- US Admiral Warns About 'Hazardous' Military Buildup In South China Sea
Though it rarely makes headlines in the US, the simmering rivalry between American and Chinese military forces has prompted some to declare the South China Sea – where Beijing has been building out its military and naval infrastructure in defiance of international court rulings – the “world’s most dangerous hotspot”.
And as China has transformed rocky atolls into stationary aircraft carriers, nobody has been more vocal about the dangers of China’s increasingly aggressive posture in the Pacific than Admiral Philip Davidson, the commander of U.S. Indo-Pacific Command, who has warned about the growing geopolitical threat even as many established economists have played down the risk of a conflict because, in theory, the economic links between the world’s two largest economies represent a reliable counterweight.
Admiral Philip Davidson
Offering yet another ominous warning just days after Washington again provoked Beijing by flying two B-52 bombers over the contested sea, Davidson told a group of reporters that he had observed a rise in Chinese military activity in the Pacific.
Asked about the US’s “freedom of navigation” operations in the region, Davidson declined to offer specifics but said only that the US would remain “an enduring Pacific power.” But turning the focus again to China, Davidson warned that China’s military buildup was a “hazard” to trade flows and financial information that circulates via fiber optic cables running on the ocean floor under the South China Sea.
“It’s building, it’s not reducing in any sense of the word,” Davidson told reporters on Thursday in Singapore when asked about China’s military activities in the South China Sea. “There has been more activity with ships, fighters and bombers over the last year than in previous years, absolutely.”
“It’s a hazard to trade flows, the commercial activity, the financial information that flows on cables under the South China Sea, writ large,” Davidson added.
As Bloomberg pointed out, Davidson’s comments appeared to assuage US allies’ concerns about a possible US pullout from the region, which have intensified thanks to President Trump’s isolationist rhetoric.
Davidson’s comments are the latest from a senior U.S. official seeking to reassure allies in Southeast Asia of the American commitment to what Washington refers to as the Indo-Pacific region. Secretary of State Michael Pompeo last week in Manila assured the Philippines that a defense treaty would apply if its vessels or planes are attacked in the South China Sea.
However, many of the US’s regional allies, particularly the Philippines, have questioned whether the US has done enough to curb Beijing’s ambitions. Some top Philippine military officials have even questioned whether the US defense pact needs to be changed.
Top Philippine officials have clashed over whether the mutual defense pact with the U.S. needs to be changed. While Foreign Secretary Teodoro Locsin has said the 1951 accord should stay the same, Defense Secretary Delfin Lorenzana wants it reviewed, even after Pompeo’s assurances.
The U.S. hasn’t stopped Chinese “aggressive actions” so far, Lorenzana noted in a statement earlier this week, while warning that vagueness in the document could cause “chaos during a crisis” and that the Philippines didn’t want to be dragged into a shooting war it didn’t start.
China has targeted a 7.5% increase in defense spending in 2019, a slowdown from last year’s projected 8.1% increase though still seen as consistent with President Xi Jinping’s plans to grow and advance the military.
And even with domestic growth slowing, China continues to spend on its military buildup. And Davidson doesn’t expect this to change. And Beijing’s increasingly belligerent rhetoric about its plans for “reunifying” with Taiwan would seem to confirm this assessment.
- "America First": A Stronger Monroe Doctrine
Authored by Federico Pieraccini via The Strategic Culture Foundation,
The previous articles (first, second) examined what appears to be a coordinated strategy between Moscow and Beijing to contain the damage wrought by the United States around the world. This strategy’s effectiveness relies heavily on the geographical position of the two countries vis-a-vis the United States and the area of contention. We have seen how the Sino-Russian strategy has been effective in Asia and the Middle-East, greatly stemming American disorder. Moscow and Beijing have less capacity to contain the US and influence events in Europe, given that much depends on the Europeans themselves, who are officially Washington’s allies but are in reality treated as colonies. With the new “America First” doctrine, it is the central and southern parts of the American continent that are on the receiving end of the US struggling to come to terms with the diminishment of its hitherto untrammelled influence in the world.
South and Central American countries blossomed under the reign of socialist or leftist anti-imperialist governments for the first decade of this century. Such terms as “21st-century socialism” were coined, as was documented in the 2010 Oliver Stone documentary film South of the Border. The list of countries with leftist governments was impressive: Fernando Lugo (Paraguay), Evo Morales (Bolivia), Lula da Silva (Brazil), Rafael Correa (Ecuador), Cristina Fernández de Kirchner (Argentina), Fidel Castro (Cuba), Daniel Ortega (Nicaragua) and Hugo Chávez (Venezuela).
We can establish a close correlation between Washington’s actions since 1989 and the political roller-coaster experienced in South America in the ensuing thirty years.
Washington, drunk on the experience of being the only superpower in the post-Soviet period, sought to lock in her commanding position through the establishment of full-spectrum dominance, a strategy that entails being able to deal with any event in any area of the globe, treating the world as Washington’s oyster.
Washington’s endeavor to shape the world in her own image and likeness meant in practical terms the military apparatus increasing its power projection through carrier battle groups and a global missile defense, advancing towards the land and sea borders of Russia and China.
Taking advantage of the US dollar’s dominance in the economic, financial and commercial arenas, Washington cast aside the principles of the free market, leaving other countries to contend with an unfair playing field.
As later revealed by Edward Snowden, Washington exploited her technological dominance to establish a pervasive surveillance system. Guided by the principle of American exceptionalism, combined with a desire to “export democracy”, “human rights” became an enabling justification to intervene in and bomb dozens of countries over three decades, aided and abetted by a compliant and controlled media dominated by the intelligence and military apparatuses.
Central and South America enjoyed an unprecedented political space in the early 2000s as a result of Washington focusing on Russia, China, Iran, Afghanistan, Syria, Iraq, Yugoslavia, Somalia, Georgia and Ukraine. The Latin Americans exploited this breathing space, with a dozen countries becoming outposts of anti-imperialism within a decade, advancing a strong socialist vision in opposition to free-market fundamentalism.
Both Washington and Moscow placed central importance on South America during the Cold War, which was part of the asymmetric and hybrid war that the two superpowers undertook against each other. The determination by the United States to deny the Soviet Union a presence in the American hemisphere had the world holding its collective breath during the Cuban Missile Crisis.
As any student of international relations knows, the first objective of a regional power is to prevent the emergence of another hegemon in any other part of the world. The reason behind this is to obviate the possibility that the new power may venture into other regions occupied by other hegemonic powers, thereby upsetting the status quo. The second primary objective is to prevent access by a foreign power to its own hemisphere. Washington abides by this principle through its Monroe Doctrine, set forth by President James Monroe, with the United States duly expelling the last European powers from the Americas in the early 19th century.
In analyzing the events in South America, one cannot ignore an obvious trend by Washington. While the United States was intent on expanding its empire around the world by consolidating more than 800 military bases in dozens of countries (numbering about 70), South America was experiencing a political rebirth, positioning itself at the opposite end of the spectrum from Washington, favoring socialism over capitalism and reclaiming the ancient anti-imperialist ideals of Simon Bolivar, a South American hero of the late 18th century.
Washington remained uncaring and indifferent to the political changes of South America, focusing instead on dominating the Middle East through bombs and wars. In Asia, the Chinese economy grew at an impressive rate, becoming the factory of the world. The Russian Federation, from the election of Putin in 2000, gradually returned to being a military power that commanded respect. And with the rise of Iran, destined to be the new regional power in the Middle East thanks to the unsuccessful US intervention in Iraq in 2003, Washington began to dig her own grave without even realizing it.
Meanwhile, South America united under the idea of a common market and a socialist ideology. The Mercosur organization was founded in 1991 by Argentina, Brazil, Paraguay and Uruguay. But it was only when Venezuela, led by Chavez, became an associate member in 2004 that the organization assumed a very specific political tone, standing almost in direct opposition to Washington’s free-market template.
Meanwhile, China and Russia continued their political, military and economic growth, focusing with particular attention on South America and the vast possibilities of economic integration from 2010. Frequent meetings were held between Russia and China and various South American leaders, culminating in the creation of the BRICS organization (Brazil, Russia, India, China and South Africa). Brazil, first with Lula and then with Dilma Rousseff, was the unofficial spokesperson for the whole of South America, aligning the continent with the emerging Eurasian powers. It is during these years, from the birth of the BRICS organization (2008/2009), that the world began a profound transformation flowing from Washington’s progressive military decline, consumed as it was by endless wars that ended up eroding Washington’s status as a world power. These wars in Iraq and Afghanistan have deeply undermined US military prestige, opening unprecedented opportunities for alliances and future changes to the global order, especially with the rise of Iran’s influence in the region as a counterweight to US imperialism.
China, Russia and the South American continent were certainly among the first to understand the potential of this political and historical period; we can recall meetings between Putin and Chavez, or the presence of Chinese leaders at numerous events in South America. Beijing has always offered high-level economic assistance through important trade agreements, while Moscow has sold a lot of advanced military hardware to Venezuela and other South American countries.
Economic and military assistance are the real bargaining chips Moscow and Beijing offer to countries willing to transition to the multipolar revolution while having their backs covered at the same time.
The transformation of the world order from a unipolar to a multipolar system became a fact in 2014 with the return of Crimea to the Russian Federation following the NATO coup in Ukraine. The inability for the US to prevent this fundamental strategic defeat for Brussels and Washington marked the beginning of the end for the Pentagon still clinging on to a world order that disappeared in 1991.
As the multipolar mutation developed, Washington changed tactics, with Obama offering a different war strategy to the one advanced during the George W. Bush presidency. Projecting power around the globe with bombs, carrier battle groups and boots on the ground was no longer viable, with domestic populations being in no mood for any further major wars.
The use of soft power has always been part of the US toolkit for influencing events in other countries; but given the windfall of the unipolar moment, soft power was set aside in favor of hard power. However, following the failures of explicit hard power from 1990 to 2010, soft power was back in favor, and organizations like the National Endowment for Democracy (NED) and the International Republican Institute (IRI) set about training and financing organizations in dozens of hostile countries to subvert governments by underhanded means (colour revolutions, the Arab Spring, etc.).
Among those on the receiving end of this soft-power onslaught were the South American countries deemed hostile to Washington, already under capitalist-imperialist pressure for a number of years in the form of sanctions.
It is during this time that South America suffered a side effect of the new multipolar world order. The United States started retreating home after losing influence around the globe. This effectively meant focusing once again on its own backyard: Central and South America.
Covert efforts to subvert governments with socialist ideas in the hemisphere increased. First, Kirchner’s Argentina saw the country pass into the hands of the neoliberal Macri, a friend of Washington. Then Dilma Rousseff was expelled as President of Brazil through the unlawful maneuvers of her own parliament, following which Lula was imprisoned, allowing for Bolsonaro, a fan of Washington, to win the presidential election.
In Ecuador, Lenin Moreno, the successor of Correa, betrayed his party and his people by being a cheerleader for the Pentagon, even protesting the asylum granted to Assange in Ecuador’s embassy in London. In Venezuela following Chavez’s suspicious death, Maduro was immediately targeted by the US establishment as the most prominent representative of an anti-imperialist and anti-American Chavismo. The increase in sanctions and the seizure of assets further worsened the situation in Venezuela, leading to the disaster we are seeing today.
South America finds itself in a peculiar position as a result of the world becoming more multipolar. The rest of the world now has more room to maneuver and greater independence from Washington as a result of the military and economic umbrella offered by Moscow and Beijing respectively.
But for geographic and logistical reasons, it is more difficult for China and Russia to extend the same guarantees and protections to South America as they do in Asia, the Middle East and Europe. We can nevertheless see how Beijing offers an indispensable lifeline to Caracas and other South American countries like Nicaragua and Haiti in order to enable them to withstand Washington’s immense economic pressure.
Beijing’s strategy aims to limit the damage Washington can inflict on the South American continent through Beijing’s economic power, without forgetting the numerous Chinese interests in the region, above all the new canal between the Atlantic and the Pacific that runs through Nicaragua (it is no coincidence that the country bears the banner of anti-imperialist socialism) that will be integrated into the Belt and Road Initiative (BRI). Moscow’s objective is more limited but just as refined and dangerous to Washington’s hegemony. A glimpse of Moscow’s asymmetrical military power was given when two Russian strategic bombers flew to Venezuela less than four months ago, sending an unmistakable signal to Washington. Moscow has the allies and the technical and military capacity to create an air base with nuclear bombers not all that far away from the coast of Florida.
Moscow and Beijing do not intend to allow Washington to mount an eventual armed intervention in Venezuela, which would open the gates of hell for the continent. Moscow and Beijing have few interlocutors left on the continent because of the political positions of several countries like Argentina, Brazil and Colombia, which far prefer an alliance with Washington over one with Moscow or Beijing. We can here see the tendency of the Trump administration to successfully combine its “America First” policy with the economic and military enforcement of the Monroe Doctrine, simultaneously pleasing his base and the hawks in his administration.
Leaving aside a possible strategy (Trump tends to improvise), it seems that Trump’s domestic political battle against the Democrats, declared lovers of socialism (naturally not as strident as the original Soviet or Chavist kind), has combined with a foreign-policy battle against South American countries that have embraced socialism.
The contribution from China and Russia to the survival of the South American continent is limited in comparison to what they have been able to do in countries like Syria, not to mention the deterrence created by Russia in Ukraine in defending the Donbass or with China vis-a-vis North Korea.
The multipolar revolution that is changing the world in which we live in will determine the rest of the century. One of the final battles is being played out in South America, in Venezuela, and its people and the Chavist revolution are at the center of the geopolitical chessboard, as is Syria in the Middle East, Donbass in Central Europe, Iran in the Persian Gulf, and the DPRK in Asia. These countries are at the center of the shift from a unipolar to a multipolar world order, and the success of this shift will be seen if these countries are able to resist US imperialism as a result of Moscow and Beijing respectively offering military help and deterrence and economic survival and alternatives.
Russia and China have all the necessary means to place limits on the United States, protecting the world from a possible thermonuclear war and progressively offering an economic, social and diplomatic umbrella to those countries that want to move away from Washington and enjoy the benefits of living in a multipolar reality, advancing their interests based on their needs and desires and favoring sovereignty and national interest over bending over to please Washington.
- Rubio Demands US Initiate "Widespread Unrest" In Venezuela
Predictably during a Senate Foreign Relations Committee hearing on Thursday, Republican chairman Marco Rubio condemned Venezuela’s Maduro as a “clear danger” and a “threat to the national security of the US.” To be expected the hearing was filled with plenty of threats and talk of flipping “military elites” and enforcing tougher sanctions.
But perhaps unexpected was just how out in the open and brazen Rubio’s own admissions of how far he’s willing to go in promoting regime change in Caracas. In public testimony he called on the US to promote “widespread unrest” in order to eventually bring down the Maduro government.
Rubio previously at the Colombian border, near the Simon Bolivar international bridge in Cucuta, Colombia on February 17. Image source: AFP It appears Rubio is now urging the White House to initiate a full-on “Syria option” for Venezuela, which implies covert arming, funding, and militarization of the opposition to reach peak escalation and confrontation with the government, perhaps inviting broader external military intervention, similar to efforts to topple Syria’s Assad over the past years.
We’ve commented before about how popular anti-Maduro protests seemed to have lost significant momentum of late, pretty much fading out altogether over the past couple weeks, after tensions came to a head on Feb. 23 when US-backed opposition leader Juan Guaido led a failed attempt to get an unauthorized humanitarian aid convoy across the Colombian-Venezuelan border.
This as it appeared the opposition was itching for a provocation that might draw the US and regional allies into some of kind of more direct intervention, and as a significant uptick in US military flights went to and from Colombia near the border with Venezuela.
At Senate hearing on Venezuela just now, Marco Rubio called for the US to promote “widespread unrest” (violent guarimba riots) as a means of encouraging regime change. His proposal was met with approval. https://t.co/PDBCNoi4Q5 pic.twitter.com/OIEk0K0O7G
— Max Blumenthal (@MaxBlumenthal) March 7, 2019
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During Thursday’s Senate hearing, there appeared a willingness to admit the fact that it appears Maduro is not going anywhere anytime soon, for example, when the committee’s top Democrat, Sen. Bob Menendez of New Jersey, said, “Confronting tyranny requires sustained commitment. But Maduro is not invincible. He’s far from it.”
Though issuing plenty of threats of tighter sanctions and strangling Venezuelan oil exports, the Democrats on the committee stopped short of endorsing military action: “The support that we have lent unequivocally on Venezuela does not include the use of force,” Menendez said further.
However, Rubio’s extreme “regime change by any means possible” hawkishness was on full display. Journalist Max Blumenthal reports:
At Senate hearing on Venezuela just now, Marco Rubio called for the US to promote “widespread unrest” as a means of encouraging regime change. His proposal was met with approval.
Blumenthal noted this was a reference to instigating further “violent guarimba riots” — referencing the local Spanish word — that have been a feature of Venezuelan city streets since Maduro was sworn in for a second six year term in January, and which has further represented the more violent side of Venezuelan politics for years.
Journalist Clifton Ross, who has long reported from on the ground in Venezuela, explained the term as follows:
Your Spanish lesson for the day is guarimba, (feminine, as in ‘me voy a la guarimba’ I’m going to the guarimba) the blocking of roads, lighting of tires, and sometimes involving defensive acts of rock-throwing, a practice adopted by the Venezuelan opposition in response to elections they feel are unfair. Those who participate in the guarimbasare known as guarimberos. It is presently the season of guarimbas, and one can only hope, for the sake of the nation, that they will soon come to an end.
Though Maduro has survived the latest round of international pressure to succumb to internal coup efforts led by a US-supported opposition, the fires of unrest Venezuela don’t look to be extinguishable anytime soon.
As Ben Norton also pointed out on Thursday while speaking of using “humanitarian aid” as a pretext for regime change: “They’re not even hiding it at this point.”
They’re not even hiding it at this point: Venezuela’s US-backed neoliberal opposition leader Antonio Ledezma is openly admitting the strategy is to falsely claim Venezuela needs “humanitarian intervention” on “R2P” grounds, just like Yugoslavia and Libyahttps://t.co/lh8wuMwnIg
— Ben Norton (@BenjaminNorton) March 7, 2019
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Indeed, Rubio personally promised just this during hearing: “To those in Venezuela: Your fight for freedom and restoration of democracy is our fight, and the free world has not and will not forget you,” he said, and added, “We [the United States] will be [focused] on this as long as it takes.” Earlier in the day Rubio told Fox News that:
“Trump won’t give up until Maduro is gone in Venezuela.”
More ominously, Rubio predicted during the hearing, “Venezuela is going to enter a period of suffering no nation in our hemisphere has confronted in modern history,” in reference to the Venezuelan military blocking US aid shipments and tightening sanctions.
Of course Rubio laid all blame for the dire future plight of common Venezuelans on the Maduro regime alone, and not on his own admitted desire to stir yet more unrest in the country.
- Craddick: Today's Korea Quake & The Path Forward After The Hanoi Summit
More than a few eyebrows were raised this evening after reports, from South Korean news, that an “artificial” quake has taken place in North Korea, which was immediately spun as a possible underground nuclear test. This is not entirely unexpected as President Trump has already been barraged by a wave of special interests hoping to derail peace talks. However, as Disobedient Media’s William Craddick details below, the end goal of denuclearization and peace for North Korea is within reach, stay the course.
Although the Hanoi Summit did not result in a signed deal between the negotiating teams, both North Korea and the United States should not come away from their meetings discouraged. As President Donald Trump said during a post-Summit press conference, both parties have come away with the information they needed to understand each other’s perspective. An agreement is within reach if dialog is continued with adequate frequency.
With proper planning for the next meeting between the leaders of the United States (US) and the Democratic People’s Republic of Korea (DPRK), proper perspective for Chairman Kim Jong Un and cooperation from the Global Powers the mutually beneficial goal of denuclearization and an end to hostilities in the Korean Peninsula is within sight.
I. Feedback On Hanoi
The length of negotiations were unfortunately hampered not only by partisan bickering at home, but also the looming threat of the nearby border war that was breaking out between India and Pakistan as well as apparent harassment of North Korea by intelligence agencies.
Both President Trump and Chairman Kim also miscalculated in their approach to negotiations. Kim’s insistence that sanctions be dropped before denuclearization was an unrealistic expectation borne out of North Korean fears of a potential US invasion that failed to account for US sensitivities about previous North Korean failures to conform to past agreements between the members of the Six Party Talks. Trump’s modus operandi of walking from negotiations to increase pressure and the likelihood of a favorable deal was also an unnecessary solution to a problem that could have been resolved by an extension of the Summit’s timeframe to hammer out points of contention.
None of these mistakes were terminal however, and there is a very clear road forward towards peace and stability.
II. Recommendations For Future Summit
To overcome the stumbling block that hampered a total success in Hanoi a step by step process for denuclearization must be laid out. The most logical method of execution would be to agree to a road plan whereby North Korea would progressively disarm specific sites and dispose of weapons systems, verified by outside inspection. In return, the US would remove specific sanctions as benchmarks are met. Such a clear and controlled process will help boost North Korean confidence in the intention of the United States to deal fairly in relation to sanctions and assuage US fears about any unfaithful dealing by North Korea. If an agreement that allows for the DPRK to retain a limited number of nuclear weapons is reached it will need to include arrangements for routine inspections to ensure that the ordinance can be tracked to the satisfaction of the international community.
Any deal that is reached must include a signed agreement by the United States pledging not to attack the DPRK or overthrow Kim Jong Un. Ideally, such promises would also be accompanied by a framework outlining the ways in which the United States will assist North Korea with economic development. Because North Korea’s pursuit of nuclear weapons was incentivized by fear of foreign invasion by the US there must be assurances, publicly memorialized in writing, to reduce these kinds of tensions. These promises should not necessarily be expected to include the removal of American troops from South Korea since their presence is aimed to protect South Korea and Japan from a hypothetical invasion by China. As such an invasion would also necessitate the occupation of North Korea, the US deployment in South Korea also provides an element of security to Kim Jong Un, his people, and government.
Although the process of nuclear disarmament is a priority that must be resolved before other concerns, a formal ending to the Korean War must also be a primary objective of both the DPRK and the United States. If both parties were to schedule disarmament strategically there is an outside possibility that the next summit could include the signing of an armistice. The choice of Seoul as the location for the next summit would also allow for representatives of South Korea and China to be present in the event that denuclearization talks had progressed satisfactorily to the point that the topic of the Korean War could be properly broached. Hosting a summit in Seoul would also create an opportunity for Kim Jong Un and President Moon Jae-in to discuss various issues relating to inter-Korean affairs and future partnerships as relations continue to warm.
III. Recommendations To Chairman Kim Jong Un
The young leader of North Korea certainly did not ask to come to power in the manner that he did and has faced a number of challenges while navigating power struggles and grappling with a country suffering from isolation and collapsing infrastructure. Kim Jong Un has an unprecedented opportunity to show the world that he will be a truly great ruler of North Korea that will take them from a hermit kingdom to a regional powerhouse on par with their southern neighbor. Steps that Chairman Kim could take towards this goal include voluntary denuclearization and an international diplomacy campaign to build new bridges and put his country on the map geopolitically.
A. Voluntary Denuclearization
Pre-emptively taking steps to denuclearize certain sites in the DPRK would be a maverick move from a country that has long caused consternation to its neighbors by behaving unpredictably. Such actions would also help North Korea make a stronger case to their American counterparts for progressively removing sanctions in return for verified movement towards denuclearization.
It is a common trope amongst some political commentators that North Korea sought nuclear weapons with the primary goal of using them as a deterrent against the United States. But as journalists such as Julian Assange have correctly noted, North Korea’s WMD stockpiles were primarily acquired due to their fears of strategic threats from China. Chinese troops have already once become a de facto occupier of North Korea during the Korean War. Establishment media outlets such as Foreign Policy have also openly advocated for Chinese troops to occupy North Korea in recent years. Korea has a long history with China, which has generally ruled the region as a pseudo-vassal state in a similar manner the other areas such as Tibet and Xinjiang. There is little doubt that any direct Chinese military involvement in North Korea would lead to disastrous policies of Hanification in the region. It is through this lens that the DPRK’s behavior must be interpreted.
B. Nuclear Technology Acquisition
North Korea’s nuclear technology sounds worrying when described in lurid headlines, but the reality is that their stockpiles are more of a risk to themselves than the countries they supposedly would use them to attack.
North Korea is notoriously cash starved, but their communist economy has been effective at producing conventional weaponry en mass. It is this one overabundant resource that has allowed the hermit kingdom to strike the deals needed to acquire second hand nuclear technology. Nations who have seemingly engaged in such transactions with the DPRK generally appear to be Middle Eastern and include Syria, Iran and potentially Egypt. This policy has also created some significant liability for North Korea, as the weaponry they sell often ends up on the black market or in the hands of rebel and terror groups which creates a chain of attribution tying the DPRK to organizations engaged in activities which they never had any intention of supporting.
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Syria – As outlined by the Council on Foreign Relations’ Foreign Affairs, North Korea has had a collaborative relationship with the Syrian government since the 1960’s which has involved the frequent sale by the DPRK of conventional weaponry and missiles. It would appear that the terms of these sales included arrangements to transfer nuclear technology. In 2004, World Tribune reported the deaths of several technicians from the Syrian Scientific Studies and Research Center, an institute responsible for the research and development of nuclear, biological, chemical and missile technology and weapons, in the Ryongchon province of North Korea. In 2008, Japanese national public broadcaster NHK cited South Korean military sources who stated that as many as ten North Koreans may have been killed in an Israeli airstrike of a facility in Deir ez-Zor, Syria that was allegedly a secret nuclear reactor capable of producing plutonium.
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Iran – Iran and North Korea have also enjoyed a close relationship since the Iran-Iraq war, where North Korea began selling conventional weapons and military technology to Iran while also providing military advisors. The business relationship has opened another avenue for North Korea to acquire nuclear technology. A 2003 report by the Los Angeles Times highlighted the Iranian government’s connections to nuclear programs in Russia, China and Pakistan as well as North Korea. While the first three had long-established nuclear programs at the time, North Korea did not. This provides yet another indication that conventional weapons and technology transfers by the North Korean government were made with the goal of acquiring nuclear materials, technology and know-how.
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Egypt – A third potential venue for the DPRK to barter for hand-me-down nuclear technology was Egypt. According to the Federation of American Scientists, Egypt launched a nuclear program in 1954, but shifted their focus to research and civilian applications in 1967 after being defeated in the Six Day War. Much like with Syria and Iran, Egypt has a long-standing military and diplomatic relationship with North Korea that has drawn the ire of the United Nations. Although their nuclear reactors were originally provided by the Soviet Union, Egypt has also acquired reactors for research purposes from other countries such as Argentina as recently as 1992. Given the long history of weapons sales by North Korea to Egypt, both directly and indirectly through brokerage services, it is likely nuclear technology transfers could have occurred in the course of these dealings.
C. North Korea’s Nuclear Weapons And Technology Are A Danger To Itself
Although North Korea believes their nuclear stockpiles are a deterrent, they are actually a double-edged sword that places them in danger because of the risk posed by the radiation they create as well as the fact that the mere possession of such assets will make the DPRK a target in the event of any nuclear war between the great powers that would suck them into a conflict they cannot win.
Because of the aged condition of the technology purchased second-hand by the DPRK to develop nuclear capabilities it is likely that the radiation risk to the entire country is high. The many failures of North Korea’s missile tests have long been noted by Western and international media. Considering the run down materials and apparently shoddy construction of nuclear facilities, reactors and, missile technology there is a very real possibility that some of the North’s nuclear weapon “tests” were in fact accidental explosions. The potential for another disaster on the scale of Chernobyl or Fukushima may be far higher than publicly acknowledged.
The risk of radiation poisoning to North Korea’s population could also be extreme based on the record high statisticsof cancer death rates in South Korea. Additionally, if the death of Kim Jong Il was in any way aggravated by radiation exposure, then the risk to Kim Jong Un’s health in the long term could become a concern for the overall wellbeing of his country.
Nuclear weapons provide North Korea with a false sense of protection. In the event that war might break out between North Korea and one of the Great Powers or between the Great Powers themselves the policy of Mutually Assured Destruction (MAD) would ensure that North Korea would become a target for multiple nations with more nuclear and conventional firepower than it could ever hope to muster in return.
The possession of nuclear weapons is not a fix-all for North Korea and would in fact doom them to destruction in the event of a war. North Korea might fear that to relinquish them would condemn the country to the same fate as Libya or the Ukraine. But North Korea does not play into any strategies relating to regional destabilization like Libya or Venezuela. Nor does it factor into long term expansion plans for organizations like NATO. There is far more to gain by reducing or totally eliminating stockpiles of nuclear weapons than there is to retain them.
D. A Diplomatic Charm Campaign
Kim Jong Un is a man who is happy while traveling abroad, but who seems to merely be going through the motions when at home in a nation whose infrastructure is built with relics of the Japanese and Soviet eras. Embarking on a series of outreach efforts to project a more positive image of North Korea, build diplomatic ties and lay the groundwork for the establishment of embassies around the world is a much needed first step in transforming his country. Meetings with European and Asian leadership will be essential if Kim wishes to communicate that the DPRK is open for business. Such a campaign could also include a historic visit to the White House in the same manner as the 1987 summit between General Secretary Mikhail Gorbachev and President Ronald Reagan near the end of the Cold War.
IV. Recommendations To The Big Three Powers
With Trump’s walk-away in Hanoi, Russia and China have a fresh opportunity to step into negotiations and win a PR victory that will ultimately help make the world a safer place. All three great powers have the necessary experience working with WMDs and considerable incentive to peacefully eliminate the threat from North Korea. Yet only the United States has stepped up to the plate to do the heavy lifting involved with the process. Russia and China must begin to understand the benefits they stand to gain from assisting the DPRK on the path to peace.
China’s incentive to bring peace and stability to the Korean Peninsula is one that plays into their long term geopolitical goals. Actions taken to help solve the crisis would allow Beijing to recuperate their image around Asia, particularly after years of contentious strife with countries such as Japan, the Philippines and Vietnam over territorial water disputes. Proof that China can resolve their conflicts peacefully will speak far louder than any words will be able to.
Russia also has every reason to take an increased role in the peace process since they have begun to build a reputation as a stabilizing global power after their intervention to prop up the Syrian government of Bashar al-Assad in the Syrian civil war. Their cooperation with North Korea would create a new avenue for economic cooperation within the DPRK, whose economy is being eyed by many different corporate interests that hope to secure lucrative deals while assisting with infrastructure and trade development.
V. Conclusion: Stay The Course, Ignore Naysayers
It is little surprise to see that in the aftermath of the Hanoi Summit, President Trump has been barraged by a wave of special interests hoping to derail peace talks. This is very much analogous to the pressure that was placed on President Ronald Reagan in the aftermath of the 1986 Reykjavík Summit. Trump’s response must be, like Reagan’s, to ignore it and persevere.
Institutions such as the Heritage Foundation have already begun baying for a return to hardline policies that will stifle any hope of a future deal. In the media, NBC News, an outlet that previously worked with the CIA and parts of the defense industry to undermine Korea negotiations, has once again been active in using any imaginable excuseto argue against the peace process. These distractions detract from the promising future of a prosperous, peaceful Korean Peninsula that no longer is a liability to the world, but an asset.
Chairman Kim Jong Un must continue with open arms to work with the global powers and the DPRK’s neighbors to pursue denuclearization and an armistice. President Trump and Kim walked away from Hanoi with a continued feeling of goodwill and a clear vision of each other’s perspectives and desires. This understanding must be built on to achieve a total success that will become the toast of the international community for years to come.
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- Deadbeat Nation? 37 Million Credit Cards Were 90 Days Past Due In 4Q18
As those who follow our monthly consumer credit updates already knew, aggregate household debt balances jumped in 4Q18 for the 18th consecutive quarter, and were $869 billion (6.9%) above the previous peak (3Q08) of $12.68 trillion. As of late December, total household indebtedness was at a staggering $13.54 trillion, $32 billion higher than 3Q18. Overall household debt is now 21.4% above the 2Q 2013 trough, according to quarterly data from the Fed.
“The increase in credit card balances is consistent with seasonal patterns but marks the first time credit card balances re-touched the 2008 nominal peak,” according to the report.
There are approximately 480 million credit cards in US circulation, that is 1.47 credit cards per citizen, and up more than 100 million since the 2008 financial crisis.
More troubling is that according to the Fed, 37 million Americans had a 90-day delinquent strike added to their credit report last quarter, an increase of two million from the fourth quarter of 2017. These 37 million delinquent accounts held roughly $68 billion in debt.
Credit-card balances slipping into serious delinquency have been growing for the last several years, according to the Fed. As of 2019, a record number of Americans also have auto loans that are 90 days past due.
“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector,” economists Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw noted in a Feburary report.
Rising delinquency levels pose a serious risk to consumer spending, which accounts for more than 2/3 of economic activity.
Almost a third of the credit card debt is held by the baby boomer generation, while millennials are up to their eyeballs in student loans. That could be troubling because some of the oldest and youngest borrowers are financially dependent on family members, according to Josh Wright, the chief economist at iCIMS and a former Federal Reserve staffer.
“This tells us that if the expected economic slowdown gets serious, these are the groups that will pose the biggest threat to the economy,” he said.
While President Trump continues to promote the “greatest economy ever” on Twitter, 1Q19 GDP expectations have crashed, a troubling sign that consumers have topped out.
Last week, Goldman published its 1Q19 GDP tracking estimate at a paltry +0.9%. This forecast, as Goldman’s chief economist Jan Hatzius said, “reflects an expected drag from inventories, sequentially slower consumption growth, a decline in residential investment, and a four-tenths drag from the government shutdown.”
Goldman wasn’t the only one echoing low-growth forecasts for 1Q19, but also the NY Fed’s GDP Nowcast, which showed growth crumbled from 1.22% (and 2.17% as recently as a month ago), to a stunning 0.88%, as a result of the collapse in Personal Consumption, Housing Starts, Wholesale Inventories, and others.
The most shocking: Atlanta Fed’s 1Q19 GDP nowcast – recently tumbled to just 0.5%. And while it is possible that consumers hit their maximum threshold of borrowing ahead of the holiday spending season, the growing refusal to service their credit card debts is an ominous sign of a nearing recession.
- Chinese Exports Collapse In February Despite Largest Credit Injection Ever
While a few will blame the total and utter collapse in China exports in February on the lunar new year’s early date this year, the scale of the miss is simply stunning.
For a few brief seconds, everything was awesome as Bloomberg’s initial headline proclaimed a big RISE in exports, but they quickly corrected – causing heart attacks across every tape-reading algo in the world…
This is how you blow up a few million worth of algo servers:
CHINA FEB. EXPORTS RISE 16.6% Y/Y IN YUAN TERMS; EST. 6.6%
CORRECT: CHINA FEB. EXPORTS -16.6% Y/Y IN YUAN TERMS; EST. 6.6%
— zerohedge (@zerohedge) March 8, 2019
https://platform.twitter.com/widgets.js
Exports plunged 20.7 percent in February while imports fell 5.2 percent, leaving a trade surplus of $4.12 billion, the customs administration said Friday.
Economists forecast both exports and imports would shrink, although not as much as the fall. The Lunar New Year break fell about 10 days earlier than last year, likely boosting January’s shipments and weighing on February’s.
But Chinese imports from the US crashed the most on record…
In addition to the shutdown that happens each year, February was an uncertain period for Chinese exporters, with negotiations through the month on whether the U.S. would raise tariffs from March 1.
Analysts were quick to defend the crash as an outlier…
“There is big progress in the trade talks compared with a few months ago. But the trade tension itself brings uncertainties to companies, who could slow or delay their investment, or even move some of their production overseas” UBS AG economist Tao Wang said in a conference call on Thursday. A potential economic slowdown in the U.S. and Europe, together with their monetary policies, will also add to the external challenges for China, she said.
And the rest of the world better hope so too… because if this correlation holds up – all hell is about to break loose back in the ‘decoupled’ USA…
US equity futures dropped on the headlines…
And Chinese stocks were already suffering their biggest drop of the year…
As a reminder, this collapse is occurring after the PBOC announced it had flooded the economy with a gargantuan 4.64 trillion yuan in various new forms of debt which comprise China’s Total Social Financing in January, including notably, the “shadow” credit which Beijing had been aggressively cracking down on: an aggressive credit expansion which many took as a tacit confirmation that China was losing the fight with deleveraging.
So if 4.64 trillion didn’t help… and RRR cuts… and promises of tax cuts… just what is the US and Chinese equity market pricing in?
- Amazon Vendors Panic After Online Giant Suddenly Halts Purchases
After Amazon successfully put a majority of its retail “brick and mortar” competitors out of business, it is now cracking down on its own supply chain.
In Jeff Bezos latest move to boost flagging profits and razor-thin margins at the company’s core e-commerce business, Amazon abruptly stopped buying products over the past two weeks from many of its wholesale vendors, encouraging them to instead sell their products directly to consumers on Amazon’s marketplace, even if that means disrupting relationships with longtime suppliers and potentially limiting customer choice. And, according to Bloomberg which cited consultants who help clients sell on Amazon, thousands of vendors are affected.
The departure from the company’s traditional business model of serving as logistical middleman between buyers and sellers, is pushing suppliers directly onto the marketplace – rather than selling products itself – and lets Amazon offload the risk but more importantly, the cost of purchasing, storing and shipping the merchandise. Instead, leveraging its quasi-monopolistic scale, Amazon is moving to charge suppliers for these services while taking a commission on each transaction, resulting in much higher margins per transaction. The disruptive strategy is part of a larger effort to reduce overhead by getting more suppliers to use an automated self-service system that requires no input from Amazon managers.
Commenting on the change in the company’s traditional operating model, Amazon responded to Bloomberg that it regularly reviews its selling partner relationships “and may make changes when we see an opportunity to provide customers with improved selection, value and convenience.” What it meant is that it is now big enough to extract an even greater profit from each transaction as the company’s vendors have no other choice.
And while their options may be limited, the vendors were not only shocked by the change in strategy, they are also furious: the abrupt cancellation of orders prompted panic this week at the ShopTalk retail conference that drew more than 8,000 retailers, brands and consultants to Las Vegas.
Some attendees said Amazon stopped submitting routine orders last week for a variety of products, often without explanation. The drought continued this week, affecting more vendors and leaving them frustrated about the lack of communication from Amazon.
One vendor who has been selling products to Amazon for five years said he got a canned response when he inquired why his routine weekly purchase order never came through. The response gave him no clarity about his standing as a vendor, he said.
Meanwhile, unless sellers adopt to the new way of transacting they could be stuck with massive losses as they find themselves with significant inventory they are unable to find buyers for. As Bloomberg explains, because many suppliers source products from manufacturers months in advance, “they’ll have to quickly shift their sales tactics if the expected Amazon orders don’t come in.”
Now more Amazon vendors will be forced to sell on the marketplace or risk getting stuck with unsold inventory, said Will Land, CEO of Marketplace Valet, an e-commerce logistics provider and consulting firm in Riverside, California.
“When you get used to those big checks,” he said, “it’s hard to pull away.”
“If you’re heavily reliant on Amazon, which a lot of these vendors are, you’re in a lot of trouble,” said Dan Brownsher, Chief Executive Officer of Channel Key, a Las Vegas e-commerce consulting business with more than 50 clients that sell more than $100 million of goods on Amazon annually. “If this goes on, it can put people out of business.” Brownsher was among several consultants who said Amazon’s move has affected thousands of vendors.
In some ways the move shouldn’t have come as a surprise: in recent years, Amazon has increasingly prioritized its marketplace. More than half of all products sold on Amazon in 2018 came from marketplace merchants, while revenue providing services to those merchants is growing at double the pace of revenue from the online store. This is reflected in the company’s “sum of the parts” valuation: according to Evercore ISI analyst Anthony DiClemente, the marketplace business is worth about $250 billion, more than double the value of the online retail business.
It’s almost as if having put many of its less efficient competitors out of business, Amazon has “gone hostile” against the very people who made its ascent to the throne of online retail monopoly possible in the first place.
Which once again begs the question: is Amazon a monopoly, and when will the FTC finally be forced to me a determination. One thing is certain: as Bezos – and Amazon – seek to also directly influence consumer behavior, don’t be surprised not to find any mention of just how “capitalistic” Amazon has become, say, on the pages of the Washington Post, which is bundled as a “free” subscription to any paying member of Amazon Prime.
- World's Most Successful Hedge Fund Manager Ever Reveals Some Of Medallion's Secrets
Two years ago, when profiling the world’s most successful hedge fund in history, Bloomberg stared like this:
Sixty miles east of Wall Street, a spit of land shaped like a whale’s tail separates Long Island Sound and Conscience Bay. The mansions here, with their long, gated driveways and million-dollar views, are part of a hamlet called Old Field. Locals have another name for these moneyed lanes: the Renaissance Riviera.
That’s because the area’s wealthiest residents, scientists all, work for the quantitative hedge fund Renaissance Technologies, based in nearby East Setauket. They are the creators and overseers of the Medallion Fund—perhaps the world’s greatest moneymaking machine. Medallion is open only to Renaissance’s roughly 300 employees, about 90 of whom are Ph.D.s, as well as a select few individuals with deep-rooted connections to the firm.
The fabled fund, and we are of course talking about Renaissance Technologies’ employees-only Medallion fund, known for its intense secrecy and “black box”-like mystery of what actually goes on there, has produced about $55 billion in profit over the last 28 years, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. Just like Berie Madoff, the fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.
“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”
Yet while many have tried to emulate and reverse engineer Medallion’s success, nobody has come close to the inner workings of the world’s most successful money machine.
At least until Wednesday, when fabled code-breaker and Renaissance founder, Jim Simons spoke at MIT, at the second of three talks about his iconic career; the talk, which followed last week’s conversation about mathematics and precedes next week’s on philanthropy, attracted an overflowing crowd that included MIT investing chief Seth Alexander. Andre Stern of the U.K.’s Oxford Asset Management introduced Simons.
Simons launched Renaissance after leaving academia and in 1988 started the Medallion Fund, which through last year generated an unrivaled annual average return of about 40 percent, according to calculations by Bloomberg. “That’s net of fees,” Simons said in response to a question from a reporter.
As discussed here extensively in the past, while Renaissance manages money across a handful of funds, the in-house only Medallion evokes the greatest mystery, and as Bloomberg notes, it employs trading strategies to predict price changes in global markets that over three decades no one on Wall Street has been able to replicate. That’s why the U.S. Securities and Exchange Commission came calling after the Bernard Madoff scandal broke in 2008, Simons said.
“They did study us,” said Simons as he spoke about his career in money management. “Of course, they didn’t find anything.”
What was more unique, is that the traditionally media-shy Simons offered a some clues into what sets Renaissance apart:
At the core of the company, which employs about 300 people, Simons said “is a great computing system, good scientists and low turnover.” Employees, who get a piece of the profits, sign non-disclosure agreements when they are hired and non-compete contracts after a couple of years on the job.
“It’s fun to work there,” Simons said in a question and answer format led by MIT professor Andrew Lo, who started the quant fund AlphaSimplex Group. “People get paid a lot of money.” Some, like former co-CEO Robert Mercer may not find it that much fun to work there, but that’s why he recently quit the firm.
According to Simons, the East Setauket-New York company never stops improving its models as it tries to stay a step ahead of the competition, which has flourished in recent years as quant firms attracted more assets than traditional, fundamental shops. Simons stepped down as head of the company in 2010 but remains as non-executive chairman. He said he meets with the company monthly, encouraging management to keep hiring good, young scientists.
Sharing some more details into the company’s “secret sauce”, Simons said that the Medallion strategy is continually being reinvented, though some parts have remained for as many as two decades. Initially launched as a systematic, trend-following fund that traded in commodities markets, it was losing money after the first six months. So the fund was completely revamped.
Still, the company realized after about 15 years that there were limits on how much Medallion could manage without pushing markets too much, Simons said in a conversation after the talk. So Renaissance finished booting outside investors in the fund in 2005, and since then has sought to limit its size.
While Simons refused to say how much Medallion has in assets, Bloomberg calculations put it at about $10 billion. Simons did say there is about $45 billion in the firm’s other funds, which are still open to outside investors, and generate far smaller returns than Medallion.. They employ longer-term trading strategies, so the funds haven’t delivered the same level of returns as Medallion.
“Yes inefficiencies do get traded out, but the market is dynamic,” Simons said, quoted by Bloomberg, in response to a question from the audience. “There’s room for new inefficiencies to materialize. We keep finding new things and throwing out old things.”
After his talk, students descended on the former mathematician who had broken ground in the field decades ago, winning the American Mathematical Society’s Oswald Veblen Prize in Geometry in 1976.
In the middle of the scrum, Simons vaped, producing a cloud of smoke as he answered more questions.
Below we publish a video recording of the first part of Simons’ three part presentations, discussing the role of mathematics in money.
- Nonfarm Payroll Preview: Beware The Snow Shock, But All Eyes On Wages
After January’s blockbuster report, analysts forecast Friday’s headline nonfarm payrolls will drop to a far more muted pace of 180k (12-month average: 234k), with the February jobs drop due to more seasonal temperatures weighing on weather-sensitive industries. Survey quirks may contribute to firmer wage growth, which could tick up to a pace last seen in 2009.
Here’s what to expect from the BLS at 830am EST on Friday morning courtesy of RanSquawk:
- Non-farm Payrolls: Exp. 180k, Prev. 304k.
- Unemployment Rate: Exp. 3.9%, Prev. 4.0% (NOTE: the FOMC currently projects unemployment will stand at 3.5% at the end of
- 2019, and 4.4% in the longer-run).
- U6 Unemployment Rate: Prev. 8.1%.
- Average Earnings Y/Y: Exp. 3.3%, Prev. 3.2%.
- Average Earnings M/M: Exp. 0.3%, Prev. 0.1%.
- Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs.
- Private Payrolls: Exp. 175k, Prev. 296k.
- Labour Force Participation: Prev. 63.2%.
JOB GROWTH: While consensus expects a sharp drop from last month’s 304K payrolls print, predicting a number around 180K, Goldman is bracing for a big miss on the headline jobs print, estimating that nonfarm payrolls increased 150k in February, 30k below consensus and the slowest pace in five months. Goldman believes the trend in job growth has likely slowed from the 232k average pace of the last six months, and expects a drag of at least 40k from above-average snowfall during the February survey week. The February seasonal factors have also evolved unfavorably in recent years—perhaps reflecting the unusually mild weather of recent Februaries. If so, this would also restrain payroll growth in tomorrow’s report.
WAGE GROWTH: While the Street expects a healthy 0.3% MM rise in average hourly earnings (3.3% for the YY), Nomura is slightly more optimistic, and forecasts the annualised rate will rise to 3.4%, the firmest pace since April 2009. “We expect average hourly earnings to increase 0.34% MM in February, partly due to a positive bias related to where the BLS survey week falls relative to the first of the month,” Nomura writes, “in addition, we see some upside risk to February AHE arising from unusual declines for certain industries during January including manufacturing and construction that could revert.”
Meanwhile, Goldman estimates average hourly earnings increased 0.4% month-over-month, with the year-over-year rate rising two tenths to a new cycle high of 3.4% (consensus is +0.3% mom and +3.3% yoy). Our forecast reflects quite favorable calendar effects (the February survey week ended on the 16th of the month). Supervisory earnings have also been somewhat soft in recent months and could rebound, as headline average hourly earnings (+0.77% over the last three months) have underperformed the production and non-supervisory subset (+0.96%).
JOBLESS CLAIMS: For the week of the February NFP survey period, US initial jobless claims for the week were reported at 236k vs 200.5k for the January survey period. Some desks had noted that the trend-pace of jobless claims has weakened (jobless claims ticking higher), which is likely to be a function of slowing economic growth. This may continue in the coming months, though positive developments on China/US trade and Brexit may see some flattening in the summer. Additionally, claims have been rising from very low levels.
ADP PAYROLLS: The ADP reported 179k payrolls were added to the US economy in November, short of the 195k the Street was looking for. Crucially, Moody’s chief economist stated that while the report was strong, job growth has likely peaked: “This month’s report is free of significant weather effects and suggests slowing underlying job creation. With very tight labour markets, and record unfilled positions, businesses will have an increasingly tough time adding to payrolls.” Others noted that the data followed months of above-trend prints, so may not signal any meaningful shift in job growth. Additionally, Pantheon Macroeconomics says it looks for an official NFP reading above the ADP print since the BLS data will include people returning to work following hurricanes. “ADP isn’t directly affected by hurricanes because it counts names on payroll lists, while the BLS only counts people who were paid during the survey period, so hourly-paid part-timers can drop off the numbers after storms, and then return the following month,” Pantheon said.
BUSINESS SURVEYS: The employment sub-index in the manufacturing ISM report for February ticked down by 3.2 points, taking it to 52.3, signalling employment growth for a 29th straight month. “Employment continued to expand, but at the lowest level since November 2016, when the index registered 51.6 percent,” ISM said, noting that an Employment Index above 50.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The nonmanufacturing ISM employment sub-component fell by 2.6 points, taking it to a still healthy 55.2, representing the 60th consecutive monthly print above 50. The survey compiler noted comments from respondents, which included “lower employment makes higherpaying positions elsewhere more attractive” and “It is more difficult to find well-qualified workers. Our backlog of unfilled jobs is stubbornly the same despite the efforts of the HR department.”
JOB CUTS: Challenger reported US employers announced 76.8k job cuts in February – the highest monthly total in over threeand-a-half years; that’s a 45% jump vs January, and 117% jump vs February 2018. Challenger noted that the sharp rise was primarily due to the US Army cutting over 50k jobs, as well as the fall in oil prices which caused thousands of job cuts within the energy sector.
“Job cuts have been trending upward since the last half of 2018,” Challenger wrote, “we continue to see companies respond to shifting consumer behaviour, new technology, as well as trade and market uncertainty through workforce restructuring,” and added that retailers, meanwhile, “are closing or revamping brick-and-mortar locations, leading to job loss or going bankrupt and cutting their entire workforces.” The organisation also drew attention to the auto sector, where job cuts are up by over 200% YY. “The Auto industry is one in which shifting consumer demand and new tech is creating the need to pivot in a different direction. Tech companies like Apple and Tesla are competing for the self-driving market, causing disruptions to traditional manufacturers and suppliers like Apple and Tesla are competing for the self-driving market, causing disruptions to traditional manufacturers and suppliers.”
Here are they key qualitative considerations headed into tomorrow’s jobs print, via Goldman:
Arguing for a weaker report:
- Winter weather. Mild winter weather likely boosted job growth in December and January by 100k or more cumulatively, and the unwind of these effects is likely to weigh on job growth in February and early spring. Furthermore, survey-week snowfall swung above average in February, with a 1-inch seasonally adjusted rise vs. January (population-weighted basis, see left panel of Exhibit 1). The February seasonal factors have also evolved unfavorably in recent years (see right panel) – note the possibility that the seasonal adjustment software is fitting to the unusually mild weather of recent Februaries. If so, the seasonal factors could amplify the impact of snowy weather in tomorrow’s report. Goldman’s February payroll growth estimate embeds a -40k weather effect, but there is risk of a considerably larger drag.
- Jobless claims. Initial jobless claims rose over the five weeks between the payroll reference periods (+8k to 229k on average, a 10-month high). This increase is consistent with some slowing in the underlying pace of job growth. Continuing claims also rose from survey week to survey week (+89k to 1,805k), but we continue to believe that residual seasonality is currently boosting that measure (by 100-150k).
- Job cuts. Announced layoffs reported by Challenger, Gray & Christmas increased by 23k in February to 66k (SA by GS). On a year-over-year basis, announced job cuts rose 41k, mostly reflecting increases in the industrial goods (+28k yoy) and retail (+13k yoy) sectors, the latter of which may include the impact of retailer bankruptcies (Payless Shoes, Charlotte Russe).
Arguing for a stronger report:
- Job availability. Three measures of labor demand all rose to new cycle highs in their most recent readings. The Conference Board labor market differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—rose 0.2pt to +34.3 in February. JOLTS job openings also rose (+169k to 7,335k in December). Third, the Conference Board’s Help Wanted Online (HWOL) index—whose methodology has been improved to remove duplicate ads and other sources of volatility—rose to 0.3pt to 104.0 in February.
- Labor supply constraints. Historically, labor supply constraints are less likely to bind in February, as first-reported job growth is often relatively strong when the unemployment rate is below estimates of NAIRU (for example, in 1997-99, 2006, and 2017-18). This may reflect the seasonally elevated pool of unemployed workers available to be hired (following end-of-year layoffs). Relatedly, firms may pull forward some spring hiring into February if they expect difficulty finding workers.
Neutral Factors:
- Business surveys. Service-sector business surveys generally improved in February, as our headline non-manufacturing tracker rose by 4.0pt. While the employment component also increased (+1.3pt to 54.0), it has still declined notably in recent months and remains well below the elevated levels seen in mid-2018. Manufacturing-sector surveys were mixed in February, and our manufacturing employment tracker remained relatively stable (+0.2pt to 55.8). Taken together, business surveys suggest a slowdown in the pace of job growth but hardly a collapse (see Exhibit 2). Service-sector job growth rose 224k in January and averaged 173k over the last six months. Manufacturing payroll employment rose 13k in January and increased 19k on average over the last six months.
- ADP. The payroll-processing firm ADP reported a 183k increase in February private payroll employment—7k below consensus and moderately below the average pace over the prior six months (+214k). While slightly below expectations, the February ADP report suggests that the underlying pace of job growth remains above potential. We also note that winter weather tends to affect the official payroll measure more so than it affects the ADP series.
- End of Government Shutdown. While the partial government shutdown (Dec. 22 through Jan. 25) did not significantly affect January’s federal employment figures (+1k mom sa), contractor layoffs may have weighed on the information (-4k) and business services (+30k vs. six month average of +43k) categories in that report. In terms of February job growth, while a rebound in contractor activity could conceivably boost employment in some services categories, federal office closures in the first two weeks of the payroll month may have depressed federal hiring.
Source: RanSquawk, Goldman
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