Washington Look Ahead: January 23 -27, 2022

Russia’s threatened invasion of Ukraine is dominating the attention of President Biden and Congress (NOTE: The House is out of session this week, the Senate is in session). For President Biden, the implications for the future of NATO, US credibility globally, and his political future are in the balance. For Congress and the markets, too, the question is what sort of sanctions might be placed on Russia and when.

 This past weekend, a growing chorus of Republicans began arguing stringent sanctions should be placed on Russia now – not after any invasion takes place. However, the Biden Administration made it very clear they have no interest in punishing Russia while also negotiating a peaceful stand-down of tensions.  

But if Russian President Vladimir Putin gives the order to invade, the menu of sanction options Congress could legislate seems quite broad. We are most focused on one reported in the Washington Post today where the Biden Administration would expand the reach of sanctions beyond financial targets to broader sectors and industries. Known as the foreign direct rule, it has been used only once before with stark effect against Chinese tech giant Huawei. In essence, it would extend sanctions to the technology sector – specifically, the semiconductor industry – with the aim of denying Russia access to the global cell phone, tablet, computer markets. The US would also look to other countries to go along with these sanctions (which, quite frankly, we do not see China agreeing to do). We will be writing more separately on what the markets should expect if Russia invades shortly. 

 Speaking of technology, we are seeing growing pressure from President Biden on Congressional Democratic leaders to get moving on passage of the US Innovation and Competition Act (USICA). We believe this legislation will be of particular interest to investors as it will impact not just the tech sector but infrastructure and job creation. The bill passed the Senate last year by a wide bipartisan margin but died for various political reasons in the House. In short, the bill would offer a variety of incentives to jumpstart hi-tech research, development, and manufacturing in the US (e.g., pushing to bring them back from China so the US can better compete with China.) We note Intel’s announcement last week of their intention to invest $20 billion in Ohio to build semiconductor manufacturing facilities as an example of what USICA seeks to achieve.  

Following President Biden’s two-hour press conference last week, where he sought to hit a “reset button” on his legislative agenda, there are three key points we want to encourage you to focus on as things progress.

First, as we keep saying and as the President’s made clear, the stalled Build Back Better (BBB) package remains a top priority for him to get passed. But – as we have suggested in recent reports – it is most likely the White House and Congressional Democratic leadership will break BBB into, in the President’s word, “chunks” for passage. Notably, Senate Budget Committee Chair Bernie Sanders (I-VT) on Sunday called for such a strategy to get legislation moving – a signal that Progressive Democrats may be willing to sacrifice some of their legislative priorities to get victories on the legislative scoreboard.

Conceptually, that sounds like a smart strategy. In reality, it will be more complicated than it sounds. Meaning, for example, if the President and Congressional Democratic leadership put forward the expanded Child Tax Credit as a stand-alone bill, it will likely fail as being too costly.  Whatever parts of BBB the President really wants to get passed into law will likely only be passed via the budget reconciliation process (which cannot be filibustered and only needs 51 votes in the Senate). Otherwise, Republicans are not interested in giving the President and Congressional Democrats any major legislative victories this year on top of philosophically opposing the significant expansion of the social programs the President wants.

 Therefore, we continue to believe we will see the emergence of a stripped down “BBB” in the coming weeks with the aim of getting it done (or within sight of final passage) in February in advance of the President’s State of the Union speech March 1st.   No doubt that will be a highly ambitious timeline and considering BBB’s troubled history so far, anything could happen to derail that timing.  

Second, we want to remind everyone the fighting within the Democratic Party over BBB has been over the size/scope of the social programs. It has not been over the proposed tax increases. Investors need to keep this in mind. Perhaps Democrats will scale back the tax proposals in proportion to the size of the scaled-back package – but to date, we have not heard any such suggestion coming from Democratic leadership. Corporate and individual tax increases are not only still on the table but likely in a slimmed-down BBB.

Third, Congress will be watching the Federal Reserve meetings this week for indications of the timing of rate increases and their assessment of inflation and overall economic growth. If the Fed indicates we should expect prolonged economic challenges, it could force even more scaling back of BBB. Moderate Democrats led by Senator Joe Manchin (D-WV) have pointed to inflation risk and economic uncertainty as a reason for not moving BBB forward.

We hope this quick overview is helpful. Please let us know if you have any questions.

Latin America Watch: As the US Struggles with the Migration Crisis, Honduras and the Rest of the Northern Triangle May Be Entering New Period of Political Turmoil

Latin America Watch: As the US Struggles with the Migration Crisis on the Southern Border, Honduras and the rest of the Northern Triangle May Be Entering a New Period of Political Turmoil

Honduras is a country of particular focus and concern to the Biden Administration. As one of the three nations constituting the “Northern Triangle,” Honduras has seen large numbers of its citizens flee the country that has been riven by poverty, extraordinary gang and drug violence, and overall crime. Most have trekked north to the US., thus being a leading contributor to the ongoing migration crisis on the southern US border. The other two countries of the Triangle are El Salvador and Guatemala.

In November 2021, Honduras elected its first female President, Xiomara Castro. Castro characterizes herself as a democratic socialist and is a political veteran. She was Honduras’ first lady until her populist husband was ousted in a coup in 2009. She previously launched two failed attempts at the presidency. 

 Castro is set to be sworn into office on January 27th – with US Vice President Kamala Harris set to attend – but domestic politics have taken an unexpected and troubling turn in recent days. The newly elected Honduran Congress exploded in acrimony, electing two different and competing leaders and holding dueling sessions. Concern over possible violent social unrest has escalated and worry about the future of the Castro presidency has emerged even before she takes office.

Of particular surprise, Castro’s own Liberty and Refoundation Party rebelled against her attempt to build a legislative majority by promising leadership of Congress to the allied party of her vice president, Salvador Nasralla, of the Salvation Party. That split threatens to give control of the legislature back to National and Liberal Parties that had traded the presidency for generations.

 As a result, in the last few days, large numbers of Castro’s supporters have surrounded the legislative building in protests. With the crowds growing in numbers, the competing faction moved to a nearby country club to hold their own session and elect their own leaders.

The political crisis highlights how challenging the Northern Triangle is for the Biden Administration -and in particular Vice President Harris – in seeking long-term reforms in the hopes of alleviating the historically massive migrant crisis at the US border.

Vice President Harris has been working to find ways to bolster cooperation to promote greater economic growth, counter corruption, and address the root causes of migration to the Triangle nations. Following Castro’s election, she reached agreements with Castro on a set of programs and policies for Honduras to begin meeting these goals.

Harris’ performance has been heavily criticized in the US by Republicans and the media. She avoided contact with the previous Honduran administration led by former President Hernandez, who has been implicated in a criminal case that resulted in his brother’s sentencing to life in prison for drug trafficking last year by a New York court. Local political observers have speculated the crisis may have been instigated to some degree by Hernandez and his political associates.

Overall, the Triangle region is proving to be a growing social and national security threat.  The two other Triangle nations – Guatemala and El Salvador – have emerged in the last year as authoritarian governments unwilling to work with the US.  

 In particular, El Salvador President Nayib Bukele called for a diplomatic “pause” with the US in November while aggressively pursuing more robust relations with China. This has included requesting significant infrastructure investment from China. The most recent example is the signing of a deal on December 30th for China to construct a 50,000-seat national stadium in El Salvador – a “gift” from China and not a loan, according to Bukele.  

 Bukele also oversaw the passage of a new law that allows the government to expropriate land for public use – thus allowing China to use the land to build the very infrastructure projects Bukele has accepted.

Of particular concern to US defense officials is China’s interest in the Gulf of Fonseca on the Pacific Coast, rimmed by El Salvador, Nicaragua, and Honduras. Notably, Nicaraguan President Daniel Ortega (another authoritarian just re-elected after jailing all his political opponents before the vote) cut long-held diplomatic relations with Taiwan in favor of China.  

Like El Salvador’s Bukele, Ortega is seeking large loans and infrastructure projects with China. He has made clear he would like China to modernize the port of La Union and make China the operator of the port, which would allow China to establish a naval presence. The Gulf is shallow and would require enormous work to make it capable of receiving large tankers and container ships. But it is just the sort of project China has been known to take on and succeed and make successful.

What We Get With President Biden’s Three Federal Reserve Nominees

As expected, the White House announced last night President Biden intends to nominate three individuals to open Federal Reserve Governorships. The three nominees are:

•  Sarah Bloom Raskin for Vice Chair for Supervision

• Lisa Cook for a Governorship

• Philip Jefferson for a Governorship

Upon their confirmation, this will make this the most diverse Federal Reserve Board ever. We expect both Cook and Jefferson to have reasonably easy confirmation hearings. Raskin will have a tougher time as several Republican Senators are already speaking out over their concerns over her views of regulation. But we expect at this point she will be confirmed. Here is a quick snapshot of the three nominees:

Sarah Bloom Raskin:  A former Deputy Treasury Secretary during the Obama Administration (2013-3016), Raskin (60) also served as a Federal Reserve Board Governor in the early years of the Obama Administration (2010-2013).

As the incoming chief bank regulator, Raskin is expected to be much tougher on banks in terms of regulation and enforcement. As noted above, we believe she will garner the most opposition in the Senate of the three nominees. Big banks are likely not happy today with her nomination. She has the full support of Senator Elizabeth Warren (D-MA) and other Progressive Democrats, who have long called for stricter oversite of banks. Already, Republican Senators are expressing concern over her view of the role of the Fed concerning climate change. Raskin has been outspoken about the need for banks being required by regulation to take tougher stances in the fight against climate change – including curbing lending to fossil-fuel intensive companies and the oil/gas industry overall.

 Of note, in an opinion piece in September 2021, Raskin laid out her views on how regulators should deal with climate risk. She argued, “U.S. regulators will need to leave their comfort zone and act early before the problem worsens and becomes even more expensive to address.” 

 Raskin is a graduate of Amherst College and Harvard Law School. Currently, she is a law professor at Duke University School of Law. Before her government service, she was at the law firm of Arnold & Porter, then a counsel at the U.S. Senate Banking Committee.

 She then was named Chief Financial Regulator of the State of Maryland before becoming a professor at the University of Maryland School of Law before moving on to Duke. She is married to Congressman Jamie Raskin (D-MD), who was lead manager of the 2021 Impeachment trial of President Trump.

Lisa Cook: A distinguished professor of economics and international relations at Michigan State University, Cook would be the first African-American woman to ever serve on the Federal Reserve Board.  

Part of Cook’s academic focus has been on racial discrimination’s role in the economy. In 2020, she wrote a well-received column for the New York Times arguing discrimination has a much more negative impact on the whole economy, not just those who are its direct victim. Senate Banking Committee Chair Sherrod Brown (D-OH) strongly supported her nomination, suggesting she will have an easy confirmation.

A Marshall Scholar who attended Spelman College and then went on to earn a second B.A. in philosophy, politics, and economics from Oxford University. Cook then earned a Ph.D. in economics from the University of California, Berkley. She has been on the faculty at Harvard University’s Kennedy School of Government, Deputy Director for Africa Research at the Center for International Development at Harvard, and National Fellow at Stanford University. 

In 2012-2013 Cook served on the White House Council of Economic Advisors. She also served on the Biden-Harris Transition team advising the Federal Reserve, Banking, and Securities Regulators. She is also a regular guest columnist for the New York Times.

Phillip Jefferson: A well-known and highly respected economist and academic, Jefferson is currently the Vice President for Academic Affairs, Dean of Faculty, and Paul B. Freeland Professor of Economics at Davidson College.  

Jefferson knows the Fed well, having served at the Federal Reserve twice – first as a research assistant in the fiscal analysis section from 1983-1985 and then again as an economist in the monetary affairs division in 1996-1997. He has also held professorships at Columbia University and Swarthmore College. Born and raised in Washington DC, he attended Vassar College, the London School of Economics, and went on to earn his doctorate at the University of Virginia. 

Jefferson is seen as a leading authority on poverty and inequality, having conducted extensive research and written numerous books and articles on the subject.  

On the news of his nomination, former President Trump’s Chair of the Council of Economic Advisors, Kevin Hassett, said Jefferson is “a first-class scholar and former Fed economist who is supremely well-qualified to be a governor. He will very likely receive broad bipartisan support in the Senate.” 

We will update you on their confirmation process. In the meantime, please let us know if you have any ques

Monday Look Forward: January 17-21, 2022

The Ongoing Futile Fight Over Voting Rights and Filibuster Reform May Take Second Stage to the President’s Press Conference. Crypto Comes Under More Scrutiny.  And Will February Give Us BBB-Lite?

Today, is a federal holiday in honor of the great civil rights leader Dr. Martin Luther King. Both political parties are taking the day to honor his legacy at various rallies and events around the country. Congress will return to work tomorrow.  

Overall, this week will be a legislative “wash” - We do not see any significant movement or progress on any major legislation this week.  President Biden and Congressional Democratic leaders will do what they did last week: Try to pass a voting rights bill (which will fail) and then, as a result of that failed vote, try to change the Senate filibuster rules (which, again, will fail). Efforts last week to change the filibuster rules blew up when Senator Kristen Sinema (D-AZ) took to the Senate floor, defiantly making clear she would not support filibuster changes (the same day President Biden went to the Senate to meet with Democrats to ask them to do just that in order to move forward on the voting rights bill). Moreover, President Biden’s impassioned speech in Georgia last week on voting rights did not move the political needle in Washington as no members of the Senate appeared to shift their views and vote.

In our view, the big event in Washington this week will be President Biden’s press conference Wednesday at 4:00 p.m. It will be the first formal press conference the President has held since November 2, 2021, at the COP26 Climate Summit in Scotland. With low poll numbers and his stalled Build Back Better (BBB) legislation in the Senate, watch for President Biden to use the press conference to help re-set the focus and energy of his 2022 agenda.

We note we are hearing from Congress more debate over and focus on Blockchain and cryptocurrencies.  Congress is, in our view, significantly behind the curve in understanding either issue and/or potential implications for the US and global economy. But that is quickly changing as they are learning fast, especially when they see headlines of Walmart looking to create their own cryptocurrency.  In the last few months, there has been a significant uptick in congressional hearings on the topic. A good example: On Thursday, the House Energy and Commerce Committee will hold a hearing on the energy impacts of Blockchain. The actual title of the hearing is, interestingly, “Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains” which ties it into the sustainability issue and Congress’ efforts to foster a robust alternative energy market.  

In our view Congress is increasingly likely to legislate on crypto this year, establishing which US financial regulators have regulatory and enforcement power.  Seeing China, India, and even Iran move to regulate (or effectively squash) the use of cryptocurrencies, key members of Congress to whom we have spoken are keenly interested in moving quickly to “get the sector under control.” We will be reporting more frequently on this issue as things progress and if you are invested in crypto, watch this space closely.

And Let’s Not Forget the Build Back Better Budget Reconciliation Act: At the risk of sounding like a broken record (because we have said this in our last five reports), we continue to believe passing some form of Build Back Better (BBB) continues to be a “we must do, we cannot fail” issue for Congressional Democrats - especially with the approaching November mid-term elections. With that in mind, we are hearing increasing chatter from Congressional and White House sources of quiet efforts to re-draft a slimmed-down version of BBB – we will call it “BBB-lite” – a package with a much smaller child tax credit, among other items.  Our guess is it will come in with a price tag between $1 – 1.2 trillion.

The goal is to hammer out a deal in February to get it done in advance of President Biden’s State of the Union Address on March 1.

For investors, it is important to remember Congressional Democrats are arguing over the size and scope of social programs - they are NOT arguing over most of the tax increases found in the House version of BBB passed November 19, 2021, among which include:

>       Raising the top marginal tax rate to 39.9 percent

>       Create a surcharge on modified adjusted gross income (MAGI) equal to 5% in excess of $10 million-plus 3% for those MAGI above $15 million.

>       Raising corporate tax rates to a minimum of 15 % on businesses with profits over $1 billion

>       Create a 1% excise tax on the value of stock repurchases by corporations

>       Limit IRA contributions when balances reach $10 million and accelerate the required minimum distributions for those accounts.

>       A 5% tax on Non-Grantor Trusts

The only outstanding big tax issue among Democrats:  How to deal with caps put on SALT (state and local taxes) deductions taken away in the 2017 tax bill.  As a reminder, when the House passed their version of BBB, they raised the cap from $10,000 to $80,000. But Progressive Senate Democrats – led by Senate Budget Committee Chair Bernie Sanders (I-VT) strongly objected to any increase in the deduction, arguing it was nothing more than a tax cut for the wealthy. Since then, we have seen little to no movement on any compromise on the issue (NOTE: Remember this is a Budget Reconciliation bill. It only needs 50 Democrats in the Senate plus the Vice President’s vote for passage. Republicans in the House and Senate are uniformly opposed to the whole bill.). 

We will update you on any breaking events this week. If you have any questions, please reach out and let us know.

Read Around the World Over the Weekend: January 14, 2022

Russia/Ukraine Tensions

>      Rand Corporation “Russia’s Limit of Advance”

Rand has conducted significant research and conducted “war games” analyzing what would happen if Russia actually invaded Ukraine.  Here is their latest assessment.

>      Carnegie Moscow Center “How Do Russians Feel About a War with Ukraine?”

One of the most asked questions in recent weeks has been whether Russia will attack Ukraine, despite a slight lessening of tensions in the wake of last week’s video call between the Russian and U.S. presidents. But how would ordinary Russians respond to a war with neighboring Ukraine?

>      Radio Free Europe/Radio Liberty “How Long Could Ukraine Hold Out Against a New Russian Invasion?”

RFE/RL dives into trying to get a sense of how hard it would be for Russia to invade Ukraine – and how long Ukraine could defend itself.

>      Real Clear World “God, Putin, and Ukraine”

The author points out that "If God had built mountains in Ukraine then the great expanse of flatland that is the North European Plain would not be such encouraging territory from which to attack Russia repeatedly.” As it is, Putin has no choice: he must at least attempt to control the flatlands to the west. So it is with all nations, big or small. The landscape imprisons their leaders, giving them fewer choices and less room to maneuver than you might think."

 Kazakhstan

>      Foreign Policy Research Institute “’A Bright Path’ Forward or a Grim Dead End? The Political Impact of the Belt and Road Initiative in Kazakhstan”

Markets focus on Russia’s interests in Kazakhstan in the wake of the rebellion there.  But China – which shares a border with the country – has large investments in the country, much of it conducted via the Belt & Road Initiative. This report looks at China’s efforts and what is next for China’s efforts in the country. 

India

>      The Print “Kazakhstan unrest matters to India”

The only silver lining for India in the situation in Kazakhstan is that it will possibly complicate China’s plans for Central Europe.

>      Foreign Policy “Pentagon Worries About Chinese Buildup Near India”

China’s new airports and highways near the border have put officials on edge.

>      Lowy Institute’s The Interpreter “Indian Ocean Step-Up”

India is in the driver’s seat to build new security structures in the region, but it can’t do it alone.

 China

>      Atlantic Council “What is ‘Common Prosperity’ and How Will it Change China and Its Relationship with the World?”

A new question is being asked in China and around the world: what is “Common Prosperity” and how will it change China? “Common Prosperity” (共同富裕, Gongtong fuyu), a phrase first used by Mao Zedong decades earlier but rarely heard until Xi Jinping mentioned it in a speech early this year, has quickly become the official Chinese slogan of choice, defining the new era of politically led economic development emerging in China. 

>      Center for a New American Security “China’s Digital Currency and Authoritarianism”

China is the first major economy to develop and implement a central bank currency (CBDC).  It has many names – Digital Currency/Electronic Payments, the digital yuan, or the electronic Chinese Yuan.  This brief explains what Beijing is doing and why.

Middle East

 >      The Circuit “The General Who Coined the Abraham Accords”

How a two-star US General from Puerto Rico earned the trust of the Emiratis to later help broker the Abraham Accords – and name it, too.

 >      The Middle East Institute “The High Price of Iran’s Anti-Israel Policies”

Recently, the Iranian regime’s anti-Israel campaign scored a goal on its own net, so to speak, when various hardline regime news outlets targeted former Iranian national soccer team captain Mehdi Mahdavikia for intense criticism. Mahdavikia's crime? Wearing a jersey at an international exhibition soccer match arranged by FIFA that featured the flags of all 211 FIFA members, including Israel’s. But the backlash to this criticism inside Iran was big and loud showing once again the regime shooting itself in the foot as it attacks Israel and raising further internal political tensions.

 Africa

 >      South African Institute for Security Studies “Sudan’s transition: What are the chances of success?”

Racked by civil war and intense bloodshed, peaceful mass protests led to the military ouster of Omar al-Bashir, ending his 30-year rule in 2019. A power-sharing agreement between the military and civilians has given much to hope for but analysis of the achievements and challenges of the transition so far show that while noteworthy progress has been made, significant challenges remain.

>      National Geographic “Giraffe populations are rising, giving new hope to scientists”

Giraffe numbers are 20 percent higher than in 2015, an increase linked to conservation efforts and more accurate survey data.  What does this say for the greater preservation effort in Africa?

United Kingdom

>      Chatham House “The UK’s Kleptocracy Problem”

The growth of London as a center for financial and professional services coincided with the collapse of the USSR and the rise of post-Soviet kleptocracies in the 1990s. These states and their elites have since become a major source of clients for UK-based services firms and of investors in UK assets.  The challenge now is, according to this report, that servicing post-Soviet elites weakens the rule of law in the UK.

Germany

 >      Fast Company “Berlin is planning a car-free area larger than Manhattan”

The citizen-driven plan that the city is considering now would create the largest car-free area in the city anywhere in the world.

Climate Change/Energy Policy

 >      Quartz “Maersk could push the entire shipping industry to move up its climate goals”

Maersk, the world’s second-largest shipping line, pledged on Jan. 12 to make its business carbon neutral by 2040 instead of its previously stated goal of 2050 – making their goals the most aggressive in the shipping industry. In doing so, they are likely to push the entire shipping industry to embrace more aggressive climate goals.

>      Washington Post “The Race to Defuse Congo’s Carbon Bomb”

At around 56,000 square miles (about the size of Iowa) and more than 30 feet deep in places, the peatland Congo shares with its neighbor, the Republic of Congo, holds at least as much carbon as the whole world currently emits in three years of burning fossil fuels.

>      International Energy Agency “Coal 2021: Analysis and Forecast to 2024”

The 2020 collapse in coal demand turned out to be smaller than anticipated – in fact, coal-fired power generation will have reached an all-time high by the end.

United States

 >      The American Enterprise Institute “The Exit Polls: A History and Trends Over Time 1972-2020”

Since the 1970’s when they were first used nationally, exit polls have been seen as an invaluable tool to understand voters’ views.  This report examines just how useful they were and are today.

Economics

 >      The Economist “The $28 trillion global reach of Asian finance”

As private savings have built up in East and South-Asia, its financiers now wield heft in far-flung asset markets.

>      Bain & Company “Young Workers Are Increasingly Overwhelmed”

Younger generations, especially in advanced economies, are under mounting stress that spills over into their work lives.

Global Security Policy/Intelligence Issues

>      The Atlantic “How Fake Spies Ruin Real Intelligence”

Espionage-themed entertainment is influencing policymakers, from soldiers fighting on the front lines to justices sitting on the nation’s highest court.  Sorry, Jason Bourne and Carrie Mathison…

>      World Economic Forum “Global Risks Report 2022”

In their annual report, the WEF shares the results of their latest Global Risks Perception Survey.

Reading Around the World Over the Weekend: January 7, 2022

Happy New Year!  We hope you had a restful holiday.  Please find our recommended weekend reads covering key issues and events around the world.  We hope you find these informative, useful, and perhaps even fun.  Please let us know if you want us to add anyone to our mailing list. 

Germany

>      Foreign Policy “The Kaiser’s Family Wants Its Stuff Back.  Germany Isn’t Sure They Deserve It.”

The former royal lost countless artworks, palaces, and wealth in the 20th century.  But were they victims – or enablers – of the Nazis?

United States

>      Atlantic Council “Seizing the Advantage: A Vision for the Next US National Defense Strategy”

As the Biden administration prepares to release its National Defense Strategy (NDS), the modern challenges facing the United States have continued to evolve, and the risks to the United States, its interests, and those of its allies and partners are more pronounced than even four years ago.  The Atlantic Council convened a group of leading experts to offer their strategic views for what should be considered in the forthcoming NDS.

>      Congressional Budget Office “The Effects of Recent Legislation on the Economy and the Budget”

Phillip Swagel, Director of the Congressional Budget Office, outlined the agency’s budget and economic analysis during the coronavirus pandemic and described some of the challenges involved in analyzing current economic policy. 

China

>      Brookings Institute “US-China Technology Competition: A Brookings Global China Interview”

The scale and speed of China’s technological advancements in recent years have raised concerns in Washington and elsewhere over the implications for the United States’ overall economic competitiveness and its national security, as well as the impact on liberal values and good governance globally.  Brookings assembled a group of leading experts – including our colleague, Ryan Hass – to explore the issue.

>      Peterson Institute for International Economics “US-China Phase One Tracker: Purchases of US Goods”

On February 14, 2020, the Economic and Trade Agreement between the United States and China went into effect.  China agreed to expand purchases of certain US goods and services by a combined $200 billion by December 31, 2021.  They didn’t make the target.  Here is a breakdown of what they did and did not do.

>      Foreign Affairs “The Taiwan Temptation” In recent months, however, there have been disturbing signals that Beijing is reconsidering its peaceful approach and contemplating armed unification. Chinese President Xi Jinping has made clear his ambition to resolve the Taiwan issue, grown markedly more aggressive on issues of sovereignty, and ordered the Chinese military to increase its activity near the island.  With this in mind, the author argues it is time to take seriously why Beijing might resort to force (Note: This was first published in June 2021 but in light of current events, we thought it worth sharing here).

 >      Foreign Policy “China’s Two-Ocean Strategy Puts India in a Pincer” The Chinese foreign minister’s island hopping is the latest sign of contestation over the Indo-Pacific – and challenges India’s claim to primacy in South Asian waters which is India’s own maritime backyard.

 Kazakhstan

 >      Carnegie Endowment for International Peace “Kazakhstan’s Unprecedented Crisis” In trying to calm violent protests, President Kassym-Jomart Tokayev has involved an unpredictable and untrusted partner: Russia.

 Foreign Policy “Why Russia Sent Troops Into Kazakhstan”

Moscow’s swift aid to a neighboring regime track with its wider strategic goals: Supporting a pro-Russian government that is strategically aligned with the Kremlin.

>      Bloomberg “Why Kazakhstan Protests Reverberate Beyond the Region”

Bloomberg offers a quick but to the point overview of the significant implications of the protests in Kazakhstan beyond the country itself.

Korean Peninsula 

>      Washington Post “Your cat could burn your house down, Korean officials warn after 107 fires sparked by felines”

The warning comes as the capital’s Metropolitan Fire & Disaster Headquarters estimated that more than 100 fires over the past three years were started by cats, many of which managed to turn on electric stoves with their furry paws. (

Latin America

>      Council on Foreign Relations “Mercosur: South America’s Fractious Trade Bloc”

Three decades after its founding, Latin America’s largest trade bloc faces multiple challenges, including persistent internal division and the economic disruption caused by the COVID-19 pandemic. 

>      Center for Strategic & International Studies “A Closer Look at Colombia’s Illegal, Artisanal, and Small-Scale Mining”

Throughout the Colombian Amazon, a rush is on by various criminal actors to secure mining revenues. Skyrocketing gold prices (now twice the price of an ounce of cocaine), various armed dissident groups looking for revenues, and the overall growing market for rare and expensive are causing new stress on an already fragile ecosystem. 

>      New York Review of Books “Brazil Turns, Lula Returns”

Bolsonaro’s years of misrule have left a yearning for stability.  Even conservative eleits are adjusting to the idea of the Workers’ Party leader as president again.

Technology/Energy/Sustainable Investments

>      MIT Technology Review “Ten Breakthrough Technologies of 2021”

2021 saw major breakthrough in tech. Some, such as mRNA vaccines, are already changing our lives, while others are still a few years off. All will have a big impact on our lives for years to come.

>      The New Yorker “How Mosquitos Changed Everything”

They slaughtered our ancestors and derailed our history. And they are not finished with us yet. 

>      Vox “Fusion Energy Is a Reason to Be Excited About the Future”

It’s been a long road, but recent advances mean we’re closing in on a game-changing technology.

Economics 

>      The Quarterly Journal of Economics “The Economic Consequences of Increasing Sleep Among the Urban Poor”

In this study, researchers point out the urban poor in developing countries face challenging living environments but that short afternoon naps at the workplace lead to significant increases in productivity, psychological well-being and cognition. In contrast, an extra 30 minutes sleep at night shows no similar improvements.

 >      Visual Capitalist “Visualizing the $94 Trillion World Economy in One Chart”

As we all know, gross domestic product (GDP) serves as a barometer for a country’s economic health. It measures the total market value or final goods and services 

and services produced in a country during a given year. Together, the U.S. and China account for 42% of global GDP.  Here is the GDP by country according to IMF estimates.

>      National Bureau of Economic Research “The Price of Nails since 1695: A Window into Economic Change”

Why nails? They are a basic manufactured product whose form and quality have changed relatively little over the last three centuries, yet the process for producing them has changed dramatically. Accordingly, nails provide a useful prism through which to examine a wide range of economic and technological developments that touch on multiple areas of both micro- and macroeconomics. 

>      Federal Reserve Bank of St. Louis “the Dynamics of International Shipping Costs”

This report shows that a nontrivial portion of the dynamics of international shipping costs observed in recovery from the COVID-19 recession appears to be consistent with the standard dynamics of international shipping costs. These costs are volatile and pro-cyclical, so it is not unusual that they increase significantly when economic activity rebounds after a recession.

>      Fortune “Crypto Crime Just Hit an All-Time High of$14 billion”

Criminals scored a whopping $14 billion in cryptocurrency in 2021, marking an all-time high and a 79% increase from the previous year according to a study by the cryptocurrency research firm Chainalysis. The report can be found here. 

Global Issues

>      Aeon “How Disruptions Happen”

Major disruptions in world history follow a clear pattern.  What can upheavals of the past tell us about our own future?

>      Council on Foreign Relations “Ten Elections to Watch in 2022”

Numerous countries will hold elections in 2022.  Here are ten to watch closely.

A Riveting New History of the Conquistadores: Blood, Gold, and the Conquest of the New World

There is, quite frankly, a lot of myth and historical mayhem out there about the discovery of the "New World" and the role of Spain's "Conquistiadores." In Fernando Cervantes's riveting new book, we get a fresh, unbiased, and deeply researched historical overview of these brave, ambitious, at times greedy, and more often than not bloody explorers. From Pizarro to Cortés to the rest of them, Cervantes drills in what drove them to risk their lives on the high seas and in the jungles of Latin America. True, the search for gold was the primary factor. And with it came a great price - particularly for the native Americas who died by the thousands from diseases brought by the conquistadores if not at the bloody tip of their swords.

What is particularly valuable about Cervante's book is his superb overview of what was going on in Europe at the time, the wars and dynastic wars, the rise of Martin Luther, and the never-ending battles with the Moors. All of which directly impacted Spain's spending and focus on the New World - indeed, in many ways tremendously exasperating the desperate search for gold and silver in the New World to fund those very wars back home.

I am happy to have this book on my shelves as I know I will find it a tremendous resource in the years to come as I grow my business in Latin America and need to be refreshed on the history of that time, which continues to define in so many ways the way of life in the region today.

Washington’s Week Ahead: Build Back Better Isn’t Dead Yet…

Welcome back from the holidays, and Happy New Year! Washington is slowly coming back to work this week. The Senate is back in session today, but the House of Representatives remains out until next week.  We want to lay out what we believe markets will be focused on this week and for the coming few weeks:

• "Build Back Better" (BBB) is NOT dead:  Despite the headlines just before Christmas that Senator Joe Manchin (D-WV) is officially opposed to and thus killed off President Biden's signature social spending and tax package, we beg to differ. Talks between Manchin and the White House continued intermittently over the Christmas break, and we expect them to continue this week. We believe the deal - currently hovering at approximately the $1.8 trillion - is (as we have been saying for months) a "Must-Do/Failure is Not an Option" event for Democrats going into the November mid-term elections.  

  How best to describe the situation? Maybe a cooking analogy works best:  While BBB may not be on the front burner day after day like it has been the last few months, it definitely is on a side burner simmering away and being tended to carefully.

  Three key points to keep in mind: 

  1. Manchin is opposed to the size/scope of the social spending components of BBB – and that can be negotiated. He is not opposed to the substantial personal and corporate tax increases. Specifically, Manchin tells the White House and Senate Democratic leadership he wants the enhanced child tax credit either removed from the bill or significantly lowered. Manchin argues the actual cost of the child tax credit is closer to $4 trillion over ten years (we think he's right as the current draft only expenses the provision for three years). Manchin has indicated numerous times he was comfortable with a package coming in at $1.5 trillion.

• But back to Manchin on taxes for a moment: He has expressed little to no concern or opposition with the numerous tax provisions in the bill.  In fact, Manchin has been vocal in supporting President Biden's position "the rich need to pay their fair share" and that the corporate tax rates should also be raised. If a deal on BBB comes together in the next two to three months, do not be surprised if the effective date for those taxes set to January 1st.

  2.     Manchin's concerns/stated opposition (for now) revolve around inflation and adding to the national deficit in the face of the Federal Reserve raising interest rates.  If inflation does begin to show itself as truly "transitory" (Washington's 2021 buzz word of the year), and there is a more precise, smoother glide path to the timing and size of Federal Reserve rate increases, do not be surprised if Manchin changes his mind. 

  3.  To our point of this being a “Must Do/Failure is Not an Option”: That “ding-ding-ding” you heard on midnight December 31st was not just the ringing in of a new year. It was also the starting bell for the re-election campaigns for every member of the House and one-third of the Senate. For Democrats, failing on BBB would leave them open to being attacked for getting very little accomplished in the previous two years.  There is no other “Big Ticket” issue Democrats intend – at this point – to tackle in 2022.  For many Democrats, the fate of BBB is intricately tied to their political futures. Thus, do not be surprised if a deal is cobbled together by March.

•  What will Congress be focusing on until (or in the absence of) the BBB deal being hammered out?:  The first big issue will be Senate consideration of a voting rights bill – which Republicans uniformly oppose.  But this brings us to the likely next major legislative battle: Getting rid of the Senate filibuster or at least cutting back how it can be used.  Senate Majority Leader Chuck Schumer (D-NY) has been pushing to get rid of the filibuster and sees the voting rights bill as the leverage to at least change the rules how the filibuster is used.  We see at least five Democratic senators – chief among them Senators Joe Manchin (D-WV) and Kristen Sinema (D-AZ) – opposed to scrapping the filibuster but maybe open to changing the rules.  Any changes to the filibuster would likely change the legislative outlook for the remainder of 2022 considerably.

• Markets should be on alert as we anticipate President Biden will finally announce his long-awaited nomination for Vice Chair for Supervision of the Federal Reserve possibly as soon as this week – the single most powerful financial regulatory post in the federal regulatory orbit.  Progressive Democrats are pushing President Biden hard to name a Progressive who will bring tough new regulations and enforcement oversite to the banking sector and the larger players in the mutual fund and insurance industries. Additionally, the President will likely name two additional Federal Reserve Board Governors – thus allowing President Biden to almost wholly remake the composition of the Federal Reserve Board.

  •  There is a long list of rumored names for the Vice Chair for Supervision slot but for the moment the leading name appears be former Federal Reserve Board Governor and Deputy Treasury Secretary Sarah Bloom Raskin.  Currently a professor at Duke Law School, Raskin appears to meet the approval of Progressives and is well known to President Biden from her tenure at Treasury during the Obama Administration.  If the name Raskin sounds familiar to you political junkies: Her husband, Representative Jamie Raskin (D-MD), was the lead impeachment manager for the second impeachment of President Trump.

•  Finally, are we about to see the “The Rise of the Regulators”?:  We will be writing a lot more about this in the coming weeks but in short we anticipate a lot more regulatory actions in January impacting virtually all sectors.  Our view and experience is this: It normally takes a new Administration’s regulatory appointments the better part of a year to get settled in and lay out their agenda.  And in the second year, they begin to execute.  Two examples of what we are watching closely: 

  •  Securities and Exchange Commission Chair Gary Gensler laid out a particularly broad and aggressive regulatory agenda in 2021. We now anticipate he will quicken effort to bring new, meaningful regulations impacting a number of key markets ranging from cryptocurrency regulation to corporate governance rules around sustainability to the market structure of the bond market.  

  •  The Federal Trade Commission (FTC) and the US Department of Justice’s (DoJ) Antitrust Division are seen as the “point of the spear” of President Biden’s ambitious executive order on competition.  FTC Chair Lina Kahn is seen as particularly aggressive in her views on large mergers and acquisitions of any kind.  Add to this expected legal actions from DoJ Assistant Attorney General Johnathan Kanter aimed at Big Tech.  Overall, we anticipate soon seeing sweeping (and likely controversial) efforts from both impacting deal-making across all sectors.

 We hope this is helpful.  Please let me know if you have any questions.

Reading Around the World Over the Weekend - December 3, 2021

India

·       Foreign Policy “Modi’s Growing Crackdown on Bollywood”

India’s film industry is under growing pressure to bend it knew to Hindu nationalists.

·       Foreign Policy Research Institute Podcast “Episode 8: India’s Status as a Great Power”

How successful has India been at securing its position as a great power? In this episode of Global Demons, Robert D. Kaplan and Ashley J. Tellis discuss India’s status as an Asian great power, its future under Narendra Modi, and how it deals with the U.S.- China Rivalry.

EU & UK

·       Der Spiegel “The First Fractures Become Apparent in Berlin”

The coalition talks were secretive, and the three parties involved sought to exude unity and harmony. Now that Germany's next coalition agreement has been presented, though, fractures are becoming apparent. And surprisingly, the Greens may not be the Social Democrats' favorite child.

·       Politico EU “Europe Reins in Big Tech: What You Need to Know”

Ministers sign off on new EU tech rulebook to curb abuse and harm online. But what does that really mean for the tech sector and tech users?

·       The Spectator “Is this the beginning of the end for Nicola Sturgeon?”

Sturgeon has been the long-time leader of Scotland’s Scottish Nationalist Party (SNP) and helped lead the failed vote for independence.  Now, there is growing speculation her tenure on top of the party has peaked.

·       Nouriel Roubini & Brunello Rosa “Why Italy’s Presidential Election Matters”

With its poor track record of managing EU funds, Italy’s recovery plan will be a major test for the future of EU policymaking more generally. While it is widely agreed that Prime Minister Mario Draghi must remain on the scene to oversee the plan’s implementation, in what capacity would he be most useful?

North Africa

·       The New Yorker “The Secretive Prisons that Keep Migrants out of Europe”

Tired of migrants arriving from Africa, the EU has created a shadow immigration system that captures them before they reach its shores and sends them to brutal Libyan detention centers run by militias.

Latin America

·       Americas Quarterly “Why Lulu vs. Bolsonaro in Brazil Leave Little Room for Others”

Five reason a “third way” candidate will struggle to break through in a polarized contest.

China 

·       VOX EU/CEPR “The Global Footprint of Chinese Banks”

The global footprint of Chinese banks is substantial and growing, including during the COVID-19 pandemic. While they are similar to other banks from emerging countries in terms of their ownership and asset structure, their global footprint often resembles that of banks from advanced countries. Geographical distance acts as a barrier for Chinese banks’ lending, comparable to that for the US or European banks. Also like their US peers, the lending of Chinese banks strongly correlates with trade. Some differences are present, such as an atypical negative correlation between bank lending and portfolio investment.

United States

·       US State Department “Invited List for Upcoming Summit for Democracy”

On December 9-10, President Biden will host the first of two Summits for Democracy, bringing together leaders from government, civil society, and the private sector to renew democratic ideals and goals.  Of note, the President has invited Taiwan, much to the furor of China. 

·       Foreign Policy “The Beautiful, Dumb Dream of McDonald’s Peace Theory”

In the rich, lazy, and happy 1990’s, Americans imagined a world that could be just like them. One of the measures created to show this was Thomas Friedman’s “Golden Arches Theory of Conflict Prevention” – which hasn’t stood the test of time very well.

·       Pew Research “Where Do You Fit in the Political Typology?”

Are you a Faith and Flag Conservative? Progressive Left? Or somewhere in between?  Take Pew’s online quiz and find out where you actually are in today’s weird and wild political typology.

Russia

·       Carnegie Moscow Center “The Coming Deluge: Russia’s Looming Lost Decade of Unpaid Bills and Economic Stagnation”

Russia faces a litany of long-term economic challenges that will hobble its growth potential but likely won’t be severe enough to force far-reaching political change.

Singapore

·       RestofWorld.org “Singapore’s Tech-Utopia Dream is Turning into a Surveillance State Nightmare”

Singapore is one of the most technologically sophisticated places in the world – one of the safest.  Yet, according to this report, it is taking something of an Orwellian turn: The city is constantly watched by 90,000 police cameras, and by the end of the decade, there will be 200,000.  Sensors, including facial recognition cameras and crowd analytic systems, are positioned across the city.  More recently, the city has begun piloting a new kind of robot that “can automatically detect anti-social behavior, from smoking to illegal food stalls and gatherings, barking orders out of its speakers, recording video and reporting back to HQ.” 

Kenya

·       Institute for Security Studies “Sweet Deals for Kenya’s Sugar Smugglers”

High production costs and the mismanagement of factories have led to a drop in sugar production in Kenya over the past two decades, opening the door for smugglers – particularly from Somalia and potentially funding the terrorist organization, Al Shabaab. In 2020, sugar made up 48% of the goods smuggled into the country, according to the National Crime Research Centre.

Lebanon

·       Gallup Polls “Leaving Lebanon: Crisis Has Most People Looking for Exit”

Quality of life has deteriorated so much in Lebanon that most people -- a record-high 63% in 2021 -- say they would leave the country permanently if they could. Canada and Germany are the most desired destinations for this group: 28% would like to go to Canada, and 19% would like to move to Germany.

Book of the Week: “Master of the Game: Henry Kissinger and the ARt of Middle East Diplomacy”

With the countless books written about Henry Kissinger, it is hard to find anything new these days contributing in a substantive or even interesting new way to his legacy, the history he was a part of, and the history he made. But there is a sparkling new exception to this rule, Martin Indyk's "Master of the Game: Henry Kissinger and the Art of the Middle East." Richly detailed and written in a highly engaging and witty style, Indyk vividly illustrates how Kissinger dealt with the multiple Middle Eastern crises' launching the US' numerous efforts over the years to bring peace to the region. Moreover, he gives a foundational history to the US' concerted and oft-failed efforts to bring peace and stability to the region.

I came away from reading this book having learned more about Kissinger's thinking, strategies, and tactics in this Indyk's book than virtually every other Kissinger biography I have read (and I've read quite a few). Indyk does not write a dry hagiography of Kissinger but keeps it honest and human. We see how Kissinger somehow balanced the extreme tensions, egos, and demands of the multiple and very different Arab states versus a still young Israel fighting for its survival. All the great names of the age are there: Sadat, Meir, Hussain, Brezhnev, Nixon. And we see all sides of Kissinger: At times sly, other times brutally frank with both Arab and Israeli leaders, as well as the Kissinger who made mistakes and had to move hard and fast to correct himself and the policies he proposed.

If there is one criticism of the book, it is the sheer amount of detail that can be slightly overpowering at times. Indyk took extraordinary time and painstaking effort to get the overall historical account correct, as well as the innumerable small but critical conversations, meetings, and interactions.

But what helps bring a unique perspective to the book is Indyk's own experiences working for US-Palestinian peace efforts over the years. A former US Ambassador to Israel and a senior aide to then-President Obama, Indyk can compare and contrast what happened during Kissinger's time versus what Obama and Indyk encountered and attempted to achieve.

This is the book to read for those fascinated by the complexities of Middle Eastern politics and history and the United States' efforts to bring greater peace and stability to the region.