(What’s Left of) Our Economy: A Respectable Case for Optimism?

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At the risk of being (undeservedly) tarred as a CCP Virus pollyanna, I can’t help but being struck by the some new evidence that the U.S. economy’s recovery from its pandemic-induced swoon will be faster than widely feared. In fact, I still share these fears to some degree. But I can’t ignore increasing signs to the contrary.

To be clear, this evidence has little to do with the subject of yesterday’s post. Just because data can be cited showing significant national progress in beating back the virus threat doesn’t necessarily mean that a more so-called “V-shaped” economic rebound is on the way. The same goes for the impact of this progress on the economy reopening decisions of individual U.S. states – even though the more decline seen in numbers of new cases (despite gains in testing that should be revealing much more infection), numbers of deaths, and numbers of virus-related hospitalizations, the more reopening obviously will be seen.

Nor are my views being shaped by the strong rebound seen in U.S. stock markets so far (including today so far), or by the newly bullish recovery views voiced last night on “Sixty Minutes” by Federal Reserve Chair Jerome Powell. And this post isn’t even driven by the latest news about vaccine progress (though such reports will clearly help as long as the results continue being validated).

The reason: I’ve been convinced that the key to the recovery’s strength will be Americans’ willingness to start patronizing businesses in an economy where most activity – and most income earning opportunities – depend on consumer spending. So I’ve put considerable stock in predictions that, even though all the objective conditions can show that a return to normality will be safe, too many Americans will remain too fearful to boost the economy significantly.

I also take seriously the idea that all the restrictions on visiting retail stores (including restaurants) and personal service businesses will limit their customer flow either simply by forcing them to operate substantially below capacity, or by dissuading many customers from visiting in the first place, and thereby sharply reducing impulse consuming. Further, I’m well aware that the much more modest shock administered to Americans by the Great Recession triggered by the 2007-08 financial crisis was painfully slow to wear off. (See here and here where I write about reasons for recovery pessimism.)

In addition, the experiences of other countries that started reopening earlier has reenforced consumer caution concerns. Sweden, for example, has imposed fewer economic restrictions than any other major country. But this survey by the consulting firm McKinsey & Co. reports that consumer spending has dropped significantly anyway, and may not recover for months. China claims that it’s beaten the virus and its regime has been easing factory lockdowns since February. But as of late April, retail sales were still way down.

Finally, there’s the second wave threat, which could kneecap the economy as temperatures start dropping in the fall even if summer does witness a decent bounce back toward pre-virus consuming.

So the case against a relatively quick recovery with real legs is still awfully strong.

But don’t overlook reasons for more optimism. One that’s nothing less than amazing: The piece in this morning’s Washington Post reporting that even though virus testing is now much more widely available in the United States than previously, Americans are far from rushing to capitalize on these opportunities. Even accepting the various reasons offered in this article (e.g., not enough Americans know that the situation has changed; there’s too much mistrust of medical providers in some U.S. communities, particularly African-Americans), it’s difficult at least for me to conclude anything else but that many in the United States simply aren’t concerned enough about the pandemic to take this precaution. After all, if they were panic-stricken, wouldn’t they be following every bit of news about the supply of tests with baited breath?

Perhaps more important, the more news that emerges that the CCP Virus is much less lethal than early reports suggested, the (understandably) less concerned about infection more and more Americans seem to be.    

Then there are all the reports of Americans, whether in states that have eased lockdowns more vigorously and those that haven’t, violating social distance guidelines, either by not wearing masks where they’re supposed to, or seemingly ignoring social distancing rules in public place – and indeed returning to restaurants and bars and beaches in pretty impressive numbers. These reports are anecdotal, and therefore should be viewed with lots of caution. Also, please don’t assume that I’m endorsing this behavior! But there sure seems to be a lot of it, these reports also seem related to growing evidence of the virus’ relatively modest death rates, and and as an old adage goes, when enough anecdotes appear, they become data. 

Finally are several indicators pointing to an actual, non-trivial comeback in economic activity, and for a variety of sectors. This account mentions encouraging signs from the tech sector to the automotive industry. This article presents evidence of bottoming even in hard-hit bricks and mortars retail stores and restaurants. And click here for information on the housing industry.

Of course, the references above to “bottoming” could still be entirely consistent with pessimistic predictions of a painfully slow climb back to pre-virus prosperity. But I still find myself wondering if, having seen the overpoweringly depressive effect of various official edicts literally to halt and outlaw much economic activity, Americans might experience a reasonably powerful growth effect from their withdrawal – not to mention declining fears that infection is a death sentence.

Im-Politic: Some Winning Anti-Virus Numbers

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As well known by RealityChek regulars, I’m a strong believer in looking at the most detailed data possible in order to understand a development or situation best. (Just yesterday, they got a great example, in this post on the latest official figures on America’s manufacturing production.)

Sometimes, though, it’s helpful to get out of the weeds. And a loftier perspective seems necessary on the coronavirus crisis and the heated debate over how fast to open the U.S. economy. Of course, because the reopening is taking place on a state-by-state basis, and because even the earliest opening states have by no means restarted their economies all the way right away, the national picture, paradoxically, isn’t the whole picture.

All the same, because the main debate is clearly between those who would go slow (at best) on the one hand, and those who would go relatively quickly on the other, it’s unmistakably useful to review the progress (or lack of progress) made by the United States as a whole. And according to the figures below, it’s been impressive, however sluggishly it began.

Let’s start with the virus death count – of most urgent concern to everyone especially if a loved one has fallen sick. I couldn’t find a chart that could be cut and pasted here, but if you look at The New York Times tracker here, you’ll see that the seven-day average of new daily deaths (the best way to monitor trends over time) peaked on April 17 at 2,362. As of this past Friday, it stook at 1,563.  That’s a reduction of more than a third – not at all bupkis.

Now let’s look at the daily change in the numbers of reported U.S. cases.  This chart comes from the Vox.com news site, and also makes clear a steady dropoff: today: 

Now let’s look at the testing figures, which also come from Vox. Keep in mind that the number of confirmed cases will logically rise as testing increases: 

Testing for coronavirus has passed 350,000 tests per day.

 

The clear message here is that the numbers of reported cases keep falling even as testing keeps rising. That’s hard to beat for (realistic) good news in this virus era.

Finally, here’s data straight from the U.S. Centers for Disease Control and Prevention showing the CCP Virus burden on the American healthcare system.  It presents the weekly change in the share of national emergency room visits accounted for by patients with flu-like illnesses (the blue line) and by patients with specific CCP Virus-like illnesses (the orange-y line). 

This statistic is especially important because a major original rationale for the shutdowns was to prevent virus cases from mushrooming so that the nation’s hospitals would be overwhelmedThis chart only goes up to May 2, but those are major decreases over the preceding six weeks (which brings us back to mid-March.)     

This graph displays data on emergency department (ED) visits for COVID-19-like illness (CLI) and influenza like illness (ILI) reported to CDC by the National Syndromic Surveillance Program (NSSP).

I’m sure as heck not going to shout “Mission accomplished” when it comes to the CCP Virus crisis. And no one can forget the major uncertainties still surrounding the cases and fatalities numbers – according to various critics, on the overcount and the undercount sides.

But given the progress made so far, given the lack of evidence of any worsening of the situation in states that have reopened on the aggressive side (see, e.g., this post), and given the fearsome public health toll sure to result from prolonged national economic paralysis, it seems fair to say that at least some of the burden of proof in the shutdown-versus-restart arguments has shifted to the former. 

Following Up: Inside April’s U.S. Manufacturing Crash II

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A little earlier today, RealityChek presented some lowlights from this morning’s Federal Reserve U.S. manufacturing production report (for April). As promised, here’s a more granular look at the results, which yield even more insights as to how the CCP Virus blow to the economy is reflecting – and probably influencing dramatically changed spending patterns.

The table below shows the findings for durable goods industries, the super-category that covers products with expected usage and shelf lives of three years or more. Included are the original March inflation-adjusted output changes, the revised March data, and the April statistics:

Wood products:                                                -4.22%       -3.15%      -9.04%

non-metallic mineral products:                        -6.56%      -6.50%     -16.26%

Primary metals:                                                -2.82%      -3.95%     -20.37%

Fabricated metal products:                               -8.28%      -4.23%     -11.33%

Machinery:                                                       -5.56%      -3.05%     -10.98%

Computer & electronic products:                     -1.89%      -1.24%      -5.02%

Electrical equip, appliances, components:       -2.24%      -2.83%      -5.99%

Motor vehicles and parts:                               -28.04%    -29.96%    -71.69%

Aerospace/miscellaneous transport equip:      -8.12%      -8.90%     -21.65%

Furniture and related products:                       -9.99%      -6.50%     -20.60%

Miscellaneous manufacturing:                        -9.94%      -7.09%       -9.05%

   (contains most of those non-pharmaceutical healthcare goods)

As in the broader category analysis from earlier today, the automotive collapse – over both March and April – stands out here, although it was joined in the double-digit neighborhood (at much lower absolute levels of course) by six of the other eleven sectors. And as predicted in last month’s post on the March Fed report, the sector that’s held up best has been the computer and electronics industry – though following surprisingly close behind is electrical equipment, appliances, and their components.

It’s also easy to see how the rapid deterioration in automotive and the miscellanous transportation category that includes aerospace (especially in April for the latter) spilled over into supplier industries like metals and fabricated metal products, and machinery.

One durable goods puzzle: the relatively fast April decrease in the miscellaneous manufacturing category, which contains non-pharmaceutical medical goods so crucial for the nation’s CCP Virus response.

The second table shows the same information for the non-durables super-category, where the virus impact has been considerably lighter. Among notable results – the sharp worsening of after-inflation output in the food sector. Although it fared relatively well, there can be little doubt that the worker safety problems in meat-packing plants, along with the cratering of big customers – mainly the restaurant and hotel businesses – played big roles.

The non-durables results also make clear that the sector that’s survived best so far has been paper. Also excelling (at least relatively speaking): the enormous chemicals sector. This industry also contains the pharmaceutical industry, although the any positive CCP Virus impact seems unlikely to date because no vaccines or treatments have been developed yet.

Food, beverage, and tobacco products:          -0.76%      -1.56%       -7.10%

Textiles:                                                        -14.05%      -6.98%     -20.72%

Apparel and leather goods:                          -16.54%    -10.31%     -24.10%

Paper:                                                            -2.04%      -0.08%        -2.58%

Printing and related activities:                    -18.18%    -10.75%      -21.16%

Petroleum and coal products:                       -5.93%      -6.56%      -18.55%

Chemicals:                                                   -1.65%      -1.50%         -5.14%

Plastics and rubber products:                      -7.60%       -4.37%       -11.03%

Other mfg (different from misc above):     -5.37%       -4.29%       -10.37% 

The virus crisis contains so many moving parts (e.g., vaccine and therapeutics progress; infection, fatality, and testing data; uneven state reopening and national social distance practicing; consumer attitudes; second wave possibilities) that extrapolating the manufacturing trends to date seems foolhardy. But tracking industry’s winners and losers as the months pass could still provide important clues as to how much further the economic woes it’s caused will continue; and when, how quickly, and how completely recovery arrives.   

(What’s Left of) Our Economy: Inside April’s U.S. Manufacturing Crash I

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There was never any point in expecting today’s Federal Reserve manufacturing production figures (for April) to change significantly what’s known about the CCP Virus’ body blow to the American economy overall, and to industry in particular. As with the case last month, however, the details reveal a great deal about how the pandemic is changing patterns of U.S. factory output – which in turn to some extent reflect changing patterns of the spending (by both consumers and businesses) that remains the main driver of the nation’s growth (or, nowadays, contraction).

The big takeaways are that:

>The March revisions show that the virus damage to manufacturing that month was a good deal less (with inflation-adjusted output falling by 5.53 percent on month) than the 6.27 percent drop initially reported.

>The April 13.78 percent month-to-month real production was by far the biggest such decrease on record (going back to 1972) – surpassing March’s previous record.

>As with March, the steepest fall-offs in price-adjusted output came in the durable goods sector – which consists of items whose active use or shelf life is expected to be three years or greater. In March, the sequential production decrease was revised from 9.14 percent to 8.23 percent. But in April, the plunge was more than twice as great: 19.27 percent.

>The March monthly shrinkage of non-durable goods production is also now judged to be smaller than first reported – 2.64 percent rather than 3.21 percent. But in April, the rate of sequential deterioration was even faster than for durable goods, speeding up to 8.23 percent.

>Within durable goods (e.g., steel, autos, computers, industrial machinery, furniture, appliances, aircraft), the automotive sector remained by far the weakest industry. It was bad enough that March’s horrific on-month after-inflation output crash dive was thought to be even greater than first estimated (29.96 percent rather than 28.04 percent). But in April, inflation-adjusted output was down by another 71.69 percent.

>And within the automotive sector, the big story was vehicles, not parts. The former’s constant dollar March production is now judged to have been 37.77 percent, not the originally reported 34.76 percent. But then in April, it careened down by 93.60 percent. That is, it nearly stopped.

>For an idea of how profoundly automotive’s tailspin has affected manufacturing’s performance, if it’s removed from the total, factory output’s April monthly contraction would have been 10.29 percent in real terms, not 13.78 percent. That is, still a terrible (and record) performance, but not quite so terrible.

>As for durable goods, its April sequential production drop would have been 12.65 percent in real terms, not 19.27 percent. Again, an awful performance, but much better than the numbers with automotive.

>Speaking of tailspins, Boeing’s troubles have continued to mount because the virus crisis has decimated U.S. travel and transportation, and they showed up in abundance in the April Fed manufacturing report. March’s monthly after-inflation output decrease for aircraft and parts was revised from 10.36 percent to 12.09 percent. And that rate more than doubled in April, hitting 28.88 percent.

I’ll be following up with more detailed April production data later this afternoon!

Following Up: Podcast Now On-Line of National Radio Interview on U.S.-China Decoupling

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I’m pleased to announce that the podcast is now on-line of my interview yesterday on John Batchelor’s nationally syndicated radio show.  Click here for a timely update on dramatic new evidence that the U.S. and Chinese economies keep steadily – and in some cases quickly – disengaging.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Im-Politic: A Media Watchdog Lets Chuck Todd Off the Hook

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If you heard two significantly different explanations for the same big mistake (and possible instance of wrongdoing) from the same organization, wouldn’t you at least think of investigating further, rather than simply leave the matter hanging? If so, congratulations. You have infinitely better journalistic instincts than Washington Post media columnist Erik Wemple – who’s supposed to earn a living trying to resolve such discrepancies, and who failed miserably in his coverage of a major recent journalism controversy.

The mistake and possible misdeed entail the treatment by NBC News’ Chuck Todd of an interview on another network with Attorney General William P. Barr. The film clip of that session – first broadcast on CBS News – used by Todd to kick off a panel discussion on the weekly Meet the Press program he hosts was missing a key passage. What Todd showed last Sunday morning depicted Barr answering in an apparently cynical way a question about his hotly debated decision to drop the Justice Department’s case against then senior Trump administration foreign policy appointee Michael T. Flynn.

Specifically, Barr was asked how he believed history would view his handling of the Flynn case. In the excerpt seen by Todd’s panelists and Meet the Press viewers, Barr’s answer stopped with the flip remark, “History is written by the winner, so it largely depends on who’s writing the history.”

As Todd noted, those words created the impression of Barr as a completely unscrupulous hack lacking any regard for his most solemn responsibility: “I was struck…by the cynicism of the answer. It’s a correct answer. But he’s the attorney general. He didn’t make the case that he was upholding the rule of law. He was almost admitting that, yeah, this is a political job.”

The problem is that Barr’s answer didn’t stop there. Wemple reported that he continued with the following points: “But I think a fair history would say that it was a good decision because it upheld the rule of law.  It helped, it upheld the standards of the Department of Justice, and it undid what was an injustice.” In other words, Todd’s comment, anel discussion, was utterly inaccurate.

And here’s where the conflicting explanations come in. That same evening, following a protest by the Justice Department’s chief press spokesperson (included in Wemple’s article), NBC responded with the following (also presented by Wemple):

You’re correct. Earlier today, we inadvertently and inaccurately cut short a video clip of an interview with AG Barr before offering commentary and analysis. The remaining clip included important remarks from the attorney general that we missed, and we regret the error.”

That is, before sending the material to Todd and whoever helps him with these tasks, someone at NBC just happened to cut off a recording of the interview at exactly the point at which Barr transitioned from wisecrack mode to serious mode. I’m personally struggling to believe that this action was an innocent mistake, as NBC’s use of the word “inadvertently” clearly claims. After all, the deleted portion represented essential context. But maybe the scissor (or the digital  editing tool) slipped. So maybe the network’s expression of regret is totally sincere.

But Todd himself appears to disagree. Tuesday, in an on-the-air appearance, he gave viewers an entirely different version of events. According to Todd (and reported by Wemple),

Now, we did not edit that [Barr material] out. That was not our edit. We didn’t include it because we only saw the shorter of two clips that CBS did air. We should have looked at both and checked for a full transcript. A mistake that I wish we hadn’t made and one I wish I hadn’t made. The second part of the attorney general’s answer would have put it in the proper context.”

He continued: “Had we seen that part of the CBS interview, I would not have framed the conversation the way I did, and I obviously am very sorry for that mistake. We strive to do better going forward.”

To his credit, Wemple raised disturbing questions about Todd’s account:

“The scope of these oversights bears some explanation. ‘Meet the Press’ aired on Sunday. CBS News published the transcript of the Barr interview in its entirety on Thursday, allowing ‘Meet the Press’ several days to evaluate it. A longer version of the interview video was available by Friday morning. The show’s mistake amounts to a stunning breakdown.”

But this partly helpful explanation was only partly helpful. For it missed the glaring contradiction between the two explanations. As I mentioned, it’s conceivable (despite Todd’s denial) that the crucial Barr passage was accidently snipped. It’s also possible that the Meet the Press staff was just lazy and incompetent, and failed to do the most elementary journalistic double-checking.

It is flatly impossible, however, for both explanations of the same set of events to be true. And yet Wemple not only overlooked this whopping inconsistency. He actually praised Todd’s apology for having “struck a tone consistent with the screw-up.”

Of course, that can’t simply be “end of story,” as Wemple clearly believes. Absent further investigation (“Wemple? Wemple?”) no one outside NBC News can know which of these versions of the Barr episode is true, or whether there’s still another explanation. So in the absence of definitive evidence, here are two alternatives that mustn’t be ruled out:

>If the snipping version is the more accurate, it wasn’t accidental at all. Instead, it may well have resulted from some zealous staffer who thought he or she could get away with an outright deception – largely because NBC has become a den of Never Trumpers, and because the other leading mainstream news organizations aren’t interested in seriously policing themselves even when unmistakable scams are uncovered, – as Wemple’s own performance has made clear. Sure Fox News might pick it up. But so what? Its findings usually get dismissed (by most outside ‘Fox Nation”) as raw partisanship anyway.

>If the lazy, incompetent version comes closest to the truth, it’s all too easy to imagine that everyone at Meet the Press is so devoted to the Resistance that as soon as someone spotted a Barr statement that made this also-loathed Attorney General look bad, no one saw no reason not to run with it.

And unless one of Wemple’s peers rises to the challenge, speculation is all that’s left. Because in this case, a so-called “media watchdog” lacked both bark and bite.

Making News: Talking U.S.-China Decoupling Tonight on National Radio

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I’m pleased to announce that I’ll be returning to John Batchelor’s nationally syndicated radio show tonight to discuss the latest twists and turns in U.S. policy toward China.  Because John and co-host Gordon G. Chang are pre-recording segments during this CCP Virus crisis, it’s still uncertain exactly when the interview will air.

But if you start listening live on-line to John’s show here at 9 PM EST, you’ll be sure not to miss an important, timely discussion of how fast the U.S. is disengaging economically (“decoupling,” as the term of art has it) from the People’s Republic.

As usual, I’ll post a link to the podcast of the interview as soon as one’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: Long Overdue Curbs on U.S. Financial Investment in China Seem at Hand

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A major debate has just broken into the open over some crucial questions surrounding the future of U.S.-China relations. Chances are you haven’t read about it much, but it essentially involves whether Americans will keep – largely unwittingly – sending immense amounts of money to a foreign regime that was long posing major and growing threats to America’s security and prosperity even before the current CCP Virus crisis. The details, moreover, represent a case in point as to how stunningly incoherent America’s China policy has been for far too long.

The controversy attained critical mass this week when the Trump administration on Monday “directed” the board overseeing the main pension plan for U.S. government employees and retirees (including the military) to junk a plan that would have channeled these retirement savings into entities from the People’s Republic. The President can’t legally force the managers of the Thrift Savings Plan (TSP) to avoid China-related investments. But he does have the authority – in conjunction Congressional leaders – to appoint members to the board, and has just announced nominations to fill three of the five seats. 

This afternoon, the board announced that its recent China decision would be deferred. But because it’s still breathing, all Americans need to ask why on earth the U.S. government has ever allowed any investment in shares issued by entities from China (as known by RealityChek regulars, I refuse to call them “companies” or “businesses,” because unlike their supposed counterparts in mostly free market economies, they’re all ultimately agents of and most are massively subsidized by the Chinese government in one way or another). And why doesn’t the board just kill off the idea for good?    

After all, at the very least, Chinese entities often engage in the most fraudulent accounting practices imaginable, thereby preventing outsiders from knowing their real financial strengths and weaknesses. As just pointed out by Trump administration officials, many also play crucial roles in China’s human rights violations and engage in other practices (e.g., hacking U.S. targets, sending defense-related products and technologies to rogue regimes) that could subject them to national or global sanctions. Worst of all, the thick and secretive web of ties between many of these entities and the Chinese military mean that in a future conflict, U.S. servicemen and women could well get killed by weapons made by Chinese actors partly using their own savings.

Further, government workers’ savings aren’t their only potential or even actual source of U.S. financing. Any American individual or investment company or private sector pension plan is currently allowed to direct money not only toward any Chinese entity listed on American stock exchanges (even though regulators keep complaining about these entities’ lack of transparency – while generally continuing to permit their shares to trade). Such investment in Chinese entities listed on Chinese exchanges is perfectly fine, too. In addition, as documented on RealityChek, U.S.-owned corporations have long been remarkably free to buy stakes in Chinese entities whose products and activities clearly benefit the Chinese military.

Still, the idea of the federal government itself significantly bolstering the resources of China’s regimes belongs in wholly different categories of “stupid” and “reckless.” And don’t doubt that major bucks are involved. The total assets under management in the TSP amount to some $557 billion. And about $40 billion of these are currently allotted to international investments. (See the CNBC.com article linked above for these numbers.)

Could there be any legitimate arguments for permitting these monies – most of which are provided by U.S. taxpayers – to finance an increasingly dangerous Chinese rival? Defenders of the TSP China decision (prominent among whom are officials of public employee unions, who seem just fine with underwriting a Chinese government whose predatory trade practices have destroyed the jobs and ruined the lives and jobs of many of their private sector counterparts) maintain that the prime responsibility of the managers is maximizing shareholder value. And since the TSP had decided that the optimal mix of international holdings are essential for achieving this aim, it quite naturally and legitimately decided to move its overseas investments into the MSCI All Country World ex-US Investable Market index.

This tracking tool and the fund it spawned are widely considered the gold standard for good investment choices lying outside the United States, and in early 2019 decided to speed up a previous decision to triple the weighting it allots to China companies. The share is only about three percent, but who’s to say it stops there?

The TSP board unmistakably should be mindful of its fiduciary responsibilities to current and former federal workers. But as noted by the Trump administration, how can it adequately promote them when it’s transferring their savings into Chinese entities that are simply too secretive to trust and that may be crippled by U.S. sanctions?

More important, as managers of a government workers’ pension fund, TSP board members can’t expect to be treated like private sector fund managers. They clearly have responsibilities other than maximizing shareholder value, and undermining U.S. policies toward China (or on any other front) can’t possibly be part of their mandate.

Bringing the TSP in line with the broader emerging U.S. government approach to China wouldn’t solve the entire problem of huge flows of American resources perversely adding to Beijing’s coffers. This article by investment analyst Steven A. Schoenfeld (full disclosure: a close personal friend) details the alarming degree to which MSCI along with other major indexers have increased the China weightings in their emerging markets indices in particular to alarming levels – levels that aren’t easy to reconcile with the imperative of investment diversity, and that haven’t exactly been broadcast to the large numbers of individual investors who rely on them.

Even immediate, permanent new restrictions on TSP would do nothing to address this issue. Nor would they affect continuing private sector investment in Chinese entities that supply that country’s armed forces, and that strengthen its privacy-threatening hacking and surveillance capabilities.

But TSP curbs would be a start. And any TSP managers that don’t like them can quit and go to work on Wall Street.

Making News: Breitbart Interview Podcast Now On-Line on the Virus and Economic Reopening

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I’m pleased to announce that the podcast of an interview last night on “Breitbart News Tonight” is now on-line. Click here and scroll down till you see my name for a timely, lively discussion with co-hosts Rebecca Mansour and John Binder on when and how the U.S. economy can reopen even as the CCP Virus pandemic continues.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Great New Developments on the U.S.-China Decoupling Front

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Amid the flood of terrible news that’s been engulfing the U.S. economy because of the CCP Virus and its shutdown effects, there’s a decidedly positive development to report: Major evidence has just come in showing that the decoupling of the U.S. economy from China’s keeps proceeding. And, even better, the data make clear that the United States is amply capable of prospering without extensive ties with (and resulting vulnerabilities to) the increasingly hostile and dangerous regime in Beijing.

The latest evidence for such conclusions about the so-called decoupling process comes from a study just jointly released by a research firm called the Rhodium Group and a pillar of the Offshoring Lobby called the National Committee on U.S.-China Relations. The real work was done by the folks at Rhodium, and the big takeaways are:

>that the value of Chinese “foreign direct investment” (FDI) in the United States (i.e., Chinese takeovers or acquisition of stakes in existing non-financial assets in the United States, and creation of new non-financial assets) fell slightly on year last year to its lowest annual level ($4.78 billion) since 2010, and is now nearly 90 percent below its peak annual level of $46.49 billion in 2016;

>that the value of Chinese “venture capital” investment (a strange term for originating in the state-controlled Chinese economy) going into the United States fell from its all-time high of $4.67 billion in 2018 to $2.57 billion last year;

>that the value of U.S. FDI made into the Chinese economy edged up sequentially last year, from $12.89 billion to $14.13 billion, but still remains well below its peak of $20.94 billion in 2008;

>and that the value of U.S. venture capital investment going into China plummeted from its all-time high of $19.57 billion in 2018 to $4.98 billion in last year.

Even if you’re not concerned about greater integration with a country that’s threatened cut off vital medical supplies to the United States during the current pandemic, or about the national security threat posed by Chinese access to defense- or surveillance- or hacking-related tech, this is great news for anyone valuing the benefits of free markets. For any participation by China’s state-controlled system in the U.S. economy can only distort the workings of free markets, and in particular, force U.S. businesses (which until the CCP Virus invaded needed to rely on private sources for their capital) to compete with Chinese rivals (which can rely on the Chinese treasury).

Rhodium’s research also found that Chinese investment flows into the United States plunged even further during the first quarter of this year (the first pandemic quarter) while U.S. flows into China remained pretty stable. But the pre-CCP Virus results are undoubtedly more revealing of the underlying longer-term trends.

Decoupling is proceeding even faster on the trade front. Last week’s monthly U.S. trade report from the Census Bureau (for March) showed that the two-way value of U.S.-China trade in goods (the sum of imports and exports) sank by 42.49 percent between the first quarter of 2019 and the first quarter of 2020. That’s the lowest quarterly level since the $72.16 billion level recorded for the first quarter of 2006.

More revealing, though: At that point, two-way goods trade represented 0.53 percent of the total U.S. economy. In the first quarter of 2020, the proportion was down to 0.35 percent.

Of course, the first quarter 2020 results have been distorted by the CCP Virus’ effects (and greater distortion surely lies ahead). More specifically, gross domestic product (GDP) decreased from the fourth quarter of last year to the first quarter of this year, and it grew a measly 2.10 percent before adjusting for inflation over the fourth quarter of 2019. (This and the following growth figures are different, and higher, than the growth figures featured in the most widely tracked GDP figures, which are adjusted for price changes. I’m using the pre-inflation GDP figures here because inflation-adjusted country-specific trade figures aren’t available.)

For more “normal” data, let’s check out the figures for the year preceding the fourth quarter of 2019. During that timespan, the value of two-way U.S.-China goods trade dropped by 19.48 percent – from $171.57 billion to $138.15 billion. But pre-inflation growth hit a solid 3.98 percent.

Slightly shifting the time periods examined produces the same pattern. Between the first quarter of 2018 and the first quarter of 2019, the value of two-way U.S.-China goods trade nosedived by 46.40 percent. In other words, it was cut nearly in half. Yet current dollar growth during that period hit 4.64 percent.

At this point, it’s necessary to point out that this big 2018-19 decline in the value of two-way goods trade came right on the heels of a huge 77.58 percent increase between 2017 and 2018. But this rise stemmed mainly from the major adjustments made by businesses on both sides of the Pacific – especially what’s called U.S. tariff “front-running” – to deal with President Trump’s steadily escalating increases in tariffs on imports from China.

The justification for confidence that, but for the virus’ impact, the New Normal in U.S.-China trade would be reflecting more decoupling comes from examining the trends before and after President Trump’s January, 2017 inauguration. From the time Mr. Trump entered office through the end of last year, the economy grew by a total of 13.23 percent. But the value of two-way bilateral goods trade became 0.32 percent higher. In other words, for all intents and purposes, it didn’t grow at all.

That marks a major turnaround from the eight years under former President Obama, when the only first-quarter-to-first-quarter shrinkage in two-way trade (7.35 percent, between 2015 and 2016) was accompanied by weak 2.45 percent GDP growth. Moreover the only Obama first-quarter-to-first-quarter period when strong GDP growth (5.14 percent) was accompanied by only relatively modest growth in two-way bilateral trade (5.28 percent) came between 2014 and 2015. For the rest of his term in office, the growth of two-way U.S.-China goods trade significantly topped the growth of the economy, before taking inflation into account.

One of the most important concepts in free market-oriented economics is that of trade-offs, often expressed with the phrase, “There’s no such thing as a free lunch.”  Decoupling America’s economy from China’s will no doubt entail further disruption and costs related to the inevitable inefficiencies of supply chain rejiggering.  But the U.S.’ ability to grow strongly even as its economic engagement with China shrivels adds to the evidence that this lunch, if not exactly free, is a terrific value.