The China Excuse

• Dems’ new debt-ceiling gambit: Invoke the CHINA boogeyman
• Why one industry has nothing to fear from the debt ceiling
• Today’s news, brought to you by Jim Rickards two weeks ago
• Congress thinks the model for AI regulation is… the FDA?!
• Tight housing market (continued)… Durham’s pathetic denouement… clever fixes for the endless-ads TV… and more!

The Biden administration has settled on a new talking point aimed at getting recalcitrant Republicans to cave on the debt ceiling: CHINA CHINA CHINA!!!

Yesterday, the White House trotted out Defense Secretary Lloyd Austin, Secretary of State Antony Blinken and Commerce Secretary Gina Raimondo to warn that a U.S. default — or even the prospect of one — is a gift to the Chinese Communist Party.

The trio testified to the Senate Appropriations Committee. “Austin warned Congress’ unpredictable government funding process, including its yearslong inability to pass annual spending bills on time, will undermine the edge the U.S. still maintains over China,” reports the military rag Stars and Stripes.

The committee’s Democrats picked up the ball and ran with it: “Xi Jinping has assessed the United States as a flawed and failing political and economic system. Nothing we could do would reinforce that impression more than defaulting on our national debt,” said Sen. Chris Coons (D-Delaware).

Right, because it would be soooo much better to just keep running up Uncle Sam’s credit card without limit.

Besides, Beijing has already expressed its level of confidence in America’s “political and economic system” — Chinese holdings of U.S. Treasury debt are back to levels last seen in 2010.

Note the precipitous drop in just the last year. That’s Chinese leaders, seeing how Washington declared Russia’s Treasury holdings worthless after the invasion of Ukraine — and wondering whether they might be next.

But really, the military-industrial complex has nothing to worry about: There’s always a last-minute agreement… and any budget cuts will leave the Pentagon unscathed.

Back in January when Kevin McCarthy was herding cats to line up enough votes to become House speaker, he committed to capping federal spending at 2022 levels — including military spending. That was a concession to win over holdouts like Reps. Matt Gaetz (R-Florida) and Chip Roy (R-Texas).

But in April, McCarthy pushed a GOP debt-ceiling bill through the House. While it included spending cuts… the details were left to be worked out later.

“Given how it is structured, McCarthy’s proposal dashes the hopes of advocates of reining in the Pentagon’s bloated budget, while prompting a sigh of relief from the Pentagon, its contractors and their allies in Congress,” wrote William Hartung of the Quincy Institute in Forbes.

“The debt ceiling debacle has proven to be little more than political grandstanding on defense,” adds Julia Gledhill, a defense analyst at the Project on Government Oversight. “It takes up almost half of discretionary spending — it is simply not possible to take defense off the table and discuss spending cuts in good faith,” she tells the Responsible Statecraft site.

So true… and good faith is mighty hard to come by in the Beltway.

Bad for world peace (and for small government), but good for defense stocks: Over the last 12 months, the SPDR S&P Aerospace & Defense ETF is up about 7%, while the S&P 500 is nearly ruler-flat. Look for that outperformance to continue.

For the moment, there are no debt ceiling jitters on Wall Street.

All the major U.S. indexes are in the green by a half-percent or better: The S&P 500 sits at 4,132.

On the Paradigm team’s weekly editorial Zoom call this morning, both our trading authority Alan Knuckman and our recovering investment banker Sean Ring agreed — a rarity, but it happens! — that if the S&P 500 can bust through 4,200… it’s up, up and away.

Gold is sinking further after yesterday’s smackdown, losing another eight bucks to $1,980. Silver has shed a few pennies to $23.67. Crude has rallied $1.75 to $72.61.

The lone economic number of note is housing starts — bouncing 2.2% in April. But permits, a better indicator of future activity, fell 1.5%. Homebuilders are still dealing with supply-chain snags, while homebuyers are contending with tighter credit conditions. Bleah…

Rickards got it right, Part 1: China’s vaunted reopening after COVID was a “false dawn,” as Jim Rickards said it would be two weeks ago.

From today’s Wall Street Journal: “China’s post-COVID growth spurt is sputtering and its youth unemployment rate hit a record high, signaling trouble for a recovery that was expected to boost global growth.”

Several economic indicators came in below expectations this week — including retail sales and factory production.

But wow, an unemployment rate of 20.4% for people ages 16–24? That’s the stuff of revolutions. We’ll keep an eye on that one for sure…

Rickards got it right, Part 2: No, you can’t rule out one more interest-rate increase by the Federal Reserve next month.

The Fed issued another “authorized leak” to its favorite reporter, the WSJ’s Nick Timiraos — describing newly emerging tensions among Fed officials. Do they raise the fed funds rate a quarter percentage point on June 14, or do they leave it alone?

After the most recent increase two weeks ago today, Jim said one more increase was within the realm of possibility — even though the overwhelming betting on Wall Street was that the Fed is done with this rate-raising cycle.

With the release of the Timiraos story, Wall Street is starting to come around to Jim’s thinking: The activity in the futures market this morning suggests a 28% probability the Fed will raise one more time.

And now if I may brag on myself for a moment — although this is one call I’m sorry I got right.

As you might be aware, John Durham — the special counsel investigating the origins of “Russiagate” — issued his final report yesterday.

It’s a damning indictment of the FBI’s conduct — really, if you weren’t already convinced the rule of law in this country is dead and buried, this should be the proverbial last straw.

But in terms of accountability, Durham came up pathetically short. Over the course of a near-four-year investigation, he secured exactly one plea bargain… while the two cases he took to trial ended in acquittal.

That’s a 33% conviction rate in a federal court system that secures convictions 99.6% of the time, according to figures from the Pew Research Center.

But as I said in July 2019, the fix was in from the beginning. Durham and the guy who appointed him — two-time Attorney General William Barr — had long ago proven themselves loyal lackeys of the deep state.

There’s nothing wrong with artificial intelligence that Congress can’t make 10 times worse.

Yesterday a Senate subcommittee held a much-ballyhooed hearing about AI. The star witness was Sam Altman, CEO of OpenAI — the outfit behind ChatGPT.

Altman shamelessly played to his audience — begging for government regulation and licensing on the grounds that AI might be used to propagate “misinformation.”

“We’re going to face an election next year,” he said. “And these models are getting better.”

Sam Altman puts on his most earnest election-integrity face [C-SPAN screengrab]

As Paradigm tech expert Ray Blanco reminded us on our conference call today, regulations always favor large, incumbent companies at the expense of scrappy competitors who lack the money and manpower to comply with the regulations. Altman, with a $10 billion investment from Microsoft, is talking his book.

So what would AI regulation look like, anyway?

In response to one senator who suggested a good model for AI regulation would be the Nuclear Regulatory Commission, Altman said the “NRC is a great analogy” for the sort of regulation he supports.

Seriously? The NRC has all but killed off nuclear power in this country at a time the grid desperately needs it: Over the past five decades, construction time for new plants has ballooned from four years to 14… while plans for 60 reactors were scrapped.

Also testifying was AI researcher-turned-critic Gary Marcus. He said the model for regulation should be… the FDA.

As I said in 2020 when a COVID vaccine was in development, “Washington’s extensive and costly regulatory regime is designed to protect well-capitalized drug firms with the resources to shoulder the costs — freezing out any upstarts. But the system still allows disasters like fen-phen and Vioxx to come to market.”

And, as it turns out, COVID jabs that didn’t deliver on the promise of preventing infection or transmission.

Sheesh. Elsewhere in his testimony, Sam Altman likened AI’s potential to that of “the printing press” — a technology that got along just fine without a licensing scheme, thank you very much. Just imagine if these 21st-century congressional clowns had been around during Gutenberg’s time in the 15th…

“Dave, it’s a rare day when I call bull**** on Jim Rickards. His insights are next-level stuff,” writes one of our regulars after Jim observed the two parties are “playing chicken” with the debt ceiling.

“Here’s my humble rephrase FWIW: Our Uniparty actors are conducting controlled opposition theater as always.

“If the Fed can create money from nothing to finance big gubment, why do we have ‘debt ceilings’? Why are those moving targets with X-dates?

“For that matter, why do we have debt to begin with — plus taxes, and inflation, and inflation targets?

“Yeah I know, the questions answer themselves!

“These things occur in fiat currency regimes where the banksters have captured the economy; but not in sound money systems (at least according to history books). Unfortunately I have no experience with the latter.”

The 5: Nor I. But don’t underestimate the consequences in case of default. We’ve recounted the story more than once, but during the 2011 debt-ceiling farce, there was a real chance Social Security payments would not have gone out as scheduled on Aug. 3.

But as long as you brought up the Fed, there has been Beltway chatter this time around that in the event of default, the Fed could simply buy the defaulted bonds.

Of course they could — but there’s no way they could spin that after the fact as anything other than banana-republic stuff.

We got a couple of hot takes on “Telly” — the free TVs that come with an extra screen devoted to nonstop ads and a sensor that can tell how many people are in the room…

“Your blurb on tech startup Telly brings to mind the old line that Yakov Smirnoff used to say, ‘In Russia, TV watches you.’ Yesterday’s joke is today’s reality. Yeesh!!”

The 5: Hate to break it to you, but that’s been the case for years: The “Vault 7” leak in 2017 revealed how the CIA was hacking voice-activated Samsung TVs.

According to WikiLeaks, the TVs could effectively “operate as a bug, recording conversations in the room and sending them over the internet to a covert CIA server.”

“I suppose you could just put duct tape over the part of the screen with the ads on it,” suggests another.

“Duck Tape brand tape comes in a variety of colors to match any room’s decor. And how difficult would it be to locate the sensor and either remove it or just block it with aluminum foil?”

The 5: An even more attractive option, I imagine, would be to wrap the bottom portion in some sort of opaque fabric. Isn’t it supposed to be good feng shui to cover a TV with a cloth when not in use anyway?

Best regards,

 

 

 

Dave Gonigam
The 5 Min. Forecast

P.S. Moments ago, Jim Rickards wrapped up his Secrets of Jekyll Island live webstream — direct from Jekyll Island, Georgia, where the creation of the Federal Reserve was plotted in 1910.

Jim was joined by former Fed insider Danielle DiMartino Booth for a freewheeling two-hour talk that’s already getting rave reviews from your fellow Paradigm readers.

If you missed it, our video and web teams are preparing the replay as I write. Come back to tomorrow’s 5 for a link along with the highlights.