YOUGHAL, IRELAND – Today, we take a look at the Swamp.

Slimy, slippery, slithery – the Swamp stretches out from the banks of the Potomac and beyond.

It is home to the government, of course, but also to whole industries…

The “defense” industry, for example, lies on the Virginia side of the great river…

The huge complex of health, education, and welfare is headquartered on the other side, in the Maryland suburbs…

And the financial industry, too, is in a swamp of its own, centered in the low-lying areas of Manhattan.

Deep State Home

The Swamp is where they write the laws (such as the 2,000-plus pages of Obamacare… or the 1,000-plus pages of the recent tax cuts). And it is where the deals are made (What will be subject to The Donald’s new trade taxes? What won’t?).

The Swamp is the pudding in which the rich plums are hid.

It is also home to the Deep State, the loose confederation of special interests, insiders, and cronies that controls the government.

This is the same Swamp that now casts its dark shadow over the future of the U.S., its economy, and its empire.

Federal debt is increasing two to three times faster than revenues; by 2028, given reasonable assumptions, the national debt will reach $40 trillion.

Assuming a 4% rate, that would mean $1.6 trillion a year in interest – equivalent to about half of this year’s tax receipts.

Obviously, that can’t happen. The U.S. will go to Hell or bankruptcy – maybe both – long before that.

This disaster would be easy to avoid: simply cut spending.

But the military/security/surveillance faction of the Deep State swamp prevents cuts to its budget. And the health/education/welfare/retirement faction stops any significant cuts to those outlays.

And guess where most new candidates for Congress come from…

From honest business or noble professions?

Nope… The largest groups running for Congress for the first time, aspiring to Swamp glory, are teachers and ex-military men.

They have never satisfied a customer and now represent the two biggest wings of the Deep State.

Damp Spots

We look at the Swamp because we find ourselves in one of those (mercifully rare) occasions when politics cannot be avoided. Soon, it may not matter which stock you pick… or how much your house has increased in value… or who’s a part of the Supreme Court. The whole shebang could blow up.

But how did the Swamp come to be?

Of course, there were always some damp spots near the Capitol Building. That’s what government is for – to steal from the public in order to reward the elite.

But never before were Swamp politics so ghastly that they could overrule any president or block any reform… forcing the nation into a disastrous crisis with its eyes wide open.

This week, we will look back… and then ahead. But first, let’s cast a cynical eye to the side… at what is going on right now.

Here’s Gail Collins in The New York Times:

Take the case of former Representative Billy Tauzin, who was the chairman of the Energy and Commerce Committee in the early 2000s. He worked very hard to expand Medicare to include prescription drugs. (Say thank you to Billy.) He also worked very, very, very hard to make sure the government couldn’t use its massive new negotiating power to bring drug prices down – the way most sane countries do. (Say what, Billy?) Then, after announcing his retirement in 2004, Tauzin became head of the drug manufacturers’ lobbying arm, PhRMA, at an annual salary of $2 million.

Guiding Deep-Staters

Ms. Collins only brought up one Swamp critter to criticize another: Jon Kyl, recently chosen as an interim senator to replace another fallen Swamp denizen, John McCain.

Mr. Kyl left the Senate in 2013. What did he get up to? Naturally, he went the way of the Swamp… right into one of the biggest law firms in Washington – Covington & Burling.

The company website explained his role:

He advises companies on domestic and international policies that influence U.S. and multinational businesses and assists corporate clients on tax, healthcare, defense, national security, and intellectual property matters, among others.

Ms. Collins clarified:

[He] became a lobbyist for the American Automotive Policy Council, Anheuser-Busch, H&R Block, JW Aluminum, Wal-Mart Stores, and others too numerous to mention.

And who is Louis Freeh? The name came up after it was revealed that he paid Rudolph Giuliani to help a rich American beat a corruption rap in Romania. Again, we consult the company website:

Freeh Group International Solutions, LLC (“FGIS”) is a global risk management firm serving in the areas of business integrity and compliance, safety and security, and investigations and due diligence. FGIS was founded by Louis J. Freeh, former director of the Federal Bureau of Investigation (FBI) and former federal judge.

And this time, we’ll do the clarifying ourselves: Freeh is a Swamp critter – a fixer.

Freeh cleared out his desk at the FBI in 2001. Since then, he’s gotten rich by helping other Deep-Staters make their way through the Swamp.

Journalist Mike Lofgren, writing in Washington Monthly, offers more detail:

Freeh was also a lawyer for Prevezon, a money-laundering Russian company caught up in Robert Mueller’s investigation of Russian interference in the 2016 election. Prevezon is also represented by Natalia Veselnitskaya, the Russian lawyer who notoriously participated in the infamous June 2016 Trump Tower meeting between Russian operatives and Paul Manafort, Donald Trump, Jr., and Jared Kushner to discuss supposed “dirt” on Hillary Clinton.

How much can you make doing that kind of work? A lot more than you can get on a G-man’s pension. Lofgren continues:

Presumably, Freeh has been well compensated by them. In May 2017, he was reported to have paid $9.38 million for a house in Palm Beach boasting a view of the ocean.

Ripe fruit hangs from every tree in the Swamp. How it got there will be our subject for tomorrow.

Stay tuned…

Regards,

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Bill

MARKET INSIGHT: MORE PAIN AHEAD FOR HOMEBUILDERS

By Joe Withrow, Head of Research, Bonner & Partners

Homebuilder stocks have drastically underperformed the S&P 500 this year…

That’s the story of today’s chart, which maps the percentage gain of the SPDR S&P Homebuilders ETF (XHB) – which tracks a basket of 35 homebuilders and homebuilding material companies – against the S&P 500 from September 2017 through today.

Chart

As you can see, homebuilder stocks outperformed the S&P 500 during 2017… But they have drastically underperformed the S&P this year.

XHB has only gained 5% over the past 12 months… while the S&P 500 has gained 17%. And year-to-date, XHB is down 9%, while the S&P 500 has climbed 8%.

A major reason for this shift is rising interest rates – which have driven mortgage rates steadily higher and demand for new homes lower since the second half of 2017.

And 4% appears to be the line in the sand…

According to Freddie Mac, the government-sponsored mortgage company, the average rate on a 30-year, fixed-rate mortgage originated between September 1 and December 31, 2017 was 3.9%.

Then, in January of this year, 30-year rates jumped over 4%… and the average rate on a 30-year, fixed-rate mortgage is now 4.6%.

And with interest rates trending up and the Federal Reserve in a “tightening” cycle, mortgage rates are likely headed higher.

All else being equal, homebuilder stocks will likely underperform the S&P 500 for as long as interest rates continue to rise.

– Joe Withrow

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Were the Big Banks Worth Saving?
Ten years ago, the big banks got a big bailout from the federal government. The average American got nothing. The architects of the plan said it was necessary to stabilize the financial system. But 10 years on, some are wondering if the big banks were even worth saving…

How Trump Takes on Big Tech
Last month, President Trump accused Silicon Valley giant Google of “rigging” search results to stifle conservative-leaning viewpoints. Google denies the claim. But now, Big Tech is squarely in the crosshairs of the Trump administration. Here’s how the showdown might shake out…

MAILBAG

After Saturday’s Diary, “California’s War on the U.S. Dollar,” readers consider if the United States is headed for a second civil war…

What is missing from your article is the fact that the states, per the Constitution, have more authority in domestic issues than the federal government. In fact, there is nowhere in the Constitution that allows the Environmental Protection Agency to exist. Hence, the states can make whatever laws they want in this regard.

– Ricardo G.

I disagree that the coming “war between the states” will necessarily be a non-shooting war. And from the Second Amendment: “A well-regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.” I would recommend that California invest in some intercontinental ballistic missiles. It should be able to find the appropriate technology at its various labs, e.g., the Lawrence Livermore National Laboratory and those in Silicon Valley.

– Kendrick M.

IN CASE YOU MISSED IT…

Is this Trump’s promised infrastructure boom?

The president campaigned on a promise to provide America with an infrastructure project to jumpstart the economy. Most assumed that would mean new roads, bridges, or tunnels.

But leaked White House documents suggest the White House might have something else in mind entirely… Details here.

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