Month: June 2018

Speaking with reporters in Seoul, South Korea, Secretary of State Mike Pompeo said the US expects North Korea to take steps toward a “major” nuclear disarmament within the next two-and-a-half years, the Associated Press and Reuters reported. While he refused to lay out a specific timeline, Pompeo said he’s hopeful that steps toward a “major, major disarmament” will be taken before the end of Trump’s current term, which ends in January 2021.

“Oh yes, most definitively. Absolutely … you used the term major, major disarmament, something like that? We’re hopeful that we can achieve that in the 2-1/2 years.”

The Secretary of State also pushed back against North Korean media’s portrayal of the summit, saying “one should heavily discount some things that are written in other places.” He added that North Korean leader Kim Jong Un “understands that there will be in-depth verification” of the country’s nuclear commitments if it does reach a deal with the US. Ahead of the summit, Pompeo made clear to the North Koreans that any deal must include “complete, verifiable and irreversible” denuclearization.

However, despite his assurances, reporters appeared to fixate on the vague nature of the agreement signed by Trump and Kim, but Pompeo insisted that it’s ridiculous to focus on the fact that the agreement lacked one word – “verifiable” – arguing instead that the language in the statement was sufficient “in the minds of everyone concerned.”

“I am … confident they understand that there will be in-depth verification,” Pompeo said, saying the initial agreement between Trump and Kim had not captured all of what had been agreed by the two sides.

“Not all of that work appeared in the final document. But lots of other places where there were understandings reached, we couldn’t reduce them to writing, so that means there’s still some work to do, but there was a great deal of work done that is beyond what was seen in the final document that will be the place that we will begin when we return to our conversations,” Pompeo said after flying to Seoul from Singapore.

While President Trump has said he would temporarily suspend live military drills between the US and South Korea (a declaration that reportedly was news to the US military and its partners in Japan and the South), Pompeo clarified that the drills would resume if the North stops negotiating in good faith.

Trump “made very clear” that the condition for the freeze was that good-faith talks continue. He says if the U.S. concludes they no longer are in good faith, the freeze “will no longer be in effect.”

Pompeo added that conversations with North Korea should continue next week, though he couldn’t say for sure what the exact timing would be.

“I don’t know exactly what the timing will be for our next conversation with the North Koreans. I would anticipate it will be fairly quickly after we return to our home countries.”

“I don’t know exactly what form that will take, but I’m very confident that by some time in the next week or so we will begin the engagement.”

While Trump headed back to the US, Pompeo traveled to Seoul on Wednesday to brief South Korean officials on developments from the summit.

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While we previously did a full preview of the key issues to be covered in today’s FOMC meeting, which include changes to the dot plot (1 net dot increase will push the number of rate hikes in 2018 from 3 to 4) as well as the Fed’s 2019 rate trajectory outlook, the change to the IOER rate, the discussion of the Neutral Rate, flipping to an “every meeting is live” mode, and how the Fed plans to deal with a generally overheating economy, the biggest interest – at least until Powell sits down at 2:30pm – is what the Fed statement will say.

To recap, with a number of Fed officials, notably Williams (voter) and Brainard (voter), arguing that forward guidance may need to be changed as the neutral rate approaches, the FOMC will likely review its language around ‘accommodative policy’. The line in the statement in focus will be that rates will remain “for some time, below the levels that are expected to prevail in the longer run.” It is therefore likely that this phrase will be taken out entirely.

Elsewhere, most Fed watchers expect the statement to retain an upbeat tone, with a constructive view on household spending, an acknowledgement of lower unemployment, and a hawkish rewording of the forward guidance. On the negative side, Goldman believes that with Italian sovereign spreads returning to levels last seen in the European debt crisis, the statement may include a subtle reference to heightened uncertainty abroad, echoing recent comments from Governor Brainard.

In terms of other key changes, look for the following:

• In response to upward pressure on the effective fed funds rate, n we expect a policy directive in the statement’s implementation note that will adjust the interest on excess reserves rate (IOER). Such a change (for example, “to a level 5 basis points below the top of the target range”) was strongly suggested by the May minutes.
• We do not expect a direct reference to recently enacted tariffs nor to the prospect of additional trade restrictions. We do, however, expect these issues to come up during the press conference.
• We think Fed governor nominees Richard Clarida and Michelle Bowman will not attend next week’s meeting. Given that the Senate Financial Services Committee vote is currently scheduled for Tuesday the 12th, the odds of scheduling and holding a floor vote to confirm them in time for the meeting are very low.
• We do not expect any dissents, matching the unanimity of the March tightening action. The December dissenters (Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans) are non-voters this year, and we expect that even the more dovish voters on the Committee will be persuaded to support a second hike in 2018

Putting it all together, here is the Goldman proposed redline of what the June (vs May) statement will look like:

Finally, in an interesting, if completely meeaningless exercise, Goldman conducted “probit regressions to quantify and analyze the growth and inflation assessments of the FOMC statements of the past decade.”

Focusing on the FOMC statements since 2007—an inflection point in the era of enhanced central bank communication—Goldman classified the growth and inflation language of each statement into six ordinal groupings, following a similar approach used in past research to analyze inflation pressures in the Beige Book. For example, the FOMC statement’s characterization of job growth during this period has run the gamut from “strong” and “solid” to “softened” and even “declined steeply.” This is charted below:

What does this mean for the June FOMC statement? As shown in the chart below, Goldman expects an upgrade to consumer spending (to “picked up in recent months”) and an adjustment to the job growth language (to “solid” from “strong on average”), but no changes to business investment or overall activity. With regard to the inflation assessment, the bank finds that the modestly lower pace at the June meeting (1.80% core PCE yoy vs. 1.88% at the May meeting) has not historically been enough to warrant a downgrade to the inflation rate (from “close to 2 percent”).

And yes, this is the kind of “analysis” you do if you are an economist with way too much computing power and time on yours hands.

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It’s time to get out that tinfoil hat. 

Greg Johnson of Skunk Bay Weather, a local weather website that runs camera enabled weather stations on the northern Kitsap Peninsula; Kitsap County, Washington, recorded a mysterious object early Sunday morning that has social media buzzing.

One of Johnson’s weather stations has a camera monitoring the Puget Sound at Whidbey Island from Skunk Bay, and at 3:56 a.m. Sunday by a high-resolution, 20-second exposure camera, snapped what looks like the impossible — a missile blasting off from what seems to be the Naval Air Station Whidbey Island.

My good night cam picked up what appears to be a large missile launch on Whidbey Island Sunday AM. I sat on it for a while. After sharing with Cliff Mass he did a blog on it. https://t.co/jBPXRtRGFP @NWSSeattle @WunderCave @WeatherNation pic.twitter.com/RnN8H3IsQ9

— Skunkbayweather (@Skunkbayweather) June 11, 2018

Johnson told KCPQ13 Washington, he was at first hesitant to release the photo into the public domain because he said it appears to be a missile launch from the Naval Air Station Whidbey Island across the bay.

“I feel strongly it was a missile launch,” Johnson said.

But Tom Mills, a spokesperson for NAS Whidbey Island, told KCPQ13 that “It wasn’t a missile launch from the facility. There are no missile launch capabilities on the Navy base at Whidbey Island.”

“There’s a lot of speculation around here,” Mills said, as he conveniently suggested to KCPQ13 that the image could be a lens flare. “But it’s definitely not a missile launch.”

Cliff Mass, a professor of Atmospheric Sciences at the University of Washington, speculated that the object looks like a missile on his blog Monday.

“I’ve seen a lot of stuff,” Mass wrote. “But nothing like this.”

“It really looks like an ascending missile,” he added.

There was reportedly Alaska Flight 94 and a helicopter in the region of the northern Kitsap Peninsula at the same time the camera snapped the mysterious object.

In responding to speculation of various aircraft overhead, Johnson said, “For the record… My cams pick up airplanes all the time… I can guarantee this is NOT an airplane. They fly buy much higher and have a whole different signature….. I’ll grab a plane image and share it.”

For the record… My cams pick up airplanes all the time… I can guarantee this is NOT an airplane. They fly buy much higher and have a whole different signature….. I’ll grab a plane image and share it.

— Skunkbayweather (@Skunkbayweather) June 11, 2018

Furthermore, The Drive points out that there are no rocket operations of any kind in the region. However, the “closest thing to something like that would be the Ohio class nuclear ballistic missile submarines (SSBNs) based not too far away at Bangor Trident Base/Naval Submarine Base Bangor.”

While there are no official reports of an Ohio class nuclear ballistic missile submarine firing an apocalyptic Trident missile in the region, the comparison below certainly looks like Sunday’s mysterious object above Washington state could have been a secret missile test. At this point, it is anyone’s guess to what happened on Sunday.

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Authored by Daniel Lacalle via The Epoch Times,

Other countries pretend to be interested in free trade; in reality they only care about their own advantage…

The G7 failure to come to terms on trade highlights the problem of governments trying to macromanage trade. And no, the failure to even agree to disagree cannot be blamed on President Trump and his new-found economic nationalism.

The list of countries with the largest trade surplus with the United States is led by China, which exports $375 billion more than it imports. It is followed, very far away, by Mexico ($71 billion), Japan (69 billion), Germany (65 billion), Vietnam (38 billion), Ireland (38 billion) and Italy ($31 billion).

Not surprisingly, the markets with most protectionist measures against the United States are China, the European Union, Japan, Mexico, and India.

These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron, or any of the leaders gathered there.

During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess to the United States.

Especially China, Germany, and Japan have economies with high state interventionism and therefore very high excess capacity, in part due to a high personal savings rate.

Steel and aluminum, like the automobile industry, are examples of building unnecessary capacity and subsidizing it, country by country, hoping it will be somebody else who closes its inefficient factories to be able to export more to that country.

In Germany, the influence of the automobile industry over the government is legendary. What isn’t are the relatively high tariffs American manufacturers face when exporting to Europe and the low tariffs America itself imposes on automobile imports.

Have Your Cake and Eat It

What is also ironic is that modern-day protectionism didn’t start with Trump. Barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The only difference between Trump and Obama was that Obama didn’t publicize this much and the mainstream media didn’t complain.

The mainstream media also misrepresented the intention of the Trump administration to level the playing field by telling the story of Trump the protectionist.

But the requirement of the Trump administration in the G7 to eliminate all tariffs and barriers, rejected by the rest, has shown that the hat trick of accusing the United States of protectionism was simply a PR stunt. Every time the Trump administration has threatened its trading partners with tariffs, we learned of hidden barriers from the so-called “free trade leaders” in China and the European Union.

In six months we have seen an important list of tariffs and barriers against the United States that many of us simply thought did not exist. And this is on top of the already higher explicit tariffs that especially China levers on imported goods. Even the European Union recognized that the “Made In China 2025” plan, which the United States denounced, was a conscious objective of limiting foreign trade.

So the story the mainstream media tells is wrong. Trump does not favor protectionism, he just wants real free trade, which means no tariffs—but for everybody. He tries to dismantle the trick of imposing hidden barriers, smile, and then export more to the United States. Needless to say, he can only get some movement into the matter by threatening to impose tariffs as a retaliatory measure.

Because of the threat, the German car manufacturers themselves have asked the European Union to reduce tariffs on U.S. cars, the Chinese have agreed to reduce barriers to the imports of U.S. agricultural and industrial products, and so on.

But because other G7 leaders want to have their cake and eat it too, the G7 summit had to explode. If all countries subsidize their excess capacity and try to export to the United States while using peregrine excuses to limit imports from the world leader, a charitable agreement is not possible.

And the “free-market-disguised protectionism” strategy of some of the G7 leaders collapsed when Trump said “they have taken advantage of the United States for decades” and called for the elimination of all tariffs and tariffs completely. Interestingly, those who presented themselves as defenders of free trade refused.

Game Over

This game is now over. But we need to be wary of the consequences.

The United States may win and get the other countries to limit their protectionism. On the one hand, it exports very little, only 12 percent of GDP. On the other hand, everyone wants to sell there because of market size and growth opportunities. Additionally, without their huge trade surplus, the European Union and China cannot sustain their growth.

And the debt? China owns $1.3 trillion of United States debt. It does not reach 6.2% of the total. It is neither the largest holder of U.S. debt nor a threat. As shown throughout 2018, the demand for US bonds is much higher than the supply on all issuances and the U.S. based bond funds would absorb any sale by the Chinese in a few days.

Also, China cannot sell them. For China, these bonds are reserves of foreign currency. If sold, the Yuan would suffer enormous volatility, especially when its currency is used in less than 4% of global transactions and its value is more than questioned because of tight capital controls. In addition, China needs several trillion of dollar liquidity to run its trading machine.

It has been very easy for the European Union and China to support their GDP growth thanks to an external sector and a trade surplus that hid trade huge barriers under the rug of regulation and subsidies.

From bureaucratic barriers, hidden taxes, lack of intellectual property protection, disproportionate subsidies to obsolete sectors, or invented environmental excuses, it is over. If they want to sell to the United States, they have to adopt measures that increase free trade, not disguise protectionism under a mask of openness.

However, the United States should be careful either way. Tariffs are the worst way to combat protectionism. They give other governments the excuse to impose higher barriers to trade and blame the external enemy, without getting rid of the existing barriers.

Lose Lose

However, if Trump’s tactics don’t work and other countries liberalize their trade, we are looking at a world with much slower than anticipated GDP growth.

Europe is already slowing down and it looks like it will get worse not better. The data on industrial production, GDP, consumption and credit point to a much poorer growth than estimated. The European Union is exiting its monetary stimulus with a very important drop of the economic surprise indicators.

But protectionism protects governments. While all of us lose, politicians often prefer things to get worse than lose control, and that is a relevant risk with China and Europe. The United States is carrying out an aggressive negotiation tactic and it can backfire.
Trump knows that tariffs hurt inside as well.

In 2001, Bush Jr. introduced tariffs on aluminum that destroyed thousands of jobs, and Obama’s constant protectionist measures led the country to the worst external sector growth data in decades. Putting the fist on the table and demanding that everyone remove their barriers can motivate everyone to blame their barriers to trade on the outside enemy. On the “protectionist” United States, and vice versa.

If the purported “free trade nations” don’t start some real free trade soon and the bickering escalates into a full-fledged trade war, those who will suffer the most will be the consumers all over the world.

*  *  *

Daniel Lacalle is chief economist at hedge fund Tressis and author of “Escape From the Central Bank Trap,” published by BEP. 

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Authored by Mike Shedlock via MishTalk,

Capital flight to Germany, the Netherlands, and Finland is in full swing. These sums cannot be paid back.

I have commented on Target2 liabilities before.

Perhaps a Mish-modified translation from the Welt article Imbalance in the Euro System Reaches a New Record will ring a bell.

The central banks of Germany’s euro partners Italy, Spain and France owe the Bundesbank almost a trillion euros . This is a new high. – more than ever before. Tendency continues to rise. There is no security for this money.

Read that last line again and again until it sinks in. Italy is €464.7 billion in the hole. Spain is €376.6 billion in the hole.

Creditors owe Germany, the Netherlands, and Finland over €1.157 trillion.

In May, Italian liabilities increased by almost 40 billion euros.

“Capital flight to Germany is in full swing,” says Hans-Werner Sinn, longtime head of the Ifo Institute and one of the most prominent economists in the Federal Republic.

Originally, Target2 was designed to facilitate cross-border transactions within the eurozone. The system achieved this goal. From the point of view of critics, this means that the Deutsche Bundesbank provides long-term unsecured and non-interest-bearing loans to the central banks of other eurozone countries , especially the central banks of southern countries Italy, Spain and Portugal.

Fundamental Eurozone Flaw

Target2 is a fundamental problem of the Eurozone.

• The ECB guarantees these loans.

• As long as they are guaranteed, then hells bells, why not make more loans?

Germany Will Pay

Germany will pay one way or another. Here are the possibilities.

1. Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution.

2. Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe

3. Breakup of the eurozone

Those are the alternatives.

Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.

Related Articles

1. Germany Points Finger at “Moochers of Rome”
2. Michael Pettis Calls Surplus Trade Statements by German Finance Minister “Utter Lunacy”
3. Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct

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After two months of legal wrangling following an April 9 FBI raid on his home, hotel room and office, sources close to Trump personal attorney Michael Cohen say that he’s preparing to cooperate with prosecutors from the Southern District of New York who have been overseeing the criminal probe against him, ABC News reported Wednesday morning.

In the latest sign that he could be preparing to cooperate, ABC said the law firm that has represented Cohen so far will not be representing him going forward. So far, Cohen has been represented by Stephen Ryan and Todd Harrison of the Washington and New York firm McDermott, Will & Emery LLP.

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Despite Russia production-cut roll-back headlines, WTI/RBOB prices are unchanged from the huge, bearish surprise API-reported inventory surge. However, for the 2nd week in a row, DOE data was entirely opposite and showed a big crude and gasoline draw. Markets ignored the 100k b/d surge in production…

Bloomberg Intelligence Senior Energy Analyst Vince Piazza notes that a potential agreement by OPEC to increase oil output when it meets later in June is curtailing the crude rally from earlier this year, while prices in earshot of $80 a barrel weigh on demand and threaten economic growth.

Bloomberg reports that OPEC and its partners will meet next week and debate whether to restore output halted last year. Saudi Arabia and Russia have said it’s time to reverse the cuts and appear to have begun reviving supplies, but face opposition from Iran, Iraq and Venezuela.

“There is no need for a change in the level of production,” said Iran’s OPEC governor, Hossein Kazempour Ardebili, who serves as one of the country’s representatives to the group. “Any increase should be limited to the production allocation in the agreement, which is valid to the end of 2018.”

Oil’s recent rally to a three-year peak above $80 a barrel in London has prompted warnings that prices could hurt economic growth. Yet Kazempour insisted that OPEC will resist pressure to raise production.

“The Trump administration is trying to intervene in the affairs of a sovereign organization,” he said. Such attempts have failed in the past and “they will also fail” this time.

API

• Crude +833k (-1.25mm exp)

• Cushing -730k (-900k exp)

• Gasoline +2.33mm

• Distillates +2.1mm

DOE

• Crude -4.143mm (-1.25mm exp) – biggest draw since March

• Cushing -687k (-900k exp)

• Gasoline -2.271mm (+1mm exp)

• Distillates -2.101mm

After a very bearish API report, and an extremely bearish DOE report last week, DOE data surprised across the board with the biggest crude draw in 3 months and a surprise gasoline draw. This is the 4th weekly decline in Cushing stocks in a row…

As always, all eyes will be on US crude production and the supply side of the equation and it spiked by 100k b/d to 10.9mm b/d – a new record…

On the demand side, both gasoline and diesel demand tumbled  in last  week’s data, but rebounded notably this week.

Bloomberg Intelligence Energy Analyst Fernando Valle points out that rising refinery utilization is pushing U.S. product stockpiles higher, but gasoline margins look a lot more challenged than distillate. Coverage for distillate is at a five-year low as domestic and export demand grow with economic activity. Gasoline, on the other hand, is saddled with demand destruction caused by elevated crude prices.

Infrastructure bottlenecks have pushed WTI-Brent differentials to around $9 a barrel, with higher exports plus elevated refining demand lending support to sentiment.

And domestic bottlenecks…

WTI/RBOB prices were flat from API’s bearish print but exploded higher after DOE’s surprise draws…

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Authored by Kevin Muir via The Macro Tourist,

Going to make today’s post short and sweet.

Recently the market has gotten somewhat excited that the Federal Reserve might slow down the rate of Federal Funds tightening. This has been the result of three developments:

1. A few speeches from FOMC Board members that indicated the Federal Reserve was concerned about the flattening yield curve, and that the Fed’s goal would be to ensure it doesn’t invert.

2. A recent phenomenon where the effective Fed funds rate is trading at a higher spread to IOER (interest on excess reserves).

3. The increasing troubles in certain emerging market countries as US dollar liquidity has tightened.

Between these three concerns, the market has built a “dovish hike” into today’s FOMC announcement. Many participants believe the Fed is more likely to slow the pace of tightenings as opposed to increasing it.

Well, sold to them.

I am not claiming to know what the correct policy should be, but I am confident that Jerome Powell’s Federal Reserve will not alter course for any of these three reasons.

The Federal Reserve will hike at least every other meeting until something breaks. Full stop.

Powell will not reduce this pace because the 5-30 spread is hitting new lows. Nor will he care about the effective Fed Funds spread over IOER. And finally, the Federal Reserve has a mandate to set policy for the USA and will not alter course because of emerging market wobbles.

Additionally, there have been stories indicating the Federal Reserve is considering holding press conferences every meeting as opposed to every second one. Although there are plenty of good reasons to change this policy, I believe that Powell is worried he will have to raise rates at a quicker pace in the future.

Let’s face it, on the metrics that matter to the Federal Reserve (employment and inflation), the signals are all pointing to an economy that needs higher rates.

I know true Fed-watchers will tell me that initial claims and CPI are not preferred Federal Reserve indicators, but that’s splitting hairs.

The truth of the matter is that the US economy is doing well. In fact, beneath the hood, it might even be booming.

We are so far away from the Federal Reserve slowing down the rate of hikes. The economy is doing well. Stocks are on their highs. Unemployment is hitting new lows. Inflation is ticking at cycle highs. If anything, I expect the Federal Reserve to increase the pace of tightenings – not the other way round.

I am not sure what this will mean to asset prices, but be careful in assuming the Fed is on financial markets’ side…

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