Daily SA: SEC Chair: AI Threat to Global Financial Stability (Wed, 19 July 23) – Forward Observer

Daily SA: SEC Chair: AI Threat to Global Financial Stability (Wed, 19 July 23)

Good morning. Here’s your Daily Situational Awareness for Wednesday, 18 July 2023.


  • READ TIME: 6 Minutes, 51 Seconds
  • Inside the Beltway
    • (1) House Republicans Grill FDA Over Foreign Drug Maker Testing
    • (2) SEC Chair: AI Threat to Global Financial Stability
    • (3) White House Releases Cybersecurity Implementation Plan
  • Domestic INTSUM
    • (4) Homebuilder Sentiment Rising
    • (5) Bank Regulators: More Capital Required for Residential Mortgages
    • (6) Europe’s Economy is No Match for the United States
    • (7) Teamsters Threaten Strike After Yellow Misses Pension Payment
  • Russia-NATO SITREP
    • (8) Russia Strikes Ukraine Port After Grain Deal Expires
  • China & Indo-Pacific SITREP
    • (9) Kissinger Makes Surprise Visit to China
    • (10) Rep. Bacon: Treat Japan Like the U.K.


  • (1) HOUSE REPUBLICANS GRILL FDA OVER FOREIGN DRUG MAKER TESTING: House Energy and Commerce Committee Chair Cathy Rodgers (R-WA), Health Subcommittee Chair Brett Guthrie (R-KY), and Oversight Subcommittee Chair Morgan Griffith (R-VA) sent a letter to Food and Drug Administration (FDA) Commissioner Robert Califf seeking information on the agency’s efforts to test foreign made medicine that is imported into the United States.
    • According to the letter, Chinese and Indian drug makers receive the most warning letters from the FDA, and violations have included carcinogens in medicines, destroying and falsifying records, and non-sterile manufacturing processes.
    • The lawmakers said they are worried the U.S. is overly reliant on foreign manufacturers that repeatedly violated FDA safety standards for generic drugs and ingredients. 
    • Why It Matters: Safety concerns over foreign drug makers have pushed the DOD to implement a pilot program to test their own drugs. U.S. supply chains depend on these Chinese and Indian medical companies and labs, making them vulnerable to diversion in the case of pandemics, as we saw with COVID, which led to shortages of medicines and medical equipment made overseas and political conflict with China. – R.C.
  • (2) SEC CHAIR: AI THREAT TO GLOBAL FINANCIAL STABILITY: Securities and Exchange Commission Chair Gary Gensler said governments will have to overhaul regulations to maintain global financial stability in the face of AI proliferation.
    • Gensler added that financial advisers and brokerages are facing crackdowns on conflicts of interest when they use AI to steer clients toward products, and the SEC is considering new rules on the issue in the fall.
    • Why It Matters: AI has the potential to be a disruptive technology in many fields, and the U.S. government is turning its focus on the global strategic implications of the military, finance, and political use of AI. Senate Majority Leader Chuck Schumer (D-NY) announced a series of AI forums this fall to bring lawmakers up to speed on the basics of the technology. Lawmakers are concerned that using AI for disinformation could invite backlash and make AI development politically untenable, so expect the Senate to try and get ahead of this going into 2024. – R.C.
  • (3) WHITE HOUSE RELEASES CYBERSECURITY IMPLEMENTATION PLAN: The Biden administration released a new implementation plan for the White House Cybersecurity Strategy announced in March, that acting National Cyber Director Kemba Walden said is intended to “ensure accountability.”
    • The Senate version of the National Defense Authorization Act includes language directing the National Academy to evaluate the possibility of creating a new cyber warfare service branch.
    • Why It Matters: U.S. cyber strategy has lacked a whole-of-government approach, and efforts to protect critical infrastructure have been piecemeal. This implementation plan seeks to integrate cybersecurity efforts across the federal government, build public-private partnerships, and develop a uniform set of cybersecurity standards across critical infrastructure operators. – R.C.


  • (4) HOMEBUILDER SENTIMENT RISING: Despite rates on 30-year mortgages at the highest since 2007, homebuilders are optimistic about single-family homes.
    • Sales of new homes in May 2023 increased 13% compared to April and were 20% higher year-over-year, but the median price was down 7% compared to May 2022.
    • The National Association of Home Builders sentiment index has risen for seven straight months and is the highest since June 2022.
    • Why It Matters: Two factors explain this latest homebuilder sentiment. First, new home construction is making up for the lack of existing homes for sale. Unless there’s a death, divorce, job loss, or job transfer, homeowners with a 3% 30-year mortgage won’t move and let go of their low interest rate. Second, capital is “going to ground,” so to speak. When people are worried about the future, tangible assets, including real estate, are often the winners. All that said, if interest rates continue to rise, home affordability could slow down the market for new homes. – H.B.
  • (5) BANK REGULATORS: MORE CAPITAL REQUIRED FOR RESIDENTIAL MORTGAGES: Next week, the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency will release their new bank mortgage capital plans that go beyond international standards.
    • Residential mortgage loans with higher loan-to-value (LTV) ratios would get higher risk assessments.  
    • Banks with $100 billion in assets would fall under the new rules, affecting dozens of regional U.S. banks.
    • Why It Matters: Regulators may not approve the final rules until 2024. If approved, banks must set aside more capital to protect against losses or defaults. Affected banks could then restrict residential mortgages. For potential homebuyers, this means tougher lending standards at large banks, or they could finance through a regional bank. – H.B.
  • (6) EUROPE’S ECONOMY IS NO MATCH FOR THE UNITED STATES: The U.S. economy isn’t stellar, but it’s doing much better than Europe on a comparative basis.
    • As the global economy slows down, Europe’s reliance on exports – which make up 50% of the Eurozone’s Gross Domestic Product (GDP), compared to 10% for the U.S. – is another weakness.
    • Annual wages, adjusted for inflation and purchasing power, have fallen 3% in Germany and 3.5% in Italy since 2019; over the same period, real wages in the U.S. have risen by 6%.  
    • Why It Matters: Europe’s economy will continue to struggle. They have an aging population, falling productivity, a lack of reliable energy, and a migrant crisis. We expect that global capital will flee Europe for the safety of the best destination: The United States. – H.B.
  • (7) TEAMSTERS THREATEN STRIKE AFTER YELLOW MISSES PENSION PAYMENT: The Teamsters Union said workers at trucking giant Yellow would strike on 24 July after the company missed benefits and pension payments, setting up benefits to end on 23 July.
    • Yellow company officials said they would pay $50 million to resume benefits accrual after the company secured additional financing.
    • Why It Matters: Yellow is the third largest less-than-truckload carrier in the country and has been teetering on the edge of bankruptcy. The Teamsters Union worked with Yellow and the Trump administration to keep the carrier from collapsing during COVID, but the new Teamsters President Sean O’Brien promised a “militant approach” to negotiations with companies and is signaling he will allow Yellow to go under rather than compromise. – R.C.



  • (8) RUSSIA STRIKES UKRAINE PORT AFTER GRAIN DEAL EXPIRES: Russian forces struck the Ukrainian port of Odesa on Tuesday following the expiration of the Black Sea grain deal.
    • The Russian Defense Ministry said the strike was in retaliation for Monday’s attack on the Kerch Bridge.
    • Russian cruise missiles reportedly struck an oil storage depot and a factory that makes naval attack drones.
    • Why It Matters: The Black Sea grain deal is now officially dead with the Ukrainian attack on the Kerch bridge and the Russian response on the port of Odesa. Russia appears to have a plan, which may involve wearing down Ukraine and its NATO patrons before commencing its counter to Ukraine’s counteroffensive. Ukraine appears to be striking Russian targets in a helter-skelter manner and has yet to concentrate its land forces on any one point in the Russian defensive lines – a bad sign that Ukraine is foundering. – M.M.

China & Indo-Pacific SITREP

  • (9) KISSINGER MAKES SURPRISE VISIT TO CHINA: Henry Kissinger, a veteran diplomat from the Cold War era who kick-started U.S. relations with China 52 years ago, met with China’s Defense Minister Li Shangfu in Beijing Tuesday.
    • Kissinger made the surprise trip in an effort to improve relations between the U.S. and China.
    • Li told Kissinger that “friendly communications” had been “destroyed” because U.S. leaders failed to meet China halfway.
    • Why It Matters: Kissinger’s visit comes as a long line of U.S. officials have traveled to Beijing in an effort to reframe an approaching conflict between the U.S. and China into a more friendly “competition.” None of the U.S. officials to date received warm welcomes or accomplished much of significance. On the other hand, Kissinger, who Beijing views as a “friend of China,” received a stately welcome and audience with Li Shangfu. In post-meeting remarks, Kissinger warned of catastrophic consequences if a conflict between the U.S. and China breaks out. Washington and Beijing have diametrically opposed national interests, and one, or the other, will have to yield if the war in the Pacific is to be avoided. Of the two, Beijing is the least likely to yield and has the greatest military advantage in the region. – M.M.
  • (10) REP. BACON: TREAT JAPAN LIKE THE U.K.: At a Hudson Institute panel on Electromagnetic Spectrum Dominance, Representative Don Bacon (R-NE) advocated for treating Japan like the United Kingdom.
    • This includes full spectrum information sharing, cross-platform training, sharing control over joint commands, and treating all assets in a joint command as a single fleet.
    • Bacon stated, “Without Japan fully in with us, I don’t see how we can counter China.”
    • Why It Matters: The U.K. holds a special status as a Five Eyes member above even NATO membership status. Integrating Japan into a similar role for the Indo-Pacific is another step toward “Global NATO.” It should be noted that the armed forces already do cross-deck training to compare operations. This is a preliminary step to cross-platform training whereby nations exchange personnel to train them on their specific equipment. As Japan takes a leading role in Pacific diplomacy, this could be used to further integrate lesser allies and neutral nations such as South Korea and Vietnam, which will further incense China. – J.V. 

Low Intensity Conflict SITREP (Next 48 hours)

  • Washington, DC – The Party for Socialism and Liberation is planning a protest at a Washington, D.C. visit by Israeli President Herzog. The group claims Israeli President Herzog supports racism and Zionism, and the protest is scheduled for 1630 EDT on Wednesday, 19 July, at New York Ave and North Capitol St NW.


M.S. indicates analyst commentary from Mike Shelby

M.M. indicates analyst commentary from Max Morton

J.V.  indicates analyst commentary from Jared Vaughn

R.C. indicates analyst commentary from Robert Cook

H.B. indicates analyst commentary from Harrison Burge

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