January 2018 – Page 210

Sen. Chuck Schumer It’s rare for a president to pull funding from a sweetheart transportation project. But on the final Friday of 2017, the Trump administration announced that it was backing away from an Obama-era plan to lavish billions in federal aid on the Hudson Tunnel project.

Billed as “the nation’s most urgent major infrastructure project” by its proponents, the venture envisions a new rail tunnel beneath the Hudson River along with repairs to an existing rail tunnel damaged by Hurricane Sandy. All of this would mostly serve to increase rail transit service within the New York City metro area.

Given the huge price tag—a projected $13 billion—the state governments of New York and New Jersey have spent years trying to shift as much of the financial burden as possible onto federal taxpayers. They temporarily succeeded in 2015, when the Obama administration made a non-binding public commitment to fund half the project.

Officials in the two states have since acted as if this agreement was ironclad, drafting financing plans that depended on this 50/50 split—and also calling for their own local contributions to be funded entirely with federal loans.

But in July, the Trump administration withdrew a representative from the board of the Gateway Program Development Corporation—the umbrella organization managing the project—citing conflict of interest concerns.

And on Friday, Federal Transit Administration Deputy Director K. Jane Williams renounced Obama’s 2015 funding pledge entirely in a letter to New York Budget Director Robert Mujica.

The even split between federal and local funding, Williams said in her letter, “would be considerably higher than much existing precedent for past ‘mega projects.'” Such a commitment, she pointed out, would completely exhaust the federal government’s Capital Infrastructure Grant program on a single project.

Further plans to rely on federal loans, Williams noted, would mean that the federal government would be coughing up 100 percent of the initial cash needed to pay for the Hudson Tunnel project.

Mujica hit back in his own letter, which disputed the idea that federal loans constitute federal support and complained that the change was disrupting the state’s plans. “Stepping away from the 50:50 framework now,” he wrote, “would represent stepping away from a previously agreed upon path and the entire basis for getting this critical national infrastructure project done.”

That framework was never approved by Congress, nor did it go through normal Department of Transportation channels. Williams therefore dismissed the 2015 pledge, stating bluntly that “there is no such agreement” and that instead of pinning their hopes on it, New York and New Jersey need to “directly address the responsibility for funding a local project where 9 out of 10 passengers are local transit riders.”

Telling New York and New Jersey to go back to the drawing board on the Hudson Tunnel project is a welcome policy development, as it will hopefully shift more of the burden of funding the project onto those who will actually use it.

As Reason’s Baruch Feigenbaum wrote back in September, the expectation that the feds would pay for a new rail tunnel had far more to do with politics than fiscal necessity. “State and local politicians don’t have the courage to ask local residents to pay higher taxes or user fees so they argue that any New York City project is national in order to get funding from taxpayers in Atlanta and Dallas,” he pointed out. “The Greater New York region is one of the largest, wealthiest metro areas in the world. It’s time that local residents start footing more of the bill for their infrastructure.”

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2017: The Year The Unicorn Died

Authored by Mark St.Cyr,

Remember back in days of yore (pre-2015) when a new year celebration, or any celebration or extravaganza for that matter, would pale in comparison to a “it’s different this time” funding round after-party?

You remember don’t you? This was where being on the “guest list” or “invite” was the equivalent throughout Silicon Valley as a red carpet event was in Hollywood. Of course, all the free-flowing bubbly and more would be paid for via those “funding rounds.” But hey, who needs to watch the bottom line when there isn’t one to begin with, right? Remember the mantra: “It’s different this time.” So party on and party hard, business can wait and is so – old school.

So how will this years new year celebration be rung in for the Unicorn set? Hint: Bring out the crying towels, because, it is indeed – different this time.

This year is culminating with an event which for all intents and purposes proves that the faithful have lost their faith. That event is none other than the most over-valued, over-rated, over-hyped, over-_______(fill in the blank) unicorn known as Uber™ penning its deal with SoftBank™, which purportedly cuts it valuation by some 30%. Or said differently – by about 1/3rd. And that’s if you believe the metrics and math used to begin with.

Supposedly there is some form of accounting alchemy that will allow a portion of the “investment” to be applied in such a way that the original near $70 BILLION valuation metric can stay intact. i.e., It’s probably not lying in a legal sense. But everyone knows its pure bull. From my purview this same reasoning would allow me to openly cite that land in Kentucky I’ll sell you is truly oceanfront – you’ll just need to wait for the full effects of climate change to evolve as to see it. But it’s not like I’m lying, right?

Now some will argue (especially any next-in-rotation fund manager, or Silicon Valley aficionado paraded across the main stream financial media) that this latest investment proves that there is a worthy, worthwhile business in Uber. Maybe there is, maybe there isn’t, but here’s what we do know, which is far more telling and far more prophetic in my view:

Softbank was looking to purchase somewhere around a 14% stake. So to entice current shareholders that were supposedly “holding out for the big IPO pay-day of riches” they offered a price of $33 per share, in the hopes that this would be enough to possibly bring on board some of those holdouts. It would appear they could have offered less. Why?

As being reported by the Wall Street Journal™ “people familiar with the mater” said the tendered shares offered (you know, at almost a 1/3 discount) totaled around 20%. That implies not only was there no need to possibly further incentivized, or pry any shares from true believers cold clinched hands, but rather, there were more willing sellers (e.g., more offered) than what was required for the deal. i.e., SoftBank only needed 14%, but had 20% available (at nearly 1/3rd off!) or offered for sale. SoftBank implied it’s going to leave that remaining 5% on the table.

If you’re still a “it’s different this time” true believer: Can you say, “Uh, oh?” Because if we use math as it is intended, that means, or one can infer, that SoftBank is leaving 25% of the available shares that it could have purchased – on the table.

Remember, it (SoftBank) thought it was going to have a hard time getting that 14%, this was why (all conjecture) the $33 per share was offered to begin with, as to hopefully tempt any possible on-the-fencers.

But temp it did! So much so that it was oversubscribed to the sell-side by some 25%. Talk about it’s different this time. So much for any remaining faith remaining in the faithful of an IPO to riches for this once most valuable private startup, is it not? After-all, this latest “investment” slashes Uber’s valuation to less than it was said to be worth in 2015. (i.e., $51B, 2015 – $48B today.)

I made the statement back in May of 2016, “If everything is so great. where are the Unicorn IPOs?” This was met via “The Valley” and nearly every so-called “tech aficionado” or next-in-rotation fund manager with derision and more across the mainstream business/finance media channels. I was of the “doesn’t get tech” crowd and was to be laughed off, or maligned for ever daring to question the unicorn or “it’s different this time” religion which had pervaded any remaining business sense or ethics.

But everyone seemed to forget then at the end of 2014, Quantitative Easing ended. And when 2015 began it was being touted as the year for both the rebirth of Unicorn’s and their IPO’s. And then it was 2016. And then 2017. And now we begin 2018.

The difference this time for unicorns is this: Not with hope. But rather, to face what I said was inevitable in 2015: “Crying Towels”

The reasoning is simple, and for those in “the Valley” who like it said best in pictures, here you go. To wit:

In 2015 depictions of Venture Capitalists went cartoonish – literally.

In 2016 the IPO to save the IPO world, Twilio™ debuted…

Then subsequently died – literally.

(Chart Source)

Then for 2017 it was the ultimate mascot for any-and-all remaining “it’s different this time” devotees to prove to the world that in fact, it still was, with Snapchat’s™ IPO…

then – it all snapped – literally.

(Cover source, Chart Source)

Yet, what is far more troubling which should be carefully, thoughtfully contemplated by all continuing to believe in the charade that is “The Valley.” I offer you the following to ruminate…

Over the course of the last 12 months the “markets” have never – in all its history – seen levels of such low volatility, for so long. In fact, the markets have also: Never had one full year of 12 consistent, back-to-back winning months. Again: 2017 did not have one, repeat, not one losing month. And, closed the year at heights never before seen in the history of markets.

And the most lauded, valuable, watched unicorn – in the history of unicorns – not only didn’t IPO – insiders sold their shares at a 30% discount – and the offering was oversubscribed to what was need. Or said differently…

It’s over, just like 2017.

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Stop Making Iran Protests About American Politics: Podcast

Iran on fire ||| Abaca Press/SalamPix/Abaca/Sipa USA/Newscom Today’s Reason Podcast, which features myself, Nick Gillespie, Katherine Mangu-Ward, and Peter Suderman, begins with a discussion about the dramatic protests in Iran: their significance, the context, the vast amount that we don’t know, the bad Twitter takes, the America-centric focus, and what Washington should do specifically about what few existing policies directly affect the situation in Tehran and throughout the Islamic Republic.

We also argue about legal (but heavily regulated) weed in California and elsewhere; President Donald Trump’s recent comments on North Korea, Pakistan, and DACA; and whether cheesy ’80s movies about nuclear holocaust (think The Day After and Testament) are worth rewatching.

Audio production by Ian Keyser.

Relevant links from the show:

Our finest hour ||| South Park * “What Feminists—and Islamists—Don’t Get About Burqas“

* “Unplugging the Doomsday Machine: Daniel Ellsberg on nukes, leaks, and the lost documents he copied along with the Pentagon Papers”

* “The Myth of the Playground Pusher: In Tennessee and around the country, ‘drug-free school zones’ are little more than excuses for harsher drug sentencing.”

* “Government Almost Killed the Cocktail: 80 years after Prohibition, the Dark Ages of drinking are finally coming to an end.”

* “The Democratic Way of Prohibition: How the party of pot smokers ended up standing in the way of pharmacological freedom”

Subscribe, rate, and review the Reason Podcast at iTunes. Listen at SoundCloud below:

Don’t miss a single Reason podcast! (Archive here.)

Subscribe at iTunes.

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BofA: Beware A Violent Unwind In The Most Crowded Trades

Back in 2013, when hedge funds were just starting to realize that something is fundamentally broken in the current “market”, in which few if any active participants were able to consistently generate alpha as a result of central bank nationalization of capital markets, we laid out simply and succinctly what the “Best Trading Strategy” in this market was, namely “buying The Most Hated Names and shorting the Most widely-held ones.” And, as we documented year after year, this simple strategy generated outsized alpha every single year… until 2017.

This quirk was also noticed today by Bank of America’s Savita Subramanian, who in a report on fund positioning confirms that “over the last several years, buying the most underweight stocks and selling the most overweight stocks has consistently generated alpha, although performance in 2017 has bucked the trend.”

And while 2017 appeared to be an outlier in this trend of betting against crowded trades, Subramanian cautions that this divergence will hardly last into the new 2018, to wit: “History suggests one should watch out for crowded stocks at the beginning of the year: based on our data since 2009, the 10 most overweight stocks have lagged the 10 most underweight stocks on average by 57bp and 117bp during the first 15 and 30 calendar days of the year, respectively.”

The biggest risk, according to the BofA strategist is that after Dec. 31, fund managers “tend to rebalance after year-end,” something which they already did to an extent late in 2017:

We already saw some of this trade shortly after the strong style reversal since Nov 27, when neglected stocks outperformed crowded stocks by almost a full percentage point over the next two weeks. However, this spread was subsequently wiped out ahead of December 31, suggesting that crowding risks may remain ahead of the tendency for asset allocators and PMs to rebalance after year-end.

Looking at a sector breakdown, it will not come as news to anyone that over the past year the entire fund community has bought up tech names. As 13F after 13F season has shown, large cap funds hit record overweights in Tech several times last year, and Tech overtook Discretionary as the most crowded sector. This is a two-edged sword: while on one hand, this massive crowding helped funds finish the year with the highest hit rate in 8 years (48.1%), as Tech accounted for 38% of the S&P 500’s returns in 2017, the unwind – which has yet to come – will be especially violent and painful.

It’s not just tech names however: several other sectors where there has been abnormal changes in fund positioning in recent months are financials and real estate, consumer, and energy and materials:

Financials and Real Estate: With the sector expected to benefit from tax reform and deregulation, Financials have emerged from a 15-month long underweight in 2017 to hit the benchmark (S&P 500) weight, driven by Banks and Capital Markets. Broken out from Financials as its own sector in 2016, Real Estate saw the biggest increase in exposure across sectors in 2017, with its relative weight rising from .33x a year ago to .40x today — the highest level in our data history since 2009.
Consumer: PMs cut back on Discretionary and Staples exposure throughout 2017, with relative weight in Discretionary today at an 18-month low and Staples at its lowest level since 2009.
Energy and Materials: These two sectors saw the biggest drop in relative weight last year as managers continued to shun commodity exposure. The relative weight in Energy has dropped from .87x a year ago to .76x (although is neutral on a beta adjusted basis); and Materials dropped from .95x to .86x today, its lowest level since 2009.

So going back to BofA’s original warning, namely that it is a dangerous time for the most crowded longs, here is the bank’s analysis of the 10 stocks active funds have the most and least exposure to as of this moment.

Again, Subramanian’s warning is that should there be a violent unwind – and one is long overdue – the most crowded stocks will be hit the hardest, while predictably the “least loved” stocks will outperform.

Or perhaps not, because at the current rate, active funds may no longer be the marginal decision – and price – makers for stocks. As the following charts show, not only is the exodus of funds out of active (and into passive) vehicles accelerating – with passive winning and active losing for most of the last 9 yrs – but the cumulative outflows from active funds since the great financial crisis are now approaching $1 trillion dollars, offset by $2 trillion in inflows into passive funds.

If that is indeed the case, the only differentiating factor is how much faster will retail investors dump funds into stocks, which as we first warned one year ago, are being sold by institutions, private clients and other smart money at an unprecedented pace to “mom and pop” investors across the US.

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Welcome to 2018 – We Are All Connected

To see a world in a grain of sand
And to see heaven in a wild flower,
Hold infinity in the palm of your hand,
And eternity in an hour.

A robin redbreast in a cage
Puts all heaven in a rage.

A dove-house fill’d with doves and pigeons
Shudders hell thro’ all its regions.
A dog starv’d at his master’s gate
Predicts the ruin of the state.

A horse misused upon the road
Calls to heaven for human blood.
Each outcry of the hunted hare
A fibre from the brain does tear.

– William Blake, Auguries of Innocence

Over the course of 2017, I spent a lot of time detailing where we stand as a species and where I think we’re going. To summarize, I think the positive impact of the internet and social media on humanity is still very much in its infancy. The more connected we become to one another across the planet, the more we’ll realize we have far more in common with one another than we do with the sociopathic oligarchs and politicians in charge of our respective nation-states.

Much of the 20th century was defined by unimaginable human conflict and terror, unleashed upon the public by crazed elites and rulers who were able to successfully manipulate large populations. The key to preventing a repeat of this sort of thing in the 21st century is billions of human beings across the planet communicating and sharing friendship with one another to the point we can no longer be tricked in killing each other. We need to learn to see “the other” in ourselves and voluntarily collaborate with our fellow humans on the challenges that face us in order to bring our species to the next level. This isn’t just a pipe-dream or insane utopian ramblings, I think it’s entirely possible.

That said, the road could be long and some real disasters may lie ahead before we finally get our footing as a species. As far as I see it, there are several factors still preventing us from getting from point A to B. For one thing, leaders of nation-states throughout the world are almost always some of the worst individuals society has to offer. The types of people who aspire to, and generally attain political power, tend to be the most unconscious, power hungry, sociopathic characters around. That’s just how this stuff works.

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The Incredible Shrinking Trump Administration

Across nearly every federal department and agency, staffing levels fell during the first year of the Trump administration as empty positions went unfilled, budgets were cut, and de facto hiring freezes were implemented.

All told, the government shed about 16,000 jobs between January and September, according to an analysis by The Washington Post, citing data from the Office of Personnel Management. That stands in stark contrast to the first nine months of the Obama administration, when the federal workforce grew by 68,000. It’s the first time the federal workforce has declined in the first year of a new administration since it fell by about 70,000 under Bill Clinton in 1993.

But it’s still a leviathan. The Post story overstates the extent of the cuts by claiming—in the very first paragraph—that the reductions “could eventually bring the workforce down to levels not seen in decades.”

That’s technically true, but it will take a long time for that “eventually” to kick in. The federal workforce included 1.94 million employees at the end of September, according to the Post. That’s well above the approximately 1.8 million employed by the federal government before the Obama administration started staffing up. Getting back to pre-Obama levels of federal workers would require cutting another 16,000 jobs every year for the next nine years.

Still, it’s a step in the right direction—even if something of an accidental one.

There’s no doubt that Trump came into office with a promise to reshape the federal government—he famously proposed to “drain the swamp” during his presidential campaign—but he was never all that explicit about whether he intended to reduce the federal workforce. In fact, as Jeffrey Tucker of the American Institute for Economic Research points out, Trump made promises that would require the government to grow to new heights: “stopping immigration, keeping out foreign products, cracking down on drugs, building a wall, expanding the military, and so on.”

Does Trump deserve credit for cutting the federal workforce during his first year in office? Yes and no.

The budget proposed by the Trump White House is clearly having an effect on how federal agencies plan for the future. Trump proposed cutting as much as 30 percent from some departmental budgets (although he proposed increases elsewhere) and the White House has warned that more cuts will be proposed in the fiscal year 2019 budget set to be unveiled in a few months. So far, few of those proposals have actually become policy, but they could become policy, and agencies have responded by cutting staff or at least avoiding new hires. A temporary hiring freeze that expired in March has become a de facto freeze at many departments, according to the Post.

Trump also gets credit for putting the right people in charge at various departments. Scott Pruit’s Environmental Protection Agency, for example, cut 500 jobs during 2017 and rolled back regulations that require lots of officials to maintain.

But it’s likely that the overall decline in the federal workforce would be slighter if Trump really had his way. There are still hundreds of unfilled positions across various government agencies, including some 250 high-level posts the administration has been unable to fill. A spokesman for the Justice Department told the Post that the reduction of more than 2,300 jobs within the federal Bureau of Prisons is largely the result of hiring delays rather than an intentional effort to shrink the government.

And if Trump hasn’t drained the swamp, he’s at least inspired a lot of it to drain itself. As the Post notes, more than 71,000 career government employees have left their jobs since Trump was inaugurated—a higher number than in the first year of previous administrations, suggesting that frustration with the slow transition process or an unwillingness to serve under such a polarizing president is part of the explanation.

“Morale has never been lower,” Tony Reardon, president of the National Treasury Employees Union, which represents 150,000 federal workers at more than 30 agencies, told the Post. “Government is making itself a lot less attractive as an employer.”

Good! If government is a less attractive destination for America’s best and brightest, that means those people will put their considerable skills to work in other areas of the economy—areas where they will produce value, rather than consuming tax dollars earned by others.

In the end, it doesn’t matter too much whether a reduction in the size of the federal workforce is happening because of Trump’s deliberate efforts or as a consequence of his ineptitude. It’s probably a little of both. Regardless, it’s a bit of good news at the start of the year and a trend that will hopefully continue into 2018.

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