concept of a deep state. Examples include President Eisenhower’s reference to the military–industrial complex and President Kennedy’s speech warning of ‘secret societies’ and a ‘monolithic and ruthless conspiracy’. Shockingly, just this past Tuesday, Senator Rand Paul answered ‘absolutely’ when directly asked if a deep state exists.

For specific names of deep state activists, you can point to a former employee of both the CIA and FBI Philip Mudd who, in referring to the President, said they [the deep state] will ‘kill this guy’. Interestingly, Mr. Mudd is alleged to be a direct descendant of Samuel Mudd, an American physician who was imprisoned for conspiring with John Wilkes Booth in the assassination of President Abraham Lincoln. I suppose there is some genetic disposition within the Mudd family to overthrowing governments.

In January, President Trump referenced the ‘deep state’ in a tweet. But, in a speech last month at CPAC, he vaguely referred to ‘forces’ that don’t have the people’s best interest: 
‘We’re fighting a lot of forces.  They’re forces that are doing the wrong thing.  They’re just doing the wrong thing.  I don’t want to talk about what they have in mind.  But they do the wrong thing.  But we’re doing what’s good for our country for the long-term viability and survival.’

The President is most likely hinting at a much darker reality where his enemies are not simply part of rogue intelligence agencies. Perhaps, he is channeling the qanon posts, described by New York Magazine as:

‘…someone calling themselves Q began posting a series of cryptic messages in a /pol/ thread titled “Calm Before the Storm” (assumedly in reference to that creepy Trump quote from early October). Q claimed to be a high-level government insider with Q clearance (hence the name) tasked with posting intel drops — which he, for some reason, called “crumbs” — straight to 4chan in order to covertly inform the public about POTUS’s master plan to stage a countercoup against members of the deep state.’

These posts have been widely mocked by mainstream media publications like Newsweek as ‘fake news’. Curiously, Newsweek did notreceive a comment from the White House on a claim made by Alex Jones that he was told by them to start covering the qanon posts. As of today, there has been no public statement from the Trump administration on the authenticity of these qanon posts. The silence speaks for itself.

Originall Published in News with Chai.

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Markets in Turmoil – Can Cryptocurrencies Save the US from the Debt Bomb?

It is always amusing to hear people dismissively claim that Bitcoin is a ‘bubble’ or that it isn’t backed by anything. What most tend to overlook is that the ‘real bubble’ exists with all fiat currencies, which are all backed by nothing. As of this writing, the total cryptocurrency market cap is approximately $300 billion (down from last month’s high of around $800 billion). When compared to the global money supply and global debt markets, the cryptocurrency space is miniscule. As I’ve said a few months ago, the current system of central banking will end and the only remaining question is what will replace it.

There is no better example of a fiat currency bubble than the US dollar. While the tax cut just signed into law has provided immediate benefits to the US economy, few have attempted to address the enormous national debt burden.




Here are some basic facts on the US fiscal condition:

Historically, the Federal Reserve has raised interest rates to prevent inflation. For example, during the prior ‘tightening cycle’ (2004-2006), the fed funds rate was increased by 400 basis points (~1% – ~5%). Today, the current fed funds rate is 1.5%. A recent CNBC report forecast a 2.24% fed funds rate at the end of 2018, up about a quarter point from the prior survey. The Federal Reserve can in no way deviate from these projected increases. If it did, interest payments on newly issued debt and on maturing debt would skyrocket which would further exacerbate the national debt problem. Massive reductions in government expenditures to reduce the deficit would lead to societal chaos. Discounting some windfall capital recovery (not likely even from this executive order), the only way the US Treasury can realistically continue to pay interest on this massive debt is by keeping rates near historic lows with small yearly increases. Optimistically, low interest rates would enable the US to grow its way out of its debt. Perhaps, that is why the President has maintained such a close relationship with major banks (reversing his campaign promise). In December, the Trump administration waived punishmentfor these banks over prior crimes.

Last Friday, the 10-year Treasury yield surged to 2.845 percent, the highest since January 2014. Yields closed lower on Monday as the historic selloff in stocks sparked demand for low risk debt. Conversely, some have attributed the major drop in the stock market to long term concerns over bond yields. Since 2009, the Federal Reserve has engaged in massive money printing (i.e. QE1, QE2, etc.) to ‘stimulate the economy’. If this were sound monetary policy, Venezuela and Zimbabwe would be beacons of economic success (which they are not). The US is the beneficiary of the US dollar’s role as the world’s reserve currency. Multiple iterations of QE (money printing) have enabled the Federal Reserve to purchase treasuries and effectively keep interest rates low while capital has flowed into assets such as real estate. A future ‘black swan’ event (like the Chinese selling off their US treasury holdings or a bank run) may occur when bond yields rise suddenly. In that case there must be yet another iteration of QE.

So, we have established two points:

  1. The US can only gradually raise the fed funds rate over the next three years.
  2. The US must print money to remain solvent in case of rising bond yields.

Fundamentally, printing money to pay your expenses should be considered a credit event (default). There are times where a devaluation of a nation’s currency is necessary. One of the most egregious examples of this was in 1933 when President Roosevelt signed Executive Order 6102 which required all in the US to exchange their gold for $20.67 per ounce. Over the next year, the president then raised the official gold price to $35 per ounce, effectively cutting 40% off the US dollar. There has been global discussion (primarily from China) of the US dollar’s demise as the world’s reserve currency. In the past, precious metals were the sole alternative to fiat currencies. Now, cryptocurrencies have emerged as a possible alternative. Israeli Prime Minister Netanyahu even stated in December that banks will eventually disappear due to blockchain technology.

Cryptocurrencies have exhibited massive volatility losing 30% of its combined value over the past 24 hours and 60% over the past month. Lately, there has been a slew of negative news in the cryptocurrency space. This past weekend, most major US credit card issuers including Bank of America, JP Morgan and Citigroup banned the use of their cards to buy Bitcoin or other digital currencies. Prepared testimony for Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) chairmen was released yesterday and suggest that the US government could slap further regulations on cryptocurrencies in the near future.




Still, the unprecedented rise in cryptocurrency prices (part of the ongoing global currency reset) has enabled an effective stealth devaluation of the US dollar. There has also been evidence of positive benefits to Japan’s economy from cryptocurrencies. Nomura analysts estimate a wealth effect from unrealized gains on Bitcoin trading by Japanese investors and a potential boost to real GDP growth to Japan’s economy of about .3%.

One of the characteristics required for a cryptocurrency to be defined as money is to act as a medium of exchange. There have been all sorts of rumors that major Internet and traditional retailers will start accepting cryptocurrencies as payment in the US (they already do in Japan). Recently, Starbucks chairman Howard Schultz said he believes digital currency will catch on with consumers, though not necessarily Bitcoin. While there is plenty of speculative and unsupported euphoria, any chief executive of a public retail firm has a fiduciary duty to their shareholders to investigate the acceptance of other types of payment methods. As of a week ago, interest remained strong as over 1 million people joined a waitlist to register for cryptocurrency trading with Robinhood.

For a great perspective on the practical use of cryptocurrencies, I highly recommend watching Mike Maloney’s video on the crypto revolution. Note that there are other amazing technologies like holochain and hashgraph that may compliment or even compete with blockchain platforms. For those concerned about a future ban on cryptocurrencies, please watch this video from Andreas Antonopoulos (well-known speaker on bitcoin). An outright ban on cryptocurrencies in the US is highly unlikely. It would be a mistake to think the US government will accept some kind of market crash just to prevent a rise in cryptocurrency prices.  In addition to any economic ‘wealth effect’, the US economy can benefit from the efficiencies in industries that use blockchain technologies. One of those areas is social media where censorship issues with Facebook can be avoided. Steemit, a social media platform with virtual currency rewards that runs over the Steem blockchain, is an alternative that has garnered attention recently.

Published in News with Chai