Month: March 2018

White House Chief of Staff John Kelly was reportedly so furious over the way the press was covering Secretary of State Rex Tillerson’s Tuesday firing that he shouted at the television on Air Force One as the President and his staff took off for California, according to Politico.

Kelly’s Tuesday was already off to a chaotic start over contradictory timelines involving Tillerson’s ouster. While the White House said Tillerson was notified last Friday in a phone call which interrupted his sleep on a trip to Africa, Tillerson’s chief spokesman Steven Goldstein said that the Secretary of State was blindsided and had yet to hear from the President personally. Goldstein was also fired after releasing the contradictory statement. 

Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!

— Donald J. Trump (@realDonaldTrump) March 13, 2018

Tillerson told reporters on Monday evening that the poisoning of former Russian double agent Sergei Skripal in a Salisbury, UK park “clearly came from Russia,” and “certainly will trigger a response.” 

At that point, The White House had not yet pointed the finger at Russia – leading some (especially the “collusion” crowd) to speculate that Tillerson was fired for blaming the Kremlin. The White House has since agreed with the British government’s assessment that Russia was responsible for the poisoning, backing the UK’s decision to expel Russian diplomats. 

“The United States shares the United Kingdom’s assessment that Russia is responsible for the reckless nerve agent attack on a British citizen and his daughter, and we support the United Kingdom’s decision to expel Russian diplomats as a just response,” White House press secretary Sarah Huckabee Sanders said in the statement.

“This latest action by Russia fits into a pattern of behavior in which Russia disregards the international rules-based order, undermines the sovereignty and security of countries worldwide, and attempts to subvert and discredit Western democratic institutions and processes. The United States is working together with our allies and partners to ensure that this kind of abhorrent attack does not happen again.”

Accounts of the Friday phone call to Tillerson have varied. While some reports describe Kelly only telling Tillerson to watch Trump’s twitter account over the next few days, others have said it was a much more direct conversation in which the Secretary of State was given a heads up. In that version, Tillerson implored Kelly to hold off on any decisions until he returned to the U.S. on Monday. 

Tillerson, meanwhile, would only say that he received a “lunchtime call” from Trump during the President’s flight to California, and a separate call from Kelly – both after Trump’s tweet. 

“I received a call today from the President of the United States a little after noontime from Air Force One,” he said, adding “I’ve also spoken to White House Chief of Staff Kelly to ensure we have clarity as to the days ahead.”

Of note, former White House Chief of Staff Reince Priebus found out about his own ouster (and replacement by Kelly) after the President tweeted from Air Force One as it idled on a tarmac as Priebus sat in a nearby car. 

Tillerson cut his Africa trip short by a day with no explanation, which his (now fired) chief spokesman said was due to “demands in the secretary’s schedule.”

Rob Porter 2.0

Kelly’s consternation over the press coverage comes on the heels of former Trump staff secretary Rob Porter’s ouster in February after the Daily Mail published accounts from his two ex-wives accusing him of domestic abuse. Kelly took fire for not getting rid of Porter earler, after it emerged that the FBI had alerted the White House several times in 2017 that the allegations were holding up Porter’s security clearance. 

When the allegations against Porter began to fly, Kelly put out a statement calling Porter a “man of true integrity and honor,” and “a trusted professional.” 

Porter’s first wife, Colbie Holderness, then came forward with graphic details of her abuse – telling the Daily Mail that Porter punched her in the face and choked her. The article included a photo of her with a black eye. Porter told the daily mail that the allegations were “slanderous and simply false.” 

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Mired in a brutal economic collapse, Venezuela refuses to publish basic statistics.

So Bloomberg created their own gauge to measure one of the most important of all the missing figures – inflation (or hyperinflation in this case).

Bloomberg explains that, as the name would suggest, it tracks just one item: a cup of coffee served piping hot at a bakery in eastern Caracas. Its price has jumped to 75,000 bolivars from 1,800 bolivars over the past 12 months, an increase of 4,067%.

As we noted previously, the printing press simply cannot save the country from a death spiral, but it doesn’t mean Maduro is prepared to let go of power. He has maintained that Venezuela’s problems are due to economic warfare being waged by the United States to topple the oil-rich socialist regime.

Bremmer Rodrigues, who runs a bakery on the outskirts of Caracas, said his family are at a loss over what to do with their bags of bills. “It’s a mountain of cash, every day more and more.”
…
The shrinking value of the currency has meant that withdrawing the equivalent of $5 from an ATM produces brickloads of bills. Some ATMs now need to be refilled every few hours, because the machines can only hold so much cash. This means there are often a limited number of functioning ATMs in Caracas, and long queues to withdraw money.

But the wheelbarrows-full of bills have meant paying for everyday groceries has changed in the socialist utopia.

Having thrown in the towel on hyperinflation by printing banknotes with 200-times-higher denominations, we noted previously that things in Venezuela have continued to get worse with the currency now so devalued (with even simple purchases requiring so many bills) that instead of counting bills, they are weighing them.

Once one of the world’s strongest currencies, the bolivar has been reduced to a nuisance.

The Bolivar has collapsed beyond almost any expectation and it now takes over 20,000 Bolivars to buy a USDollar on the black-market…

Basic purchases require hundreds of bills. Shoppers shove piles of them into gym bags before venturing into crime-plagued streets and shopkeepers stash thousands in boxes and overflowing drawers.

“When they start weighing cash, it’s a sign of runaway inflation,” said Jesus Casique, financial director of Capital Market Finance, a consulting firm.

“But Venezuelans don’t know just how bad it is because the government refuses to publish figures.”

But now, as Bloomberg reports this week, even the scales can’t cope!

The price of a kilogram of ham is just too long.

“We don’t have any.”

Living in Venezuela, you get used to hearing that, but the story behind the missing ham was different. It’s not that supermarket managers were having trouble finding enough to sell – the typical cause of shortages ravaging the country – they had decided to stop ordering it. The reason: After years of hyperinflation, the price is too long.

The store’s deli scales run to only six digits.

And ham, my Whatsapp food-hunting community tells me, is retailing nowadays for about 1,480,000 bolivars per kilogram. It didn’t matter that I wanted only a few hundred milligrams. The cost was, at this market at least, incalculable.

…the clerk told me they’re trying to fix the scale so they know how much to charge.

They’d better add a whole lot of digits.

And, as Bloomberg previously concluded, people like Bremmer Rodrigues, 25, who runs a bakery on Caracas’ outskirts, are at a loss over what to do with their bags of bills. Every day his business takes in hundreds of thousands of bolivars, which he hides around his office until packing them up in boxes to deposit at the bank. He says if someone looked in on him, he might be mistaken for a drug dealer..

“I feel like Pablo Escobar,” he said. “It’s a mountain of cash, every day more and more.”

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Submitted by James Miller of The Political Insider

Beware the Ides of March, Nancy!

It looks like Rep. Pelosi is heading dangerously into Julius Caesar territory, with a mutiny growing within her caucus. Rank-and-file members are preparing to revolt against her should Democrats retake the House of Representatives this fall.

Et tu, Steny?

Mike Allen of Axios reported early this morning in his daily newsletter that up-and-coming Democrats have found a way to win: speaking out against Pelosi, and pledging to not support her as the Party’s leader.

From the write-up:

Top Democrats tell me that if they take back the House in November, a restoration of Speaker Nancy Pelosi is no longer guaranteed. In fact, some well-wired House Democrats predict she will be forced aside after the election and replaced by a younger, less divisive Dem.

The big picture: Conor Lamb, 33, won his U.S. House race in Pennsylvania this week after saying he wouldn’t vote for her for leader — a new template for moderates. Pelosi has hung in through the minority, and remains the party’s most consistent fundraiser. As for whether she’ll return as Speaker, she has just said that it’s up to the members. (Her allies note that she has never lost a leadership vote.)

New must read via @mikeallen: Pelosi in peril; many House Democrats think she will not be speaker if they win the Househttps://t.co/LO6PfIo8kD

— Axios (@axios) March 15, 2018

There’s only one problem. As Allen points out, it’s not exactly clear who will take Pelosi’s place as head of the Democrats should she lose favor. Allen notes, “Her No. 2 and longtime rival, House Democratic Whip Steny Hoyer, 78, covets the job but is three months older than she is.’

Allen does hint that Rep. Joe Crowley, a 56-year-old lawmaker from Queens, could be the Pelosi heir, however. It’s all up in the air for the time being. We know that Democrats are dissatisfied with Pelosi’s leadership, and want someone fresh and bold to lead the charge against President Trump. That someone remains to be seen.

Just watch yourself the next time you walk into the House chamber, Nancy. At this point, you don’t know who is hiding a knife under their cloaks.

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In a note from JPM’s chief cross-asset analyst John Normand, the bank’s strategist writes that in conversations with clients, “everyone is asking the same question” – namely ‘where are we in the cycle?‘ and, Normand adds, with good reason: after all, the current US expansion is almost the second-oldest of the post-war era, and most investors are aware that “asset class, sector and style performance vary considerably over the cycle.”

Normand admits that “answering this question around the economy’s position is challenging, because the lifespan of US expansions has been quite variable (as short as one year or as long as ten) and because there is no standard definition of early, mid and late-cycle phases to complement the National Bureau of Economic Research’s (NBER) designation of recessions.” Furthermore, JPM adds that “most equity and fixed income markets are expensive on standard metrics, offering little risk premium for a possible slowdown as rates rise over the next two years, much less a more extreme outcome like recession.”

In this context it is not surprising that the same question draws three vastly different answers from three different banks.

Logically, first there is JPMorgan, which while noting that markets may be in the “twilight of the mid cycle” and investors should be prepared to sell stocks if the economy edges toward a recession, there is still time. That’s because according to the bank’s proprietary model, the odds of a recession in the next year are a relatively modest 18%, rising to 52% over 2 years, and a more troubling 72% over three years.

What does the above chart imply? To maximize absolute returns, JPM says that those who prefer to be early for the next recession, perhaps due to liquidity considerations, should position when 2Y or 3Y odds are at least 70%. Those who prefer to remain invested until later in the cycle should reallocate when 1Y odds rise above 30%.

Traders should follow this model closely JPM contends, and writes that it would reduce its recommended cyclical exposure – long stocks, short bonds and credit – progressively “over the next year when one or several conditions have been met, like equities reaching our anticipated cyclical high of 3,000 on the S&P 500, or U.S. money markets pricing more of our base case of four hikes each in 2018 and 2019.”

However, as the next chart shows, JPM’s estimates that markets continue to exhibit mid-market positioning:

Equities, for example, have been delivering above-average returns and outperforming all other asset classes, while Bonds are delivering their lowest returns of the cycle and are underperforming most other asset classes. Within Equities, Cyclicals have been outperforming Defensives. EM bonds, stocks and currencies generally have outperformed DM assets. Credit returns have roughly matched Bond returns, meaning spreads have stopped tightening such that most of the return is from duration. Commodity momentum has not yet gone hyperbolic, and Energy and Base Metals are leading Precious Metals.

 

That’s good news, as shifting into late cycle presents investors with a difficult dilemma: sell early and potentially lose on substantial upside before the drop, or stay too long and risk even more.

Positioning too soon before a recession invites underperformance in the last year or two of the expansion when Equities may continue to rise, even if the investor will be properly positioned when markets peak, volatility rises and liquidity becomes more challenging. Positioning too late in the cycle spares investors the discomfort of underperforming peers but also tends to expose the portfolio to higher volatility than other active strategies when the economy succumbs, since valuations would be higher and positioning more extreme by then.

And while the odds of a recession in 3 years are rising, and those who wish to exit well before the recession strikes may want to do so now, JPMorgan is still not in that camp yet, nor are most investors and hedgers. Furthermore, “a year or more of underperformance would not be credible with many even if eventually proven correct,” Normand writes and adds that “from a systematic perspective we will await confirmation from the one-year signal before turning defensive on risk assets ahead of the first recession in a decade.”

* * *

Recession timers will be even happier with a similar exercise done by Goldman Sachs earlier in the week.

As Goldman’s chief economist Jan Hatzius wrote over the weekend, “our cross-country recession risk model continues to put the odds of a US recession around 20% on a two-year horizon (Exhibit 1), implying that the current expansion—now just a couple months from becoming the second longest in US history—will more likely than not become the longest. And our US recession risk dashboard—a collection of the most valuable leading indicators drawn from both our research and academic studies—also sends a reassuring message.”

In short, neither JPM nor Goldman would advise their clients to sell just based on traditional recession timing indicators.

* * *

Of course, one would be forgiven to be cynical here and recall that both Goldman and JPM are heavily invested in perpetuating a non-recessionary cycle, and even more heavily conflicted in keeping clients actively trading, not merely selling and cashing out.

Which is why we remind readers that a third, perhaps far more accurate forecast of recession odds shows something vastly different. As we presented over a month ago, Private Equity firm KKR, which is certainly far less conflicted on a client relationship basis – as it does not generate revenue from active trading – had a very different recession forecast.

On one hands, the near-term appears safe: KKR wrote that with tax cuts taking effect in 2018, the chance of a near-term recession appears quite remote. It added that “consistent with this viewpoint, our proprietary recession model, which we show in Exhibit 64, suggests a limited chance of recession during the next 12 months. According to the model, high interest coverage, tight High Yield spreads, low delinquencies, and a modest consumer obligations ratio all appear to be favorable tailwinds that should sustain economic growth through 2018.”

To be sure, the 1 year recession probability is almost identical with both JPM’s and Goldman’s. However, when extending the forecast period to 2 years, something surprising emerges:

Interestingly though, when we extend the model from 0-12 months to 24 months, the risk of recession increases materially. One can see this in Exhibit 65. We link the uptick in the model’s cautionary outlook in late 2019 and beyond to a structurally peaking U.S. dollar, a flattening yield curve, higher unit labor costs, and some reversion to the mean in both consumer confidence and home building expectations.

And here is how KKR shows a virtual certainty of a recession in just 2 years.

* * *

So going back to the original question which “everyone is asking“, i.e., where are we in the cycle, it appears that the question will continue being asked, for the simple reason that – when stripped of bias and conflicts of interest – nobody really knows, and certainly not Trump’s new top economist Larry Kudlow, who as a reminder back in December 2007 said there was “no recession” as “the Bush boom continued”, and added that “the pessimistas are a persistent bunch.”

Later, the NBER would determine that that was the month the recession had begun.

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A slew of MLPs (Alerian down 11%) have tumbled this morning as FERC revises its policy – disallowing income tax allowance cost recovery in MLP pipeline rates.

FERC Revises Polices, Will Disallow Income Tax Allowance Cost Recovery in MLP Pipeline Rates

The Federal Energy Regulatory Commission (FERC) today responded to a federal court remand by stating it no longer will allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates.

The U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc. v. FERC, (827 F.3d 122 (D.C. Cir. 2016) held that FERC failed to demonstrate there was no double recovery of income tax costs when permitting SFPP, L.P., an MLP, to recover both an income tax allowance and a return on equity determined by the discounted cash flow methodology.

The Commission today acted in response both to the court remand and comments filed in response to an inquiry issued after the court ruling. FERC will now revise its 2005 Policy Statement for Recovery of Income Tax Costs so that it no longer will allow MLPs to recover an income tax allowance in the cost of service.

The revised policy statement explains that, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of the United Airlines court case to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings.

In Docket Nos. IS08-390-008 and IS08-390-009, the Commission denies SFPP an income tax allowance and determines a real return on equity of 10.24 percent (Agenda Item G-3). In Docket Nos. IS09-437-008, et al., FERC accepts SFFP’s compliance filing, subject to the company submitting a further compliance that, among other things, removes the income tax allowance in SFPP’s East Line cost of service and calculates refunds (Agenda Item G-4).

The reaction is very evident…

And it’s across the whole spectrum…TC Pipelines (red), Dominion Energy MLP (blue), and Plains All-American Pipeline (green) are all down hard..

As Bloomberg notes, earlier in the day, SunTrust analysts warned that for better or worse, the spectre of midstream structure, governance, alignment remains a headwind, and has “significantly tainted our past view that 2018 would be the big entre from the generalist investor.”

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Speaking in the Oval Office following a photo-op with the visiting Irish PM, US President Donald Trump has said it appears that Russia was behind the attack on former double agent Sergei Skripal.

A member of the press corps asked the president if he thinks Russian President Vladimir Putin was behind the attack, prompting Trump to respond that “it looks like it.”

“I’ve spoken with the [British] prime minister and we are in deep discussions. It’s a very sad situation,” he continued.

“It certainly looks like the Russians were behind it. Something that should never, ever happen and we’re taking it very seriously as, I think, are many others.”

Pres. Trump on whether Russia was responsible for nerve agent attack in the UK: “It looks like it…it certainly looks like the Russians were behind it.” https://t.co/DjUQ4Op9vr pic.twitter.com/IR9MWDJA3K

— World News Tonight (@ABCWorldNews) March 15, 2018

Somehow, we are sure, the Left will find a way to explain why a “puppet of Putin” would unload more sanctions, issue a joint statement decrying Russia’s actions, and now publicly state that it looks like Russia did it.

Of course, that’s not all. As Benjamin Weingarten (@BHWeingarten) notes, the Trump administration has:

• Armed Ukrainians

• Sold missile defense to Poland

• Upped EU military sales

• Crushed Russian mercenaries

• Threatened #Russia-backed #IranDeal

• Oriented nuke/missile defense towards Russia

Does Schiff think these are all “false flags?”

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