Month: December 2016

Weekend Reading: Trumponomics

Submitted by Lance Roberts via RealInvestmentAdvice.com,

What a change a couple of weeks can make. As my colleague, Michael Lebowitz, wrote this past week:

“Following Donald Trump’s surprise victory and the violent market reactions, many investors are left scratching their heads. As shown above, the consensus narrative warned that a Trump victory would spell doom for the markets. Days later, the narrative flipped and Trump’s economic policies, all of which were known prior to the election, are deemed beneficial for share prices.”

The question which remains, however, is whether tax reform and infrastructure spending will have the impact the markets are currently betting on?

As I penned in yesterday’s missive:

“The problem for Trump is that we no longer reside in the 80’s where a large group of ‘baby boomers’ were entering the workforce and driving a massive wave of innovation and productivity changes.  Today, we are on the wrong side of the demographic trends combined with falling productivity and labor force growth.”

laborforce-productivity-growth-113016

As Dr. Ed Yardeni noted:

“In any event, the horses may already be out of the barn. Only 8.5% of payroll employment is now attributable to manufacturing, down from 10.3% 10 years ago, 14.3% 20 years ago, and 17.5% 30 years ago. Bringing factory jobs back to the US may bring them back to automated factories loaded with robots. Even Chinese factories are using more robots.”

And from Harvard Business Review:

“Slow productivity growth is the main cause of slow economic growth, and slow economic growth makes it all but impossible for everyone’s boat to rise. No wonder angry citizens want dramatic change. But while voters may see the problem in a political establishment that is out of touch, the populist politicians who are challenging that establishment are unlikely to fare better.

 

In the short term, they may be able to medicate the economy with a big tax cut or a dose of deficit spending. When the effects of that treatment wear off, though, the effects of slow productivity growth will linger.”

But beyond the productivity problem is simply debt.

While Trumponomics has fostered a furious rally in asset prices, the impacts of rising interest rates, inflation, and a surging dollar may provide headwinds of the wrong type. In fact, the current combination of events is similar to what we saw previously – in 1999. (yellow highlights)

sp500-marketupdate-120116

Also, notice there have only been three sell signals since 1999 as well which have coincided with major market peaks. If you look closely there is a high degree of similarity in the markets actions between today and the “exuberance” in 1999.

While I am not suggesting the market is about to “crash” in a fiery mass, I am suggesting the “ebullience” of the markets over the last 8-years has likely priced in any real net effects of fiscal policy changes at this point.

In other words, changes to fiscal policy will likely only offset retractions of monetary policy. 

Just a thought.

In the meantime, here is what I am reading this weekend.

Trumponomics

 

Markets

 

Interesting Reads

“I am altering the deal. Pray I don’t alter it any further.” — Darth Vadar

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TRUMPISTI! Italian Populists Expected to Defeat Referendum; EU Crisis Looms

Over this weekend, Italy will vote on a referendum that, if passed, will give the government sweeping powers to enact radical change. According to the latest polls, the referendum is expected to fail — which might then pave the way for the nationalist Five Star Movement party to form a government — who literally hate the EU. Similar to what we experienced here with Trump v Clinton, Italian liberals are out in force — demonizing the right wingers who will vote against the referendum, calling them ‘Trumpistis” — accusing them of spreading pro-Russian fake news. Sound familiar? source: NY Times/Fortune

“A protracted period of political uncertainty after a ‘No’ vote could exacerbate the Italian banking issues, unsettle the Italian bond market, and weigh on business and consumer confidence,” says Holger Schmieding, chief economist with Behrenberg Bank in Berlin.

The populist and unpredictable ‘5 Stars Movement,’ as well as the anti-euro Lega Norde of Matteo Salvini, are waiting to exploit any failure of Renzi. As such, says Schmieding, “a political crisis could open up a bigger can of worms in Italy than it would elsewhere.” And that is never good for economic growth.

Some argue this vote could be even bigger than the BREXIT vote, because of the fact that Italy has so much debt and is wholly dependent upon Germany and the ECB to keep them afloat. If the referendum fails and Italy moves to exit the EU, it’s widely expected that the entirety of the Italian banking system, with some of the worst performing stocks in the world in 2016, will collapse amidst a gigantic plume of clown dust — tossing the Germans off the side of the boat to figure out all of their losses in solitude — entirely bedraggled with ruinous losses strewn out across their overleveraged banking system.

Ciao.

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Trump and Pence vs. Free Markets, Jury Deadlocks in Walter Scott Shooting Case, Cops Won’t Investigate Post-It-Note ‘Hate Crime’: P.M. Links

  • LinkJurors are currently deadlocked over whether to find a South Carolina cop guilty of murdering Walter Scott. A single hold-out juror is refusing to consider a guilty verdict, according to reports.
  • So the police don’t think that “suck it up, pussies” post-it-note is a hate crime, after all.
  • Paul Krugman predicts that Donald Trump will betray the white working class voters who gave him so much support, which could be the first accurate prediction he has ever made.
  • Trump and Mike Pence aren’t so keen on the free market.
  • Members of the Clinton and Trump campaign staffs insulted each other during an election post mortem at Harvard University.
  • The new Legend of Zelda trailer looks amazing.
  • Have you donated to Reason yet? I will be doing a Twitter “Ask Me Anything” on Monday afternoon to promote Reason’s annual webathon.

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Tech, Small Caps Suffer Worst Week In 10 Months As Trump Hangover Hits

Everyone's doing it, just follow them…

 

An interesting week:

  • Nasdaq's worst week since Feb 2016
  • Small Caps worst week since Feb 2016
  • Bank stocks up 4 weeks in a row to highest since Jan 2008
  • FANG Stocks down 4 of the last 6 weeks
  • Treasuries down 4 weeks in a row, TLT lowest close in a year
  • USD Index down first time in 4 weeks
  • Oil's best week since Feb 2011 (at highest since July 2015)
  • Gold down 4 weeks in a row to 10 month lows

Stocks on the week stunned investors, with Small Caps and Nasdaq suffering their worst weeks since Feb 2016 (and Dow and Trannies clung to unch)

NOTE: The Dow gained 10 points on the week – just 3 stocks – GS, UNH, and JPM added over 150 points alone.

Since the election, Nasdaq is now red…

 

But futures show the real action…

 

Financials (and Energy) remain the biggest post-Election winners (with Utilities and Staples worst) but both banks and energy stocks faded today… (banks worst day in over 2 months)

 

Just two charts to consider…

 

Notably VIX flash-crashed on payrolls… but look at Dow Futures swings – desperate to keep green for the week…

 

Post-payrolls, oil was best but bonds and bullion beat stocks

 

FANG (Diamondback) outperformed FANG Stocks on the week…

 

The yield curve steepened on the week (after 2 weeks of flattening), leaving 2Y yields lower on the week and the long-end underperforming…

 

So bonds and stocks down on the week – as Risk-Parity funds suffer the 7th week of losses in the last 9 weeks…

 

FX markets were volatile this week withthe USD index ending lower for the first time in 4 weeks led by cable strength…

 

Crude soared on the week – best week since Feb 2011 (to July 2015 highs) and silver gained as gold and copper slipped lower

 

Finally we leave you with this – here is your market America…

h/t @Not_Jim_Cramer

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VP Pence Lays Out Aggressive Agenda For First 100 Days

Coming off the the “Thank Your Tour” that got started yesterday with stops in Indiana and Ohio, Vice President-Elect Mike Pence sat down with the Wall  Street Journal to discuss the new administration’s aggressive plans for the first 100 days in office.  Pence said the new team plans for a “burst of activity” right out of the gate and said “the only thing that will surprise them is that Washington, D.C., is going to get an awful lot done in a short period of time.”

Vice President-elect Mike Pence said Thursday that the incoming Trump administration is planning a burst of activity that would take aim at the gridlock in Washington, pressing forward with its goals to overhaul the tax code, health care and immigration laws.

 

In an interview with The Wall Street Journal, Mr. Pence said President-elect Donald Trump is preparing ambitious 100-day and 200-day plans aimed at fulfilling core campaign promises and jump-starting economic growth.

 

Asked what might surprise voters about the Trump White House, Mr. Pence said: “I think the only thing that will surprise them is that Washington, D.C., is going to get an awful lot done in a short period of time.”

The priorities of the first 100 days laid out by Pence are not terribly surprising and include reforming immigration, repealing and replacing Obamacare, filling the vacant Supreme Court seat and overhauling the tax code.  While several reforms can be accomplished by simply undoing Obama’s many executive orders, others, like tax reform, will require Congressional approval and will stretch into the spring.

The new administration’s first priorities would include curbing illegal immigration, abolishing and then replacing Mr. Obama’s signature health-care system, nominating a justice to fill a vacancy on the Supreme Court, and strengthening the military, said Mr. Pence, whose wife, Karen Pence, sat nearby during the interview.

 

By springtime, the Trump administration would work with congressional leaders “to move fundamental tax reform” meant to “free up the pent-up energy in the American economy,” he said.

 

Pillars of the tax overhaul would include lowering marginal tax rates, reducing the corporate tax rate “from some of the highest in the industrialized world” to 15%, and repatriating corporate cash held overseas, he said.

 

Such measures would “benefit American workers and strengthen American incomes,” said Mr. Pence, who will soon relinquish his post as governor of Indiana.

Trump Carrier

 

Of course, as Trump has already proven with his Carrier deal, Pence pointed out that the new administration will not conform to traditional Republican molds and will look to engage with individual companies to keep jobs in the United States.

His comments also suggest that a Trump White House would eschew many of the free-market principles that have guided prior Republican administrations, including injecting itself into the personnel and long-term operating decisions of individual companies.

 

He described Mr. Trump as a hands-on executive. The pair had come from Indiana, where they celebrated the decision by Carrier Corp., an air conditioning and furnace maker, to retain some jobs in the U.S. rather than relocate them to Mexico.

 

He said he was in the room when Mr. Trump made phone calls to company officials, describing his plans to make the economy friendlier to business, an argument he said proved persuasive.

 

Mr. Pence, in a private meeting with Greg Hayes, chief executive of United Technologies Corp., the owner of Carrier, also offered the company $7 million in state tax incentives over the next 10 years to keep about a third of the 2,100 Indiana workers in the U.S.

Embarrassingly, Obama recently mocked Trump for saying that he could keep Carrier in the United States, saying:

“When somebody says, like you person you just mentioned that I’m not going to advertise for, that he’s going to bring all these jobs back.  Well how exactly are you going to do that?  What are you going to do?  There’s no answer to it.” 

 

He just says, well I’m going to negotiate a better deal.  How exactly are you going to negotiate that?  What magic wand do you have?”

 

Any questions, Obama?  We think all of your questions above have been sufficiently answered but just want to make sure.  It’s pretty simple actually, you actually engage with corporate executives and negotiate incentives that make it beneficial to actually stay in the United States.

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Swedish Union Sets Up ‘Mansplaining’ Hotline

Uncle SamThe Swedish trade union Unionen—which represents 600,000 white-collar workers—made a brief but concerted stand against male condescension in the workplace this November by setting up a weeklong dedicated “mansplaining” hotline.

The hotline enabled workers of both genders to call in to report times when they or a coworker felt patronized, undervalued, or degraded, or otherwise received emails containing the phrase “well, actually…”

On the other end of the line would be academics, gender relations experts, and feminist politicians waiting to offer support and professional advice on how to counter this pernicious “domination technique.”

Unionen spokesperson Jennie Zetterstrom told The New York Times that the purpose of the hotline was to “contribute to awareness and start a discussion which we hope will be the first step in changing the way we treat each other and talk about each other in the workplace.”

During its week of operation, Zetterstrom said the hotline received calls on a range of situations, from women looking for advice on how to speak up in the face of overconfident male colleagues, to men looking to help female co-workers being ignored in group exercises.

While many callers no doubt found the hotline service helpful, it also sparked a predictable and understandable backlash online. The Independent reported that a number of Swedish social media commenters derided the hotline itself as “sexist” and “polarizing.”

It attracted some international mockery as well, with Australian writer Peter Pobje proposing a mansplaining hotline of his own where he would advise callers on “how to be a bit less emotional about everything.”

Zetterstrom told the Times that while she regrets causing anyone offense, the whole intention of the project was to “spark interest and start a debate at our workplaces and in society.” Given the attention generated, Unionen can certainly be said to have succeeded on that front.

Americans who might need help confronting or coping with mansplaining without the convenient aid of a hotline can still avail themselves of numerous advice articles, while anyone looking for examples of the phenomenon might opt to consult this online archive of mansplaining incidents.

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Death, Gold, & Taxes

Via SchiffGold.com,

A man from the French region of Normandy recently inherited a house from a deceased relative, only to discover his newly acquired home was actually a secret gold depository. Throughout the house, the man found a total of 220 lbs (3208.33 Troy oz.) of gold coins and bars totaling $3.7 million.

The man’s identity has yet to be released, but reports indicate he was in the process of preparing furniture for sale when he stumbled upon part of the horde.

Local auctioneer, Nicolas Fierfort, who had visited the home in order to appraise the furniture confirmed “5,000 gold pieces, two bars of 12 kilos and 37 ingots of 1 kilo” were found in total.

gold bar on blue background

 

Fierfort also said the golden contents were “extremely well hidden” and scattered throughout the rest of the residence.

The first stash was a tin box of coins, which had been screwed to the underside of a piece of furniture. Like breadcrumbs leading the way home, the man continued finding gold coins in places like boxes to hold whiskey bottles, “under piles of linen, in the bathroom … everywhere,” according to Fierfort. Eventually, the two modern day Conquistadors stumbled upon the mother lode: 2 – 12 kilo gold bars. That’s 386 Troy ounces each.

A little detective work dated the gold’s purchase to sometime in the 1950s and 1960s. After the gold dust settled, the newly minted millionaire was able to locate the certificates of authenticity within the dead relative’s estate papers and eventually sell it to various buyers.

However, this story of good fortune doesn’t end as happily as we would like. Along with death comes taxes. It seems the French government will be hitting the man for a 45% inheritance tax along with charging him 3 years of back taxes because his deceased relative failed to declare the gold.

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Nuclear Power Subsidies Adopted by Illinois State Government

NuclearPowerHerberKehrerNewscomWhat source of power provides no-carbon on-demand electricity? Well, yes, hydropower dams do, but the vast majority of no-carbon power in the United States is generated by nuclear power plants. So for folks worried about man-made global warming caused by the increasing atmospheric carbon dioxide concentrations as a result of burning fossil fuels, wouldn’t it be a good idea to build more nuclear power plants? For such folks, it would also seem to be a no-brainer that they should at least want those that are currently producing copious no-carbon power to keep operating, right? However, a perhaps unintended consequence of subsidizing intermittent renewable power sources has arisen; their subsidized electricity outcompetes unsubsidized and over-regulated nuclear power. As a result, nuclear power operators can’t make a profit, so many are threatening to close down their plants.

Since renewable sources of power cannot (yet) supply baseload electrity, this means that new natural gas and even coal power plants would have to open to replace the lost nuclear generation capacity. Of course, this means boosting, not reducing, carbon dioxide emissions. So what to do? The answer appears to be: Subsidies for Everybody! This solution to the problem of competing subsidies was adopted in August by New York State when it kept open several nuclear power plants by offering their operators subsidies amounting to about $500 per year.

Illinois yesterday enacted similar legislation aiming to keep three of the state’s nuclear power plants open as they compete with subsidized renewable energy. The so-called Future Energy Jobs Act would provide nuclear plant operator Exelon with around $235 million a year for up to 13 years. Nevertheless, this is another victory for Michael Shellenberger and his eco-modernist Environmental Progress group that is spearheading the campaign to keep U.S. nuclear power plants open as a way to address whatever problems man-made climate change may cause.

In its report on the adoption of the Future Energy Jobs Act, World Nuclear News cogently noted:

Agneta Rising, director-general of the World Nuclear Association, said the bill would ensure continued operation of the Quad Cities and Clinton nuclear plants, providing clean and reliable electricity as part of a package of measures designed to boost a range of low-carbon energy technologies. “In the longer term we need markets to deliver the electricity mix that we need, without intervention. Markets should recognise the value of secure and reliable electricity supplies, as well as the environmental benefits of different forms of electricity generation,” she said.

Without intervention? What a novel idea!

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TrumpCare Will Be Better Than ObamaCare

Trump may be a disaster on trade, immigration, foreign policy, free speech, reproductive rights, civil liberties and numerous other issues. But there are someHealth Care Mess areas where he might actually be an improvement over the status quo. One of them is health care — and Rep. Tom Price, his pick to head the Department of Health and Human Services, is a perfect indication of that, I note in my column at The Week.

As Peter Suderman has already pointed out, he is the only Republican who has worked out a detailed replacement plan for Obamacare and translated it into an actual bill called the Empowering Patients First Act. In broad-brush strokes, the bill will scrap the individual mandate and insurance subsidies to low income folks who don’t qualify for Medicaid. And it’ll replace them with universal tax credits for everyone not covered by their employers.

You can get the low-down on the plan in my column here.

It’s a good plan, in my opinion, but it’ll face a very rough road ahead.

Health care policy in America is enormously complex not because health care itself is inherently any more complex than other goods and services that markets do a fine job of providing. It is because after World War II America rigged the tax code to create a horrible, unwieldy, inefficient, and discriminatory system that is not easy to straighten out. Indeed, trying to work out something semi-rational by injecting the right incentives is awfully hard. Literally every reform produces winners and losers and involves trade offs that mobilize massive political opposition.

Hence it is inevitable that Price’s plan would be attacked by liberals. Their big objection among many is that the plan’s health care credits won’t be as generous as the subsidies under ObamaCare. (That they will be universal doesn’t somehow earn it too many brownie points.) And it deregulates the insurance industry too much, leaving patients, especially with pre-existing conditions, to its tender mercies.

But more surprising (though perhaps on reflection equally inevitable) is that the plan is also being attacked from the right. The Cato Institute’s Michael Cannon, in fact, thinks it is not all that different from Obamacare. He believes that there is no meaningful difference between subsidies and refundable tax credits.

Furthermore, notes Cannon, the Price plan abolishes the individual mandate in name only. “If the penalty for not buying health insurance is that you lose a $2,000 tax credit, then that’s not going to feel much different than paying a $2,000 tax penalty under Obamacare,” he insists.

I actually do think there is a big moral difference between confiscating someone’s money to make them do your bidding versus giving them money to make them do your bidding. (The real moral issue in the latter course is where that money is coming from? The government gets it from robbing Paul to pay Peter. But if the government is going to be robbing Paul anyway, then it’s better that it does not rob Peter even more.)

Cannon favors replacing the current system with Health Care Savings accounts, which has a place in the Price plan but not a sufficiently big one, in his opinion.

Here’s how that the Cannon sees it, as he explained to the New Jersey Opinion:

Say your current employer pays $13,000 a year for your insurance. Now that $13,000 would go into a tax-free account you control. You could use perhaps $5,000 to buy a bare-bones catastrophic coverage policy. Then you can use the rest to either pay medical bills or to save for future expenses.

Imagine HSA’s were in effect from the beginning for the 78 million baby boomers born between 1946 and 1964. As they now move into retirement, many would have tens of thousands set aside for health-care needs.

In other words, scrap the employer-based health care system and give HSAs to everyone. This would be awesome but also politically exceedingly difficult not only because liberals will throw a massive hissy fit but also because of the yuuuuge disruptions to people’s current health care coverage in the interim. Replacing public schools (another disastrous government monopoly) with some limited educational vouchers is difficult. This will be a gazillion times more so.

Be that as it may, if you think the political conversation got heated over ObamaCare, wait for the fireworks on TrumpCare to begin. ObamaCare at least had the effect of uniting all its center-right opponents. TrumpCare will splinter them all with each jockeying to get its preferred version enacted.

How it’ll all shake out is anybody’s guess. But it’ll sure be interesting.

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