Fulcrum Perspectives
An interactive blog sharing the Fulcrum team's policy updates and analysis.
Global Events This Week: February 6 - 12, 2022
This is Fulcrum Macro Advisors LLC's weekly calendar of key political and economic events we are watching in the coming week. We hope this is helpful. Please let us know if you have any questions.
Sunday, February 6:
> Political Events -
Costa Rica holds general elections
North Korea’s State People’s Assembly meets
Argentine President Alberto Fernandez meets with Chinese President Xi Jinping where is expected to request a $3 billion swap extension to strengthen Argentina’s reserves
Iranian Minister of Industry Reza Rahmani visits the United Arab Emirates
Sri Lankan Foreign Minister G.L. Peiris to begin a three-day visit to India
> Economic Events -
No reports/events of note
Monday, February 7:
> Political Events -
Chancellor Scholz meets President Biden in Washington D.C.
French President Emmanuel Macron meets Russian President Vladimir Putin in Moscow, Russia
US Secretary of State Anthony Blinken visits Australia for Quad Foreign Ministers Meeting, then on to Fiji, and then Hawaii for meetings with Japanese Foreign Minister Hayashi Yoshimasa and South Korean Foreign Minister Chung Eui-yong through February 13th.
German Foreign Minister Annalena Baerbock to meet with Ukraine Foreign Minister Dmytro Kuleba
French Foreign Minister Jean-Yves Le Drian and German Foreign Minister Baerbock meet with Ukraine Foreign Minister Kuleba in Kyiv
Austrian Foreign Minister Schallenberg, Czech Republic Foreign Minister Lipavsky, and Slovakian Foreign Minister Korcok meet with Ukraine Foreign Minister Kulebain in Kyiv
Poland’s President Andrzej Duda meets with European Commission President Ursula von der Leyen to discuss Russia/Ukraine tensions in Brussels
World Health Organization (WHO) Director-General Ghebreyesus and Commonwealth of Nations Secretary-General Patricia Scotland sign MoU on seven new areas of collaboration
Argentine President Fernandez meets Barbados Prime Minister Mottley in Bridgetown
U.S.-EU Energy Council to take place in Washington to discuss mutual clean energy transition issues as well as natural gas supply and pricing issues
30th anniversary of the signing of the Maastricht Treaty which laid the foundation for EU and monetary union.
> Economic Events -
China January services and composite PMI
Japan preliminary December leading index
Germany December industrial production
US December consumer credit
Indonesia GDP
Singapore Markit PMI Composite
European Central Bank President Christine LaGarde speaks at EU Parliament Committee on Economic and Monetary Affairs hearing
Tuesday, February 8:
> Political Events -
French President Emmanuel Macron to meet Ukrainian President Volodymyr Zelensky in Kyiv, Ukraine
Thailand to host and chair first round of 2022 meetings for Asia-Pacific Economic Cooperation forum through Feb. 27
European Commission to unveil proposal for Chips Act
Libya's House of Representatives to vote on new prime minister
> Economic Events -
Italy December retail sales
France December trade balance figures
US December trade balance
Japan Household Survey, January Economy Watchers Report
Hong Kong Market PMI Composite
Malaysia Industrial Production and Manufacturing Sales
National Bank of Poland monetary policy committee meets
Wednesday, February 9:
> Political Events -
Zbigniew Rau, Polish Foreign Minister and Organization for Security and Co-operation in Europe Chairman-in-Office, to arrive in Ukraine for a working visit through Feb. 11.
Treason trial against Kem Sokha, leader of Cambodia's former main opposition party, resumes
EU Health Ministers hold informal meeting to discuss initiatives related to various topics
> Economic Events –
US wholesale inventories report
Japan preliminary January machine tool orders, January PPI
Germany December trade balance
Italy December industrial production
Russia CPI figures
Reserve Bank of India monetary policy decision
Bank of Thailand monetary policy decision
Thursday, February 10:
> Political Events -
Russia and Belarus military conduct joint drills “Union Resolve” for 10 days
India’s Uttar Pradesh – India’s most populous state - holds legislative elections until March 7th
The Philippines to allow fully vaccinated international tourists to enter without quarantine
Spain to lift requirement to wear face masks outdoors
> Economic Events -
US January CPI weekly initial jobless claims, monthly budget statement
OPEC monthly oil market report
Japan domestic corporate goods index for January
Monetary policy decisions from Bank Indonesia
Monetary policy decisions from Bank of Mexico
European Commission publishes economic forecasts
South Korean Current Account Balance
Bank of Indonesia monetary policy decision
Friday, February 11:
> Political Events –
Myanmar leader Aung San Suu Kyi's hearings on corruption charges to resume.
Hearing in the criminal case against former Ukrainian President Petro Poroshenko begins in Kyiv
Iran Revolution Day celebrating the 1979 Islamic uprising
> Economic Events –
US Consumer Sentiment
Germany Final CPI data
UK Q4 and December GDP plus trade balance
Taiwan CPI, Exports, Imports, Trade Balance
Malaysia GDP, Current Account Balance
India Industrial Production
Saturday, February 12:
> Political Events –
Venezuela’s opposition plans widespread protests against President Maduro’s regime
Hungarian Prime Minister Viktor Orban gives annual state of the nation speech
> Economic Events –
No reports/events of note
Sunday, February 13:
> Political Events -
German Federal Convention (Nundesversammlung) holds special Presidential Elections where Frank-Walter Steinmeier is expected to be re-elected by the Bundestag for a second term
US 56th Super Bowl played in Inglewood, California
> Economic Events –
No reports/events of note
Russia/Ukraine Tensions Update: Did You Hear The One About How the Irish Fishermen Defeated the Russian Navy?
As the risk of a Russian invasion of Ukraine ramps up, there are a number of sub-stories that are largely being overlooked by the press – and some of them potentially have significant impact on markets. We take note of them because it is the little things during a tense time like this that can either ignite an actual conflict or result in massive negative impacts once an invasion begins.
A good example: News today that Ukrainian police broke up a ring of provocateurs (suspected of being directed by Russian intelligence) planning to launch riots in five Ukrainian cities using more than 5,000 paid protesters. This likely goes to warnings by the Biden Administration several weeks ago of possible subversive Russian activities inside Ukraine in advance of a possible invasion.
Another significant threat emerged several weeks ago when the Russian Navy announced their intention to hold large naval “training” exercises in the Atlantic Ocean which would include live-fire missile launches. There are agreements between NATO and Russia in place that each entity tell the other in advance when and where they intend to hold such exercises to ensure there are no misunderstandings of an actual military action being launched.
What raised the eyebrows and concerns of NATO officials was where th Russian Naval exercises were going to take place: In international waters off the coast of Ireland – a highly unusual location for the Russian Navy to choose. Of particular concern to NATO is what lies below the waters where the Russians declared they would hold the exercises – the largest concentration of submerged communications lines between Europe and the Western Hemisphere including all cables going directly to Washington DC or New York (see map). The risk, of course, is if an invasion did occur, Russian Naval Forces could damage or destroy these critical communications lines between the EU and the US – as well as disrupt communications lines from Ukraine to the US that would travel via these cables.
On January 23rd, the Irish Government issued strong warnings to all ships planning to sail through the area in the coming two weeks – including to the large Irish fishing industry. The Irish government strongly protested to the Russian government but were told by Russia’s Ambassador to Ireland “There is nothing to be disturbed, concerned, or anguished about and I have extensively explained that to our Irish colleagues.”
But the Irish fishing industry was having none of it, not willing to allow an intimidation tactic by Moscow to succeed, and also risk losing more than one million tons of fishery because of the exercises.
On January 25th, the collective Irish fishing industry announced they intended to make a coordinated effort to head off the Russian fleet. “Our boats will be going out to that area on the first of February to go fishing. When one boat needs to return to port, another will head out so there is a continuous presence on the water,” announced Patrick Murphy, Chief Executive Officer of the Irish South and West Fish Producers Organization.
Literally, Irish fishermen were prepared to risk their lives by sailing into the midst of a large, live-fire Russian Naval exercise it in hope of getting the Russians to leave.
The result? Victory for the Irish fisherman and a major risk to global communications systems averted. On January 29th, the Russian Defense Ministry announced they had decided “as a gesture of goodwill, to relocate the exercise by the Russian Navy elsewhere.”
“James Monroe: A Life”: Young America Was Much Like Today’s America. And That Should Give Us Hope
Jarring political fighting, frequently verging on becoming violent. All sorts of shady media outlets urging in explosive language that the two fragmented political parties take the most extreme of positions. Likely foreign interference in our federal political system and probably our elections, too. Incessant talk of civil war, of the United States breaking apart as states railed against the policies and elected politicians from rival states.
Yes, it is what we are facing today. True, we are a nation where many fear what our future will become. But, as a wise man once said, there is nothing new under the sun, nothing we have not seen before or dealt with as we are powerfully reminded in the superbly written “James Monroe: A Life” by Tim McGrath.
At first look, this is a thick, daunting book - 738 pages long. But once you begin reading, you will find yourself riveted to the wonderfully written prose chock full of fascinating details and references. McGrath takes us deep in the life and times of our fourth President but always masterly weaving in the contemporary history of the still young colonies.
He was born in rural Virginia in 1758. Educated at the College of William & Mary in Williamsburg, Virginia, and drawn to the challenges of the bar, he became a young lawyer. He quickly found a talent and affinity for politics. Associating with Patrick Henry, James Madison, George Mason, and his soon-to-be best friend, Thomas Jefferson, it was not long before young Madison was committed to the cause of independence from Great Britain.
Monroe’s life was a crowded one, seemingly putting him in the most important debates and, as I was surprised to learn, battles of the time.
Until I read this book, I had no idea Monroe was one of the leading officers a the Battle of Trenton, crossing the frozen Delaware River in the dead of night and leading one of two contingents of soldiers in their brave and successful fight against the battled-hardened Prussians. Monroe was shot in the battle and, thanks to the blessing of a local doctor joining the battle at the last moment, he survived. But he carried that musket ball in him for the rest of his life.
Monroe finished the war as a Colonel. It was a source of great pride for Monroe and led to him being addressed as Colonel Monroe even after his presidency.”
But before he got to the White House, his stellar political and, notably, his diplomatic career paved the foundations of US foreign policy to this very day. A state delegate, a US Senator, and then US Ambassador to revolutionary France, Ambassador to Great Britain, and then-Secretary of State.
Of particular note was his service as Secretary of State during the War of 1812. Monroe understood the British were strategically going to march on Washington DC. Constantly put down by then-Secretary of War, Armstrong repeatedly that the British would never dare such a move, the City of Washington never prepared. When the British eventually emerged on the march toward the new capitol, President Monroe pushed aside Armstrong and made Monroe the Acting Secretary of War - while maintaining his role as Secretary of State.
Harkening back to his brave service at the Battle of Trenton, Monroe rode out to rally the troops in nearby Bladensburg - where US forces first met (and were routed) by British soldiers. He again rallied the troops and ensured the City did not surrender to the British after burning and looting it. The British withdrew but threatened to return for various reasons - including a disastrous explosion of gunpowder stores that killed and horribly maimed many British troops in Washington. Monroe made sure that did not happen.
McGrath deals clearly and poignantly with one essential and dark aspect of our history during this time that we must address: slavery. Monroe was a slave owner for much of his adult life. Washington, Jefferson, Madison, and many of our Founding Fathers bought and sold men and women. It is shocking to think about no matter how much you read history. Men, women, and children were bought and sold like talking field animals, frequently tearing families apart. I will forever be struck by one story McGrath relates of an enslaved man wanting to be sold to a plantation owner in the deep south, far from Monroe’s farm, just hoping to be closer to his wife, who had been sold off to another plantation the year before.
And, as McGrath points out time and again, men like Monroe knew there was something wrong with it. So very wrong with it. Yet, despite their misgivings, they never went the complete step of freeing them and putting a stop to this terrible evil.
One is struck throughout the book by the intense and devoted friendship, and near-constant communications Monroe had with Jefferson, seeking his advice and counsel as he forged a deep lifetime friendship and alliance with President James Madison. Where would our country be today without that friendship? This is a theme deeply explored throughout the book in tremendous and fascinating detail.
Monroe was now seen - again but in a much larger way - as a true American hero. And this made him a natural successor to Madison. It was a hard-fought election with the continued ugly battling between the Federalist Party versus Monroe’s Republican Party. As referred to above, the poisonous relationship between the two parties almost broke the nation apart innumerable times. Pouring fuel into the hostility was a constant flow of vicious, personal publications going after the leaders of both parties, their families, their business interests. Blackmail was not uncommon. Quite frankly, you come away thinking what the US is going through today is considerably less ugly compared to what was going on back then.
But Monroe’s election to the presidency proved to be the salve the young, vulnerable, and much-wounded nation needed. Monroe’s strong leadership and self-confidence allowed him to reach across the aisle and work with the Federalists. His vast experience and brilliance gave birth to a vision that created something of a golden age for America. John Quincy Adams remarked of Monroe’s Presidency, “There never has been a period of more tranquility at home and abroad, since our existence as a Nation, than that which now prevails.”
And it was during this remarkable period Monroe developed and implemented what we have come to know as the Monroe Doctrine, ensuring the freedom of the entire Western Hemisphere from European colonization and interference. The effect was not just hemispheric but global as the world’s leading powers came to understand the United States was now a great and mighty nation to be respectfully dealt with going forward.
McGrath has given us such a refreshing book. It leaves the reader knowing that no matter how bad things may get, there are leaders out there who will emerge thanks to the freedom and opportunities our great nation offers to lead us back to our roots, our collective vision, and hope. We wait today for a James Monroe to emerge. And after reading this book, I am confident he or she will soon enough.
Fulcrum Washington Update: New Fed Nominees Get a Confirmation Hearing Date but Raskin Facing Growing Opposition
The Senate Banking Committee is now expected to hold confirmation hearings for the three recent Federal Reserve nominations - Sarah Bloom Raskin for Vice Chair for Supervision and Lisa Cook and Philip Jefferson for Governor seats on - February 3rd.
We continue to believe that Cook and Jefferson will face little opposition and be approved by the Committee and ultimately confirmed by the full Senate.
However, we are hearing/seeing growing opposition from Republicans to the nomination of Raskin. The issue Republicans are pointing to is her views on Climate Change. In particular, they are questioning her past written views that climate change is a systemic risk to the US financial system and the Fed should play a significant role in mitigating that risk.
Additionally, a consortium of trade associations representing the oil and gas industry is opposing her confirmation for her advocacy for de-banking the sector to encourage climate goals and that the Federal Reserve should play a role in pressuring banks to cut off credit to the sector.
Beyond Republican opposition to Raskin, we will be watching closely two Senate Democrats on this vote: Senator Joe Manchin (D-WV) and Senator Jon Tester (D-MT) who represent states with significant oil/gas operations. Tester serves on the Senate Banking Committee.
However, we would point to the recent Senate Banking Committee confirmation hearing of Lael Brainard for Vice Chair of Monetary Affairs where she was asked by Republican senators about the idea of the Fed bringing pressure on banks over climate change. Brainard argued against the idea, saying, “we do not want to tell banks what sectors to lend to, or not to lend to.” She went on to say the Fed does not engage in “environmental policy,” but it does have a responsibility to evaluate possible climate risk to the financial sector. Brainard said: “We do have some sort of responsibility for understanding potential financial stability implications of a host of different kinds of things. We don’t have any expertise in disease and pandemics. But certainly, it turned out that the pandemic had enormous financial stability consequences.”
We continue to believe Raskin will, in all likelihood, get confirmed. It is likely to be a little tougher than first expected.
The Senate Banking Committee has not yet set a date for a vote on the re-nomination of Jay Powell for Fed Chair or Brainard for Vice Chair – which is surprising to us considering the importance of the upcoming March Fed meetings where it is expected the Fed will begin raising rates. Both are likely to be easily confirmed (although it is expected a number of Progressive Democrats are expected to vote against Powell - led by Senator Elizabeth Warren (D-MA) But we do not see nearly enough votes to block his confirmation).
We will update you as soon as we learn when that vote is scheduled in the Committee and when the full Senate will vote on final confirmation. Please let us know if you have any questions.
Read Around the World Over the Weekend: January 22, 2022
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.
Russia
> Center for Strategic and International Studies “Russia’s Possible Invasion of Ukraine”
If peace talks ultimately fail, the Russian military has several options to advance into Ukraine through northern, central, and southern invasion routes. But a Russian attempt to seize and hold territory will not necessarily be easy and will likely be impacted by challenges from weather, urban combat, command and control, logistics, and the morale of Russian troops and the Ukrainian population.
> Adam Tooze Chartbook “Putin’s Challenge to Western Hegemony”
As NATO works to defuse the tensions on the Russian border to Ukraine, the economic historian looks at the framework analyzing the intersection of geopolitics and economics and the rise of Russia as a challenger.
> Atlantic Council “Russia’s Other European Invasion”
As Western policymakers focus on a possible Russian invasion of Ukraine, they are turning a blind eye to another invasion: the capture of European elites. From London to Athens and far beyond, bankers, lawyers, lobbyists, and former officials have all been snapped up by the Kremlin and its allies. While Russian tanks mass on the Ukrainian border, interests linked to Russian President Vladimir Putin’s predatory regime are amassing influence in capital cities across the continent.
> Carnegie Middle East Center “Moscow’s Mercenary Ways”
In an interview, Ruslan Trad, a journalist and expert on Syria, hybrid warfare, and mercenaries, describes how private military companies advance the Kremlin’s agenda in the Arab world.
Germany
> Der Spiegel “Germany Has a Russia Problem”
There is a clear and present danger of a war of aggression in Europe, but the German government doesn’t seem to have recognized it yet. What other explanation could there be for Berlin’s inexplicable paralysis in its approach to Russia? The problem is primarily a product of the party of Chancellor Olaf Scholz.
Sweden
> Defense One “’War is Coming’: Mysterious TikTok Videos are Scaring Sweden’s Children”
In Sweden, an unusual anxiety is afflicting children and young teenagers leading them to ask their parents if Russia is about to attack their country. Where did they get that idea? TikTok. “War is coming,” say some of the videos that the social-media platform is feeding to young Swedes.
Turkey
> Foreign Policy Research Institute “Turkey’s Response to the Russia-Ukraine Crisis”
As Russia increasingly looks poised to invade Ukraine, Turkey is becoming more and more nervous about the collateral damage. What does Turkey think of the tensions? What will they do? What can they do?
Africa
> Chatham House “What 2022 Has in Store for Africa”
2022 is already shaping up to be a year of mixed fortunes for Africa if the events of the first week are a harbinger. Will we see NATO more involved in the region as Russia attempts to increase its military engagement in the region?
> European Council on Foreign Relations “Gateway to Growth: How the European Green Deal can strengthen Africa’s and Europe’s economies”
In much of Africa, growth is being driven by “green energy innovation ecosystems” which combine telecoms, digital platforms, solar power, and the internet of things. European corporations risk losing out on business opportunities and political influence if they fail to integrate their services and infrastructure into these emerging ecosystems – and tremendous opportunities if they do engage in a larger way.
> Brookings Institute “Biodiversity conservation, zoonotic diseases, and human security in Africa two years into COVID-19”
the COVID-19 pandemic has revealed how vulnerable conservation and income for local communities and protected areas are to downturns in tourism. Brookings assembled a panel as part of their Africa Security Initiative to look at how COVID has affected conservation in Africa. They also looked at if there has been a genuine transformation toward “One Health” – looking at the link between biodiversity conservation and human security.
China
> Georgetown University Center for Security and Emerging Technology “Chinese Contributions to High-Impact AI Research”
In the past decade, Chinese researchers have become increasingly prolific authors of highly cited AI publications, approaching the global research share of their U.S. counterparts. However, some analysts question the impact of Chinese publications; are they well respected internationally, and do they cover important topics? In this data brief, the authors build on prior analyses of top AI publications to provide a richer understanding of the two countries’ contributions to high-impact AI research.
> Foreign Policy “China’s Continent-Spanning Trains are Running Half Empty”
Beijing is funding dozens of new rail routes as part of its global ambitions — and losing money on everyone. So what’s the long game?
> The New Yorker “How the Chinese Language Got Modernized”
Faced with technological and political upheaval, reformers decided that Chinese would need to change in order to survive.
> US State Department. “Limits in the Seas: People’s Republic of China’s Maritime Claims in the South China Seas”
The US laid out its most detailed case yet against what it calls Beijing's "unlawful" claims in the South China Sea, rejecting both the geographic and historic bases for Beijing’s claims. In a 47-page research paper, the State Department said China had no basis under international law for claims that have put Beijing on a collision course with the Philippines, Vietnam and other Southeast Asian nations.
Latin America
> Washington Post “Millennial politicians are shaking up Latin America. Here’s how they differ from the old guard”
Generational turnover is getting rid of ‘los mismos de siempre’ and making politics – and economics and markets - more unpredictable.
> Center for Strategic and International Studies “Preparing for Deterioration of the Latin American and Strategic Environment”
The report suggests Latin America and the Caribbean are currently on the precipice of a downward spiral into populist authoritarian governments, economic collapse, social unrest, and expanded presence and influence of China across the hemisphere. Although those dynamics are just now becoming clear, numerous reinforcing dynamics are driving the strategic environment of the region in a very troubling direction. For the moment, the skies of the region are still mostly clear, but the storm is coming.
Middle East
> Carnegie Middle East Center “Abu Dhabi’s Dilemma”
The drone and missile attacks by Houthi rebels on the United Arab Emirates January 17 will force the UAE to make one of two choices, neither of them desirable.
United States
> The War Room “Lost on the Next Battlefield: The Need to Replace GPS”
A revolution is needed with regard to the US military’s use of the Global Positioning System (GPS). US military planners needs to focus its efforts on modernizing the way it delivers position, navigation, and timing (PNT). Without a fundamental shift away from the Global Positioning System (GPS), the DoD will not be competitive in near-peer conflicts.
> Gallup “US Political Party Preferences Shifted Greatly During 2021”
On average, Americans' political party preferences in 2021 looked similar to prior years, with slightly more U.S. adults identifying as Democrats or leaning Democratic (46%) than identified as Republicans or leaned Republican (43%). However, the general stability for the full-year average obscures a dramatic shift over the course of 2021, from a nine-percentage-point Democratic advantage in the first quarter to a rare five-point Republican edge in the fourth quarter.
Climate Change/Energy
> Center for Strategic and International Studies “Safeguarding Critical Minerals for the Energy Transition”
The transition from fossil fuels to low-carbon energy sources will depend on critical minerals. The consumption of these minerals could increase sixfold by 2050, according to one scenario by the International Energy Agency. In that world, the trade in energy-related resources will consist largely of critical minerals rather than oil and natural gas. By value, this market could top $400 billion, exceeding the value of all the coal extracted in 2020.
Key Events We are Watching Around the World This Week: January 24 - 30, 2022
Sometime this week:
UK Government investigative report expected to be released on “Partygate” which could lead to the downfall of British Prime Minister Boris Johnson (Johnson reportedly held parties at 10 Downing Street flouting national COVID restrictions).
Monday, January 24th:
Italian Parliament to begin presidential electoral process.
EU and British officials to meet in Brussels to continue negotiations over Northern Ireland protocol.
EU foreign affairs ministers to discuss Indo-Pacific, Mali and Sudan. U.S. Secretary of State Antony Blinken to join virtually to discuss Ukraine.
Eurozone, France, Germany, Japan, UK, US all are reported on in IHS Markit flash composite purchasing managers’ index (PMI) data releases.
South Korea releases GDP figures.
Bank of England releases Asset Purchase Facility Quarterly Report.
SEC Chair Gary Gensler gives a Northwestern University School of Law’s Virtual Regulation Institute where he is likely to discuss ESG and Crypto regulation.
Tuesday, January 25th:
Federal Reserve Board Meetings (first of two days) in Washington DC.
Sixth meeting of EU-Serbia Stabilization and Association Council to be held.
Likely street demonstrations in Egypt in remembrance of the 11th anniversary of the Jan. 25, 2011, uprising against former Egyptian President Hosni Mubarak.
EU Foreign Ministers meet on Mali and ongoing issues in the country.
Germany’s Ifo Institute releases monthly business confidence index.
US Deputy Secretary of State Wendy Sherman speaks at the Yalta European Strategy Conference re: Ongoing tensions with Russia over Ukraine.
Wednesday, January 26th:
Federal Reserve Board Meetings in Washington DC and announcement on latest decisions on US interest rates.
Canada Central Bank interest rate decision.
Taiwanese Vice President William Lai to meet virtually with U.S. politicians during a stopover in Los Angeles, California, on his way to Honduras.
Australia Day celebrations take place.
India Day celebrating introduction of the Indian constitution.
Thursday January 27th:
Honduran President-elect Xiomara Castro to be inaugurated.
Defense ministers of Indonesia, the Philippines and Malaysia to discuss trilateral maritime cooperation.
First India-Central Asia summit to be held virtually.
US GP Q4 estimate released.
German Consumer Confidence Data released.
International Holocaust Remembrance Day on the 77th anniversary of the liberation of Auschwitz.
Friday, January 28th:
German Green Party hosts party congress in Berlin.
International Monetary Fund board to conduct sixth review of Pakistan’s bailout program.
France Q4 GDP released along with Producer Price Index.
Germany releases flash Q4 GDP.
Italy releases Producer Price Index.
US personal income and spending data released.
Sunday, January 30th:
§ Portugal holds general election.
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.
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