Miscellaneous

April Showers

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Yesterday, the GDP figures were released for the first quarter of the year, and they showed that the economy is flatlining. We grew at only a pitiful 0.5%. Much of it was caused by a huge decline in business investment, which saw the biggest monthly drop since the recession.

This is mostly blamed on the troubles in the oil and gas industry, but output in other areas of the economy also showed weakness. Factory orders dropped and have remained flat the past several months. Car sales plummeted 2.1% last month, their biggest drop in a year. With gas prices low this is the one thing we should see rising. The car industry stumbling means there may be some other underlying problems.

The conventional wisdom, on the other hand, views this as just a blip. The winter season in the post-recession era has usually been the weakest time of year only to be followed by a rebound into the rest of the year. The exception was 2012 where the high hopes at the start gave way to the rising probability of an Obama reelection. The economic shock spread during the year, and the traditional holiday hangover came a little early in the wake of the electoral wreckage. This year, with the jobs market expected to stay strong and the Fed signaling it will put the brakes on further interest rate increases, the economy is seen bouncing back as the rough waters give way to the calm port.

It may very well turn out that way for all I know. My crystal ball has been a little foggy lately, so I wouldn’t venture a guess either way. However, there may be some other causes for concern further down the road. This week the McKinsey Institute just issued a research report on the stock market, ominously titled, Diminishing returns: Why investors may need to lower their expectations. In it they provide a detailed analysis of why the next 30 years will see lower stock market returns than the previous few decades.

Now admittedly, most analysts’ forecast for the next 30 days can usually be attributed to luck. A forecast for the next 30 years probably isn’t something you want to bet the whole farm on. A small corner of the barn maybe, but I would save the rest of the homestead to see how things actually unfold.

The report lays out in detail why the oversized returns between 1985 and 2015 were possible, and the reasons they say are because of four factors: low interest rates, low inflation, high productivity from technological advances, and favorable demographics from emerging markets entering the global economy. Nothing controversial there. The first three elements increased profit margins, and the last one provided cash influxes, which kept interest rates low, which in turn increased the others. Virtuous cycle wash, rinse, repeat. They also include some calculations, but the self-evidence is apparent enough.

The wrench in the works is going to be the fact that those elements won’t have the effect that they once had. Interest rates are already rock bottom, and in some cases even below that. Squeezing more out of low yields is going to be tougher and tougher. In 1980 inflation was 13% and interest rates were 20%. Now they’re currently at 1.6% and 0.5% respectively. There’s nowhere to go but up. Sideways is always a possibility, but we’re still in the same boat. That won’t drive future growth either like it once did.

Demographic growth may still hold up. There’s still a whole lot of world out there with the potential to drive a modern global economy. The question is will they be capable of replicating what we saw in the recent past with hundreds of millions of Chinese rising out of the Maoist ashes and into the middle class? Any new emerging markets will have a lot more work to do. The report points out that the countries with the largest economies have seen slowing population growth, and that will continue to decelerate

In Western Europe, aging is more striking than in the United States. In France, for example, the share of the working-age population is expected to decline from 63 percent to 58 percent over the next 20 years. In Germany, the fertility rate has exceeded replacement rate in only seven of the past 50 years. Employment has already peaked in Germany, and its labor pool could shrink by up to one-third by 2064. Until the 2015 influx of refugees from Syria, Iraq, and elsewhere, the German population was expected to shrink by as much as 0.3 percent per year over the next 20 years.

Germany has decided to address their demographic collapse by welcoming in an unproductive culture. Either way they haven’t much left to contribute in preventing the forecasted shortfall.

McKinsey does hold out hope for some technological breakthroughs which could pick up the slack in productivity. Whatever it may be, they say it will need to have a bigger impact than the previous computer and internet revolutions because of the other headwinds. The best scenario would be in some combination with fast growing emerging market or industry. The problem with that happening is now that taxes and regulation are increasing, companies involved in fast growing sectors will tend to want to stay private, so equity returns will be elusive for only a select few.

Interestingly, one sector highlighted that will benefit from higher interest rates is insurance companies. The era of low to zero interest rates has made it difficult for them to make any money on annuities. Their annuities pay out guaranteed yields to customers, but ZIRP and NIRP keep profits low. Fixed income annuities in which insurers bear most of the risk will benefit from higher yields.

However, variable annuities where the customers share the risk have more exposure to equities, so they would be vulnerable to the lower growth/lower returns environment. Providers of variable annuities along with other asset managers will need to adjust their investment strategies:

To confront this, asset managers may have to rethink their investment offerings. One option would be for them to include more alternative assets such as infrastructure and hedge funds in the portfolios they manage. Such alternative assets already account for about 15 percent of assets under management globally today.

To chase returns, investors will be forced into riskier assets, possibly with dubious intentions, i.e. government boondoggles otherwise known as shovel ready infrastructure projects. We may already be seeing something like this with the imminent government takeover of financial advisors

The Department of Labor dealt a bit of a surprise blow to fixed indexed annuities in the final iteration of its rule, issued Wednesday, by lumping the annuities into a more complex and costly regulatory regime than they have presently, representing an about-face from the department’s original proposal.

Just like Obamacare pushes out the small to medium firms that can provide much needed innovation in order to capture the market, the new DOL fiduciary rules will push out small to medium sized advisors to replace them with automated puppets that will be programed to herd investors into investing in government programs.

There’s a good reason the Obama Administration is currently fighting so hard to keep these rules. It’s a template for taking over other industries. And with that it’s another impediment to productivity growth and innovation which reinforces the grim forecast of diminishing returns by McKinsey.

Revisiting “Belgium — The Failed State in the Heart of Europe”

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Jim Hoft over at Gateway Pundit has a guest post by Drieu Godefridi that is essentially a follow up to my March 24th, 2016 “Belgium — The Failed State in the Heart of Europe” piece.

It is unsurprisingly titled “Guest Post: More Terrorist Attacks Likely in Failed State of Belgium.”

Please go give Jim Hoft’s site some “linkie love” while checking out the full post, but before you go, this portion of that post bears immediate and close reading —

It is thus obvious that the Belgian government is in a shambolic state at every level, from the local to the federal, and from the executive branch to the judiciary.
 
Of course none of this would have been possible without the policy, in place now for 30 years, to open Belgian citizenship — and the borders — to hundreds of thousands of people from around the world. This open invitation has been extended mainly to Muslim countries, instigating the creation, ex nihilo, of huge Muslim communities in the cities of Brussels, Antwerp and every other Belgian city. Radicalized or not, fundamentalist of not, peaceful or not, these communities tend, in Belgium as anywhere else, to impose their political-religious credo.
 
A study by the WZB Social Science Center (Berlin), published last year in the “Journal of Ethnic and Migration Studies”, indicates that half the Muslims in Belgium, France and Austria are fundamentalists, i.e. they think that Muslims should return to the roots of their faith; that there is only one interpretation of the Koran; and that Muslim law should supercede civil (or common) law, (“Religious Fundamentalism and Hostility against Out-groups. A Comparison of Muslims and Christians in Western Europe”, Journal of Ethnic and Migration Studies, Vol. 41, N °1, 33-57). This Weltanschauung (or concept of the world) is irreconcilable with the rudiments of our Western civilization, or for that matter any society which is not strictly Islamic. To assert that Islam—which is much more than simply a religion—has nothing to do with the current spate of terrorist attacks in Europe is a psychotic denial of reality.

Denial of reality is at the heart of the “European Union” project, which has Brussels as its capital.

That is why the “Belgium — The Failed State at the Heart of Europe” meme is spreading. It is obvious to all this will not end well…but end it will.

And its passing will be marked with fire and blood.

Another step for Craig Venter.

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cell

I have previously posted about Venter’s work with synthetic organisms.

While I was digesting this new material, Craig Venter was making the Gene VII book obsolete. He set up a new company to compete with the Human Genome Project The result is well described in The Genome War by James Shreeve who was given access to Venter but less to the government funded project. This year, Venter’s autobiography was published and his plans for the future are described.

The links are at the original article which is from 2007.

Now, his group has progressed to a synthetic bacterium.

Using the first synthetic cell, Mycoplasma mycoides JCVI-syn1.0 (created by this same team in 2010), JCVI-syn3.0 was developed through a design, build, and test process using genes from JCVI-syn1.0. The new minimal synthetic cell contains 531,560 base pairs and just 473 genes, making it the smallest genome of any organism that can be grown in laboratory media. Of these genes 149 are of unknown biological function. By comparison the first synthetic cell, M. mycoides JCVI-syn1.0 has 1.08 million base pairs and 901 genes.

A paper describing this research is being published in the March 25th print version of the journal Science by lead authors Clyde A. Hutchison, III, Ph.D. and Ray-Yuan Chuang, Ph.D., senior author J. Craig Venter, Ph.D., and senior team of Hamilton O. Smith, MD, Daniel G. Gibson, Ph.D., and John I. Glass, Ph.D.

This is huge news and will take years to develop.

The most surprising result of their work—and perhaps the most sobering one for the rest of the field: The team still doesn’t understand what 31 percent of the essential genes do in even the simplest organism, to say nothing of a human genome. It’s a development Venter called “very humbling.”

“We are probably at the 1 percent level in understanding the human genome,” said Clyde Hutchison III, a distinguished professor at the Venter Institute.

That lack of knowledge isn’t standing in the way of entrepreneurs. Biology has been “hot and heavy” since the development of a molecular tool that makes gene editing easy, Hutchison explained. Scientists might be able to remove disease-causing genes or even determine a baby’s eye color. This technology, known as CRISPR/Cas-9, has alarmed many inside and outside the research community, who fear it may be used on the human genome before its effects are understood, with unforeseen results.

If he does another public seminar, I hope my friend Bradley can get me a ticket. I am now reading Lewin’s Genes XI, although he seems to be no longer the editor.

I hope I can wade through it. Sometimes, as knowledge progresses, it becomes simpler. I hope so.

“These cells would be a very, very useful chassis for many industrial applications, from medicine to biochemicals, biofuels, nutrition, and agriculture,” said Dan Gibson, a top scientist at both Venter’s research institute and his company, Synthetic Genomics Inc. Ultimately, the group wants to understand the tiny genetic framework well enough to use it as a biological foundation for more complex organisms that could address many of the world’s ills. Once each essential gene’s function is identified, scientists can build an effective computer model of it; from there, they can simulate how best to go about “adding pathways for the production of useful products,” they wrote.

I will be following this story closely, if I can only understand it.

Belgium — The Failed State in the Heart of Europe

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Today in Europe, in the aftermath of the Brussels terrorist attacks, a dark truth stands reveled about the nature of the Belgian state. Belgium is a failed state at the heart of Europe…and much of the rest of Europe is following.

Belgium quite literally lacks the military means to enforce the sovereignty of the Belgian state in the Muslim neighborhood of Molenbeek in Brussels, the Belgian Capitol.

The following is via John R. Schindler of The UK Observer:

Europe Is Again at War

We should expect more guerrilla-like attacks like Brussels yesterday: moderate in scale, relatively easy to plan and execute against soft targets, and utterly terrifying to the public. At some point, angry Europeans, fed up with their supine politi1cal class, will begin to strike back, and that’s when the really terrifying scenarios come into play. European security services worry deeply about the next Anders Breivik targeting not fellow Europeans, but Muslim migrants. “We’re just one Baruch Goldstein away from all-out war,” explained a senior EU terrorism official, citing the American-born Israeli terrorist, fed up with Palestinian violence, who walked into a Hebron mosque in 1994, guns blazing, and murdered 29 innocent Muslims.

When that violence comes, a practically disarmed Europe will be all but powerless to stop it. To take the case of Belgium, at the Cold War’s end a generation ago, its army had seven brigades with 18 infantry battalions, plus some 30 more battalions in the reserve. Today, Belgium’s army has only two brigades and six infantry battalions, some 3,000 bayonets in all. That tiny force would have trouble exerting control over even one bumptious Brussels neighborhood in the event of serious crisis.

Thanks to Belgium’s sovereignty collapse, Europe is now in the throws of an emerging decade plus Muslim insurgency spreading from Brussels…

…while E.U. Security Forces supporting the Belgians are more concerned with repressing local predominantly white citizens from striking back at terrorist inclined Muslim migrants than dealing with the Muslim problem to begin with.

And it gets worse, with hundreds if not thousands of trained terrorists arriving with the multi-million person Muslim Migrant wave that German Prime Minister Frau Merkel kicked off in 2015. The EU faces a situation where it will see a ‘major’ (Charles Hebdo, Paris, Brussels class) EU terrorist incident every 60 to 180 days for the foreseeable future. This leaves aside the worse than American urban ghetto crime and sexual assault rates these illegal Muslim migrants are now inflicting on EU citizens.

NB: The EU is now no longer tourist friendly, with all the economic fall out that means.

The political corruption — and ethnic tensions between the Dutch speaking Flems and French speaking Walloons — that dominates the Belgian state make it impossible to remedy the Muslim insurgency there.

Nothing short of Belgian territorial partition between France and Germany can bring effective enough military governance to end the Muslim Insurgency in Brussels.

Given that awful reality, Donald Trump’s idea of reducing America’s role in NATO (Or perhaps even getting out of NATO all together?) is the best thing the USA can do.

Both Vietnam’s and Shia Iraq’s lessons for America’s citizens are that it is a futile waste of American lives and treasure to try and protect people who don’t have either the will nor the means to protect themselves.

When will we win?

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From some recent readings on the Vietnam War

A bitter little story made the rounds during the closing days of the Vietnam war:
 
When the Nixon Administration took over in 1969 all the data on North Vietnam and on the United States was fed into a Pentagon computer population, gross national product, manufacturing capability, number of tanks, ships, and aircraft, size of the armed forces, and the like.
 
The computer was then asked When will we win?
 
It took only a moment to give the answer: ‘You won in 1964!’