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The Heartland Has Been Devastated: Peter Thiel Speaks Up

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In a speech at the National Press Club on October 31, billionaire businessman and tech pioneer Peter Thiel defended his controversial decision, which has caused intense debate and earned Thiel the wrath of Silicon Valley liberal elites, to back Republican presidential candidate Donald Trump.

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“Everybody knows we’ve been living through a crazy election year,” so begins Thiel’s speech. “Real events seem like the rehearsals for Saturday Night Live. Only an outbreak of insanity would seem to account for the unprecedented fact that this year a political outsider managed to win a major party nomination.”

Thiel’s speech was streamed live and a full recording on YouTube had half a million views so far. In his introduction, Thomas Burr, Washington correspondent for The Salt Lake Tribune and 109th president of the National Press, recalled Thiel’s impressive track record as PayPal co-founder and early Facebook investor, among many other success stories. Burr also mentioned the recent storm caused by Thiel’s political choices – after speaking in support of Trump at the Republican National Convention, Thiel is donating $1.25 million to Trump’s campaign.

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Thiel agrees that Trump’s words about women in a recently leaked 2005 video were “clearly offensive and inappropriate,” but is persuaded that Trump’s voters have more important concerns to worry about. “[We]’ve lost tens of thousands of factories and millions of jobs to foreign trade,” he said.

The heartland has been devastated.

“[Money] flows into financial assets; it distorts our economy in favor of more banking and more financialization; and it gives the well-connected people who benefit a reason to defend the status quo,” continued Thiel. “But not everyone benefits, and Trump voters know it. Trump voters are also tired of war.”

Clinton’s proposed course of action would do worse than involve us in a messy civil war; it would risk a direct nuclear conflict.

According to Thiel, there are loud voices that do not intend to tolerate the views of one half of the country.

“This intolerance has taken on some bizarre forms,” notes Thiel. “The Advocate, a magazine which once praised me as a ‘gay innovator,’ even published an article saying that as of now I am, and I quote, ‘not a gay man,’ because I don’t agree with their politics.”

The lie behind the buzzword of ‘diversity’ could not be made more clear: If you don’t conform, then you don’t count as ‘diverse,’ no matter what your personal background.

The Advocate article Thiel is referring to is here, and it does seem intolerant indeed, to say the least. The Advocate replied with a disclaimer, saying that commentary pieces “represent only the views of the writer, not the entire publication.”

Thiel’s point about diversity has been recently emphasized by Mark Zuckerberg, one of the few Silicon Valley tech titans who have spoken up in support of Thiel. “We can’t create a culture that says it cares about diversity and then excludes almost half the country because they back a political candidate,” said Zuckerberg. “There are many reasons a person might support Trump that do not involve racism, sexism, xenophobia or accepting sexual assault.”

Similarly, Amazon CEO Jeff Bezos doesn’t consider Thiel’s personal political views as a valid reason to boycott Thiel. “It’s way too divisive to say if you have an opinion, you can’t sit on my board,” said Bezos. “That makes no sense.”

We Have Fallen Very Far From the Apollo Standard

Peter Thiel

Peter Thiel

Thiel is known for his Libertarian views, but he recognizes that the government has a job to do, and doesn’t claim that the government never works. On the contrary, he recalled past government success stories.

“[The] government wasn’t always this broken,” Thiel said. “The Manhattan Project, the Interstate Highway System, and the Apollo Program – whatever you think of these ventures, you cannot doubt the competence of the government that got them done. But we have fallen very far from that standard.”

These words echo Thiel’s famous remark: “We were promised flying cars and we got 140 characters.” It’s no surprise that Silicon Valley, which these days does too much 140 characters and not enough flying cars (with some exceptions though) doesn’t like Thiel.

“It is better to risk boldness than triviality,” says Thiel in his “Zero to One” book on startups and how to build the future. In the book’s conclusion, Thiel proposes to accelerate “takeoff toward a much better future,” perhaps toward “new technologies so powerful as to transcend the current limits of our understanding.” In his speech in support of Trump at the Republican National Convention, Thiel criticized the triviality that seems to dominate today’s politics. “When I was a kid, the great debate was about how to defeat the Soviet Union,” he said. “And we won.”

Now we are told that the great debate is about who gets to use which bathroom. This is a distraction from our real problems. Who cares?

Images and video from National Press Club and Wikimedia Commons.

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Politics

It’s Decision Day for Catalonia’s President

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Catalonia’s President Carles Puigdemont has until 10:00 (08:00 GMT) Monday to clarify to the Spanish government whether or not he has declared independence. Depending on the decision, Spanish Prime Minister Mariano Rajyo is prepared to begin the process of ousting the leader of the autonomous Catalonia community.

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Running Out of Options

Puigdemont quickly declared independence after Catalonia’s landslide referendum on Oct. 1, where 92% of voters backed independence. However, he later suspended secession from taking effect at a regional parliament session last week. Puigdemont now finds himself between a rock and a hard place, with both the government in Madrid and separatists upset and confused by his tactics.

For Puigdemont, the decision isn’t so simple. For starters, dozens of Catalan companies have announced they would move elsewhere in the country rather than face the legal hurdles of independence. Catalonia is one of Spain’s most prosperous regions, with a local economy worth $250 billion.

He has previously stated his government is “against aggression and against imposed rule.” Those comments put the Catalan leader no closer to clarifying his position.

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The Spanish government has repeatedly said it will not accept Catalan separatism and has, for the first time, invoked Article 155 of the constitution. This provides Madrid the leverage to suspend regional autonomy and impose direct rule.

According to Bloomberg Politics, Catalonia was a major talking point for investors on the sidelines of the International Monetary Fund (IMF) summit in Washington this weekend. The autonomous region’s 2020 bonds rose last week, driving the yield down sharply.

On Sunday, Puigdemont attended a commemoration in Barcelona in recognition of a Catalan leader who was executed during the Civil War.

Spain is one of the 19 countries that share the euro. Secession would likely undermine the single currency project and drive the euro lower against other major currencies.

Featured image courtesy of Shutterstock

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Market Overview

North Korea Just Fired Its Second Missile Over Japan, and Investors Don’t Seem to Care

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Investors are getting less excited by North Korea’s antics. The Communist state just launched its second missile over Japan in as many months, and Asian markets are shrugging it off.

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North Korea Taunts Japan with Second Missile Strike

It didn’t take long for North Korea to vent its frustration after the U.N. approved fresh sanctions targeting the hermit state. Pyongyang apparently launched a missile at 6:57 a.m. Friday that flew over the northern island of Hokkaido, according to a Japanese government spokesman. The missile landed some 2,200 km away in the Pacific Ocean.

The North Koreans launched a similar test last month in a show of defiance following a verbal war with U.S. President Donald Trump. The latest provocation comes days after the U.N. Security Council targeted Pyongyang with fresh sanctions over its aggressive nuclear program.

The sanctions were part of a U.S.-drafted resolution that intends to do the following:

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  • Limit North Korea’s oil imports
  • Ban its textile exports
  • End additional laborer contracts held overseas
  • Reduce smuggling efforts
  • Prevent Pyongyang from entering joint ventures with other nations
  • Sanction government entities

Markets Unaffected

North Korea saber-rattling has been a major source of volatility in the financial markets, but that appears to be changing. On Friday, Asian markets held their ground in the wake of the missile test. Japan’s 225-issue Nikkei rose 0.5%. Mainland China’s CSI 300 Index advanced 0.2%. Hong Kong’s Hang Seng Index also traded in positive territory.

The Japanese yen, a highly liquid global reserve currency, rose immediately after news of Pyongyang’s missile test. But the gains didn’t last very long. In fact, it took about three minutes for the yen to lose two-thirds of its gain. At time time of writing, the yen has moved into negative territory against its U.S. counterpart.

Japan’s currency is often seen as a gauge of global financial stress. Investors exchange other currencies for yen when they feel geopolitical unrest will impact the financial markets. Calm appear to have prevailed Friday morning.

Cryptocurrency Outlook Remains Negative

The global cryptocurrency market has shed billions this week as China expanded its assault on the asset class. Beijing has taken major steps toward closing its domestic bitcoin exchanges. Earlier this month, it announced a ban on initial coin offerings (ICOs), the breakthrough funding mechanism that has taken the world by storm.

The crash extended to all the major cryptocurrencies, including bitcoin and ethereum. The total market cap for the crypto asset class has plunged 35% over the past two weeks. As the following chart illustrates, the sky hasn’t stopped falling since Tuesday.

China’s position on cryptocurrency diverges sharply from that of neighboring Japan. The Japanese government has taken major steps toward recognizing bitcoin and regulating its use.

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Commodities

How have various asset classes performed during previous wars

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North Korea, the dictator ruled nation has been threatening the US and its allies with a possible missile attack, which may also have a nuclear warhead on it. The experts are divided on the actual capability of North Korea to undertake the attacks, however, its leader, Kim Jong-un leaves no opportunity to provoke the US and its allies.

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Key points

  1. Stocks perform better than average when the conflict starts
  2. Gold rallies before the start of the conflict
  3. Bonds have underperformed stocks during previous wars
  4. The US dollar has fallen on few occasions during a conflict
  5. The current war, if it starts, can severely impact electronic goods
  6. The US national debt is likely to balloon if US involves itself in South Korea’s reconstruction after the war ends

Though North Korea’s military prowess is nothing great to write home about, it can still cause extensive damage to millions of civilian lives and the economy of its neighbor South Korea, to some extent Japan and the US territory of Guam. However, in this article, we shall restrict ourselves to the impact of the war on various asset classes and the world economy. We shall use the historical evidence to arrive at our conclusion.

How does the US stock market perform during wars?

The US has fought several wars since 1960 as shown above. While a few ended quickly, others have been a long-drawn affair. Notwithstanding, Barron’s has outlined the effect of the following seven major hostilities on the Dow Jones Industrial Average since early 1980s.

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Serial No War Year
01 The US invasion of Grenada 1983
02 The US invasion of Panama 1989
03 The first Gulf War 1991
04 The US bombing of Kosovo 1999
05 The US War of Afghanistan 2001
06 The second Gulf War 2003
07 The US bombing of Libya 2011

Source: Barron’s

The markets hate uncertainty; a proof of this is the average 0.6% drop in the Dow a month prior to the start of the conflict.

However, once the conflict commenced, the Dow quickly turned direction, rising 4% in the first month. The rally did not stop there. Over the next three months, the Dow rose an average 6.7%, and the gains swelled to 7.2% after six months of the start of the conflict.

Therefore, if history repeats itself, a war between the US and North Korea – if it were to happen – will not start the next bear market.

How does gold perform during wars?

Gold is considered as a safe haven during times of uncertainty. Therefore, the yellow metal has rallied from about $1260/toz to about $1360/toz levels, as tensions escalated between North Korea and the US.

But, will gold continue its rally if the war starts?

Economists at Capital Economics have analyzed gold’s performance since 1985, during military conflicts, acts of terror and political tension.

They established that “over the past forty odd years, the price of gold has on average risen by 4.1% in the six months prior to a conflict turning into a full-blown war. However, it barely moved in the months following the event. This makes sense as gold thrives in periods of elevated uncertainty and the start of an armed conflict partly erases that.”

Performance of long-term bonds during wars

Though bonds are also considered as a safe haven investment, their performance has lagged their historical average during wars, according to a study by the CFA Institute. The possible reasons are an increase in inflation during war times and the second is the higher borrowing by the government to fund the war. Due to these two, bond prices fall. Therefore, selling out of stocks and buying bonds fearing a conflict might not prove to be a good strategy. The only aberration was during the gulf war when bonds beat stocks, albeit marginally.

How does the war affect the US dollar?

The evidence of the past three decades shows that the US dollar weakens during war, according to Kathy Lien, Managing Director of FX Strategy for BK Asset Management. The US dollar fell 5% when the Libyan war started and fell 9% during the first three months of the second gulf war. The dollar was weak even during the first gulf war.

However, this time, the situation is more complex and a lot of currency movements will depend on whether China actively involves itself in the war or remains neutral. The Australian dollar, the New Zealand dollar, and the Japanese Yen will see large moves if China supports North Korea directly during the war, else the movement in the currencies is likely to be comparatively subdued.

“As the tensions grow the dollar will suffer and the actual announcement of war could take USD/JPY to 105 but if it’s a swift victory the pair would also recover quickly,” said Kathy.

Though historical evidence gives us some idea about the possibilities, every new war is different because it involves different nations and affects different asset classes.

What sectors will be affected if a war with North Korea takes place?

Commodities

North Korea, in itself, can’t impact commodity prices. However, it is surrounded by nations that are major consumers of commodities. China is one of the major consumers of commodities, however, it is unlikely that the war will impact China’s consumption materially.

South Korea is a major importer of coal and exporter of steel. Both these commodities will be majorly impacted because South Korea will be severely affected if a war breaks out. Similarly, liquified natural gas prices will be affected, as Japan is its largest importer in the world.

The seaborne trade will also be severely affected because China, South Korea, and Japan receive about one-third of the global seaborne crude supplies. Similarly, 84% of the world’s iron ore and 47% of the metallurgical coal reaches the shores of these three nations through the seaborne route.

The agricultural commodities will also be affected because China is a major importer of rice and soybeans while Japan is of corn.

Economic costs of the war

War has both a direct and an indirect impact on the economy. South Korea is a hub for manufacturing liquid crystal displays, semiconductors, and cars. A war will impact these activities, leading to a shortage across the globe. The alternative suppliers can’t bridge the gap in such a short span of time.  Therefore, prices of various electronic products are likely to rise significantly, which will impact the developed economies, including the US.

“U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation,” a report by the research consultancy Capital Economics warned, reports CNBC.

If inflation rises sharply, the Central Banks will be forced to raise interest rates, jeopardizing the fledgling global economic recovery.

Additionally, if South Korea’s gross domestic product (GDP) falls by about 50% due to war, it will reduce the global GDP by 1 percentage point, according to the report.

Once the war ends, South Korea will need huge capital to rebuild its infrastructure. If the US involves itself and ends up spending the same amount as it did in Iraq and Afghanistan, then the federal debt will reach 105% of GDP, the economists at Capital Economics warned.

Conclusion

Though historical evidence suggests that the equity market returns are better than average during a war, the situation might be different this time because of the nations involved. Any jolt to the weak economic recovery across the globe will dent the confidence of the investors. Therefore, we don’t expect the stock markets to rise substantially during the war.

Gold’s performance is somewhat neutral and it can be used to protect the value of the portfolio. Therefore, selling some overvalued stocks and buying gold might be a good strategy if a war seems imminent.

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