Month: June 2018

The Trump Administration Won’t Defend Obamacare’s Individual Mandate In Court

The Trump administration won’t defend Obamacare’s individual mandate to purchase health insurance in court. Instead it will argue that the mandate is unconstitutional—and so are the health law’s preexisting conditions rules.

It’s an unusual, though not unprecedented, move. (The Obama administration, for example, declined to defend the Defense of Marriage Act.) And the mandate won’t go without a defense; a coalition of blue states will represent Obamacare in court. It’s also clear that the decision comes straight from the top: A Department of Justice letter announcing the decision begins by saying that it was made “with the approval of the President.”

The real problem is that the Trump administration’s argument is unlikely to hold up to legal scrutiny.

The White House’s decision, unveiled in a brief tonight, follows a legal challenge to Obamacare brought by a group of conservative states, led by Texas. Those states argue that Obamacare’s purchase requirement is now unconstitutional based on the logic outlined by the Supreme Court when it upheld the mandate in 2012—and that, as a result, the entire law should be struck down.

When the Supreme Court upheld the mandate, it ruled that the mandate was unconstitutional as an economic command to purchase insurance; the Commerce Clause of the Constitution does not extend that far. Instead, Chief Justice John Roberts wrote in the majority ruling, the mandate was constitutionally permissible under a saving construction—by viewing it as a tax penalty that raised revenue for the federal government.

But the tax reform law passed by Republicans in Congress eliminated that tax penalty, setting it to zero as of 2019. Technically, the mandate remains on the books, but functionally the tax law repealed it. Since the mandate no longer raises any revenue, the states’ argument goes, the saving construction—that is, the notion that it is legal if understood as a tax—no longer applies. And since the mandate is the lynchpin of the entire law, the glue that holds the entire scheme together, all of Obamacare must be struck down with it.

Typically, the executive branch defends federal laws in court. But in this case, the Trump administration decided to side partially with the states in court. Although the federal government does not argue that the entire law should be struck down, the administration’s brief does make the case that the mandate is unconstitutional, and that the law’s preexisting conditions rules should be struck down as well. The government cites Obama administration arguments to the effect that the mandate and the preexisting conditions rules are inseparable, according to congressional findings associated with the law. (Notably, the Trump administration’s argument, if it succeeded, would allow Obamacare’s Medicaid expansion, health insurance exchanges, and the private insurance subsidies to stay in place.)

There may be some appeal in the turnabout of using the awkward logic of John Roberts’ Supreme Court against the law that it was designed to save. But I do not think it has much of a chance, for several reasons.

The first is that it will be hard for the states challenging Obamacare to demonstrate standing, given that standing to sue requires a demonstration of harm. The mandate penalty is zero, so who, exactly, is it harming?

The second, as Jonathan Adler, a law professor at Case Western Reserve University, recently argued in a Federalist Society debate, is that it’s very difficult to make the case that the mandate cannot be severed from the rest of Obamacare when Congress has, in effect, already done exactly that.

Yes, the mandate remains part of the law. However, by zeroing out the penalty as part of the tax law, the current Congress effectively declared that the mandate is severable from the rest of the law; courts are unlikely to decide that Congress was wrong that the rest of the law cannot stand apart from the mandate. So while it may once have been possible to reasonably argue that Congress intended the mandate and the preexisting conditions rules to be a tightly wrapped package, it is much harder to do so following the passage of the tax law. The arguments that the Obama administration made were about the law as it existed then; it is more difficult to apply those arguments to the altered law that exists now.

Indeed, if a court were to find that in passing the tax law, Congress acted unconstitutionally by repealing the mandate but leaving the rest of the health law in place, that could raise the question of whether the tax law itself was constitutional, and put the tax law’s standing in legal limbo. That’s probably not a road the White House really wants to go down.

Adler, to be clear, is far from a supporter of Obamacare. He helped devise one of the major challenges against it, King v. Burwell, in which challengers argued that the plain text of the law prohibited insurance subsidies in state-run exchanges. In the Federalist Society debate, he says he has problems with the law, and believes that “the individual mandate exceeds the scope of federal power.”

Although it is still early, and previous health law cases have proven difficult to predict, it seems plausible, and perhaps even likely that this case turns out to have very little practical impact.

The end result may simply be that courts rule that the mandate as it now stands is unconstitutional and unenforceable—and that’s it. Preexisting conditions rules stay on the books, as does the rest of the law. Given that the penalty, and the power of the mandate, has already been reduced to nothing, that would be a symbolic victory and nothing more.

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Trump Moves 1,600 Immigrant Detainees To Federal Prisons As ICE Scrambles To Find Space

President Trump is again demonstrating he doesn’t need the cooperation of Congress to implement some of his core campaign promises, like securing America’s borders. Case in point: Reuters reports today that US authorities are transferring roughly 1,600 ICE detainees to federal prisons over the objections of immigration advocates and human-rights groups. The move is the first large-scale use of federal prisons to crack down on people entering the country illegally. Meanwhile, immigrants rights advocates are furious because these same facilities typically house some of the justice system’s most hardened criminals.

Victorvile

US Penitentiary in Victorville, Calif.

Five prisons will temporarily take in detainees who are awaiting civil immigration hearings – a group that could include asylum seekers – as ICE works on securing additional housing space. A prison in Victorville, Calif. will house 1,000 immigrants – the bulk of people being moved under the program. Other prisons include ones in Washington, Oregon, Arizona and Texas. The news comes after the Department of Homeland Security announced its contractors have started building the first section of Trump’s planned border wall (among other features that make it superior to the rickety “fence” that had previously marked the border are special “anti-climbing plates” that make it difficult to scale).

Trump, of course, has promised to lock up people pending deportation, canceling President Obama’s “catch and release” policy that allowed illegal immigrants without serious criminal records to roam free in the US. Others were housed in local jails, or other facilities.

Immigration advocates like Kevin Landy, a former ICE assistant director who helped run the agency under Obama, blasted the plan to “temporarily” use federal prisons as “highly unusual” adding that it raises “oversight concerns” – even though the immigrants are only expected to stay for about four months until ICE makes more space available.

“A large percent of ICE detainees have no criminal record and are more vulnerable in a prison setting – security staff and administrators at BOP facilities have spent their careers dealing with hardened criminals serving long sentences for serious felonies, and the procedures and staff training reflect that,” he said. “This sudden mass transfer could result in some serious problems.”

[…]

“Our federal prisons are set up to detain the worst of the worst. They should not be used for immigration purposes,” said Ali Noorani, the executive director of the National Immigration Forum.

“Federal prisons are for hardened criminals. They are not physically set up for immigrant landscapers looking for a job or fleeing violence,” Noorani said.

Meanwhile, representatives of prison workers unions complained that they’d been given little time to prepare for the influx of new detainees. ICE data shows the average daily population of detainees in its facilities as of May 26 was 41,134, up from 38,106 in March 2017.

Officials of a prison employees’ union said the influx of ICE detainees, who were arrested at the border or elsewhere in the United States by immigration officials, raises questions about prison staffing and safety.

Union leaders at prisons in California, Texas and Washington state who spoke to Reuters said they had little time to prepare for the large intake of detainees.

At Victorville, the prison getting the largest number of people, workers are moving about 500 inmates in a medium-security facility to make space, said John Kostelnik, local president for the American Federation of Government Employees Council of Prison Locals union.

“There is so much movement going on,” said Kostelnik. “Everyone is running around like a chicken without their head.”

After an initial “Trump lull” after the president defeated Hillary Clinton in an upset victory in November 2016, border crossings have surged again – presumably because immigrants are scrambling to get across before Trump builds the wall. ICE says it’s “working to meet the demand for additional immigration detention space” as the surge overwhelms its current capacity.

“To meet this need, ICE is collaborating with the US Marshals Service, the Bureau of Prisons, private detention facilities operators and local government agencies,” she said. Nearly 51,000 people were arrested crossing the southern border in April 2018 – up from just 16,000 in April 2017. Also, as is often the case, if these detainees end up staying in these federal prisons for more than four months, it’ll likely be the fault of Democrats – not Republicans – for holding up funding that would provide ICE with the resources it needs to house all of its detainees.

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Anthony Bourdain Found Dead After Commiting Suicide By Hanging

Just days after Kate Spade, 55, took her life in a tragic suicide by hanging herself in her apartment, moments ago CNN reported that Anthony Bourdain, award-winning celebrity chef, writer and CNN TV host who took viewers “around the world” has died at the age of 61, in an apparent suicide after hanging himself in Paris.

“It is with extraordinary sadness we can confirm the death of our friend and colleague, Anthony Bourdain,” CNN said in a statement Friday morning. “His love of great adventure, new friends, fine food and drink and the remarkable stories of the world made him a unique storyteller. His talents never ceased to amaze us and we will miss him very much. Our thoughts and prayers are with his daughter and family at this incredibly difficult time.”

Bourdain was in France working on an upcoming episode of his award-winning CNN series. His close friend Eric Ripert, the French chef, found Bourdain unresponsive in his hotel room Friday morning.

Bourdain’s obituary from CNN below:

Bourdain was a master of his crafts — first in the kitchen and then in the media. Through his TV shows and books, he explored the human condition and helped audiences think differently about food, travel and themselves. He advocated for marginalized populations and campaigned for safer working conditions for restaurant staffs.

Along the way, he received practically every award the industry has to offer.

In 2013, Peabody Award judges honored Bourdain and “Parts Unknown” for “expanding our palates and horizons in equal measure.”

“He’s irreverent, honest, curious, never condescending, never obsequious,” the judges said. “People open up to him and, in doing so, often reveal more about their hometowns or homelands than a traditional reporter could hope to document.”

The Smithsonian once called him “the original rock star” of the culinary world, “the Elvis of bad boy chefs.”
In 1999 he wrote a New Yorker article, “Don’t Eat Before Reading This,” that became a best-selling book in 2000, “Kitchen Confidential: Adventures in the Culinary Underbelly.”

The book set him on a path to international stardom.

First he hosted “A Cook’s Tour” on the Food Network, then moved to “Anthony Bourdain: No Reservations” on the Travel Channel. “No Reservations” was a breakout hit, earning two Emmy Awards and more than a dozen nominations.
In 2013 both Bourdain and CNN took a risk by bringing him to the news network still best known for breaking news and headlines. Bourdain quickly became one of the principal faces of the network and one of the linchpins of the prime time schedule.

Season eleven of “Parts Unknown” premiered on CNN last month.

While accepting the Peabody award in 2013, Bourdain described how he approached his work.

“We ask very simple questions: What makes you happy? What do you eat? What do you like to cook? And everywhere in the world we go and ask these very simple questions,” he said, “we tend to get some really astonishing answers.”

Bourdain’s death happened after fashion designer Kate Spade hanged herself in an apparent suicide at her Manhattan apartment on Tuesday. Spade was found hanged by a scarf she allegedly tied to a doorknob, an NYPD source said.

Suicide is a growing problem in the United States. The US Centers for Disease Control and Prevention published a survey Thursday showing suicide rates increased by 25% across the United States over nearly two decades ending in 2016. Twenty-five states experienced a rise in suicides by more than 30%, the government report finds.

 

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Markets Slide As G7, EMs, Italy And Apple All Hit In Perfect “Risk Off” Storm

It’s “strange” that the exact same set of concerns that we noted 24 hours ago in our Thursday morning wrap and which sent global stocks and futures higher yesterday as we described in “Stock Euphoria Prevails Despite Gathering G-7, EM Clouds; Dollar Slides“, today those same Emerging Market and G-7 (or rather G-6+1) clouds have led to a sea of red in this morning market and futures monitor.

We close what until today was a mostly euphoric, if for no real reason, week with U.S. stock index futures sliding with Nasdaq 100 minis leading the declines, following Asian and European equities lower.

Of course, trade tensions are front and center on investors’ minds ahead of the Group of Seven leaders summit in Quebec, where President Donald Trump is set to meet with trading partners, or rather “insult” them (see “Trump Lashes Out At Macron, Trudeau Ahead Of “G6+1” Summit“) After Trump’s overnight Twitter tirade vs. Canada and France soured the risk tone further. Furthermore, as Bloomberg reports this morning, Trump will only stay as long as necessary in Toronto, and not a moment longer: the US president will leave the G-7 gathering at 10:30 a.m. on Saturday and put Everett Eissenstat, his deputy assistant for international economic affairs, in charge for the remaining sessions.

Adding to the overnight pain, Apple tumbled as much as 2.3% in German ADR trading after the Nikkei reported that the company warned its supply chain of a drop of around 20 percent in new iPhone component orders.

Meanwhile, the EM rout in the past 48 hours has accelerated, dragging both Brazil and India – which unexpectedly hiked rates yesterday – sending the MSCI EM futures index lower by 3% over the past 2 days.

And as EMs tumbled just hours after Argentina got a $50 billion bailout “standby” loan, the largest in IMF history, capital scrambled out of risk assets and into safe havens, sending the dollar higher, while 10-year Treasury yields dropped as low as 2.89%.

 

The selloff hit all global stocks, with the Stoxx Europe 600 Index declining as almost all sectors were the red after more underwhelming data releases from France and Germany continued a run of poor economic news in the euro area, following a sharp drop in Chinese and Hong Kong shares earlier.  The FTSE MIB is currently the European underperformer, with this risk-off tone exacerbated by internal political tensions hitting Italian assets, currently down 1.7%.

The materials sector (+1.1%) is the current underperformer on softer base metals. Significant stock specific news comes from BT Group (+0.3%), with CEO Gavin Patterson announcing his resignation, with Severn Trent’s (-1.1%) Garfield touted as the successor.

Meanwhile in Asia, the Nikkei 225 (-0.5%) was downbeat as participants digested weaker than expected GDP data which printed at a contraction and in-line with the preliminary reading. Elsewhere, China’s Shanghai Comp. (-1.3%) and HK’s Hang Seng (-1.8%) were the laggards after PBoC operations resulted to a weekly net liquidity drain of CNY 300bln and with participants cautious in anticipation of the Chinese trade data which turned out to be mostly better than expected, although by then the selling had already taken its toll.

  • Chinese Trade Balance 24.9B vs. Exp. 33.8B (Prev. 28.8B)
  • Chinese Imports Y/Y 26.0% vs. Exp. 18.8% (Prev. 21.5%)
  • Chinese Exports Y/Y 12.6% vs. Exp. 11.3% (Prev. 12.9%)

With risk off dominating early trading, the dollar jumped, advancing versus all major peers in early European trade, while 10-year Treasury yields edged lower to 2.91%; Treasury futures surged to day’s high around the time of very large block trade.

At the same time, the euro weakened for the first time in five days following worse-than-expected German industrial production data and as early London flows saw good- sized clips by yen buyers.

In emerging market FX, South Africa’s rand tumbled and bond yields soared as disappointing economic data this week persuaded traders that there’s no chance of a rate increase any time soon.

On Thursday, Brazil’s central bank’s swap sale Thursday wasn’t enough to boost the real, and the country’s stock index slid 3%; for now the Brazilian real is poised at 3.90, just shy of the 4.00 level which BofA predicted is where full blown EM contagion would emerge.

In commodities, oil erased some of the gains seen on Thursday trade, with both WTI and Brent down 0.5%. The fossil fuel is seeing some pressure from a rising USD, as well as a general risk off mood ahead of the G7 summit. In the metals scope, Gold is up on the day as a result of this risk-off tone, with the yellow metal up 0.15%. Copper has retreated for the first time in 6 sessions after hitting 4 ½ year highs following supply disruptions, with profit taking
pressuring the metal down 1% on the day. Steel has slipped from 6 month highs, but these losses are being capped by ongoing supply concerns in China, the metal is currently down 1%

 

Next up on the docket will be a potentially rocky summit of the G-7, where trade disputes are set to showcase a divide between the U.S. and longtime allies. Data include final wholesale inventories for April. No major companies are scheduled to report earnings

Bulletin Headline Summary From RanSquawk

  • US President Trump’s Twitter tirade overnight vs. Canada and France has soured the risk tone
  • Equity bourses all negative and safe-havens bid across the board
  • Looking ahead, highlights include, Canadian jobs report and the beginning of the G7 summit

Market Snapshot

  • S&P 500 futures down 0.6% to 2,759.50
  • STOXX Europe 600 down 0.7% to 383.29
  • MXAP down 0.9% to 174.67
  • MXAPJ down 1.4% to 570.78
  • Nikkei down 0.6% to 22,694.50
  • Topix down 0.4% to 1,781.44
  • Hang Seng Index down 1.8% to 30,958.21
  • Shanghai Composite down 1.4% to 3,067.15
  • Sensex down 0.3% to 35,347.21
  • Australia S&P/ASX 200 down 0.2% to 6,045.18
  • Kospi down 0.8% to 2,451.58
  • German 10Y yield fell 7.2 bps to 0.412%
  • Euro down 0.3% to $1.1761
  • Italian 10Y yield rose 12.1 bps to 2.79%
  • Spanish 10Y yield fell 3.2 bps to 1.439%
  • Brent futures down 0.6% to $77.32/bbl
  • Gold spot up 0.1% to $1,298.97
  • U.S. Dollar Index up 0.2% to 93.64

Top Overnight News

  • Trump tells EU, Canada to take down tariffs or U.S. ‘will more than match’
  • Apple told its supply chain to prepare ~20% fewer components for iPhones debuting in the latter half of this year, compared with last year’s orders, according to people familiar: Nikkei
  • Dollar gains against most Asian currencies as investor worries over EM currencies continue. INR, IDR and PHP lead the weakness — countries with current account deficits. USD/JPY steady as it holds under 110.00. Bloomberg Dollar Spot Index is heading for its first weekly decline since mid-April
  • U.S. 10-yr yield rises 1bp to 2.93% in Asia after ending Thursday 5bps lower. In the U.S. session, Treasury 10-year futures spiked higher in a frenzied period of trading in the New York afternoon, with more than 100,000 contracts changing hands in about three minutes
  • The risk-off mood led the dollar to briefly erase its decline, while buoying havens such as the Swiss franc and Japanese yen. Commodity-linked currencies suffered, including the Australian, New Zealand and Canadian dollars, as risk appetites soured
  • Russian President Vladimir Putin will meet Chinese counterpart Xi Jinping for the first time this year, with the looming U.S.-North Korea summit and the Iran nuclear deal expected to dominate their agenda
  • Indonesia is trying to sell more sovereign bonds to domestic investors as it attempts to wean itself off foreign funding that’s made it one of the more vulnerable emerging markets
  • European Industrial Production m/m: Germany -1.0% vs +0.3% est; France -0.5% vs +0.3% est.
  • Italy to ask for more funds from EU budget: Industry Minister Di Maio
  • China May Trade Balance: $24.9b vs $33.3b est; Exports 12.6% vs 11.1% est; Imports 26.0% vs 18.0% est.
  • Japan 1Q F GDP q/q: -0.6% vs -0.4% est.

Asian stocks traded in the red following a lacklustre performance on Wall St, where the major indices finished mixed as tech underperformed and the Nasdaq pulled back from record levels, although the energy sector was underpinned on oil gains. In addition, lingering tensions concerning US tariffs which threatens to isolate US President Trump at the G7, as well as a Trump tweet tirade against EU and Canada, added to the gloom. ASX 200 (-0.2%) traded indecisive as upside in energy and financials were counterbalanced by weakness in miners, while Nikkei 225 (-0.5%) was downbeat as participants digested weaker than expected GDP data which printed at a contraction and in-line with the preliminary reading. Elsewhere, Shanghai Comp. (-1.3%) and Hang Seng (-1.8%) were the laggards after PBoC operations resulted to a weekly net liquidity drain of CNY 300bln and with participants cautious in anticipation of the Chinese trade data which turned out to be mostly better than expected, although by then the selling had already taken its toll. Finally, 10yr JGBs were flat despite the cautiousness in Japan, while the BoJ’s Rinban operation was also largely ignored with the total amount at a relatively reserved JPY 360bln. PBoC skipped open market operations for a weekly net drain of CNY 300bln vs. last week’s CNY 410bln net injection.

Top Asian news

  • Japan’s Economy Snaps Growth Streak as Consumption Drags
  • Ant Financial Raises $14 Billion as Funding Round Closes
  • Terry Gou’s FII Soars in China Debut After $4.3 Billion IPO
  • Hong Kong Shares Fall Most in Two Weeks as Tencent Fervor Fades

European bourses are all in the red (Euro stoxx 50 -0.86%) as markets exude a risk off tone before the G7 summit later today. This comes after US President Trump struck a confrontational tone vs. Canada and France overnight on Twitter. The FTSE MIB is currently the underperformer, with this risk-off tone exacerbated by internal political tensions hitting Italian assets, currently down 1.7%. The materials sector (+1.1%) is the current underperformer on softer base metals. Significant stock specific news comes from BT Group (+0.3%), with CEO Gavin Patterson announcing his resignation, with Severn Trent’s (-1.1%) Garfield touted as the successor. A Commerzbank and Deutsche Bank merger was rebuked by Deutsche Bank shareholders.

Top European news

  • Germany Working to Prevent ‘Hard Brexit,’ Finance Minister Says
  • BT Chief Gavin Patterson to Depart After Strategy Reset Flop
  • Bulgarian Lawmakers Back $2 Billion Spending on Defense Deals

In currencies, the USD has staged a sharp recovery in early European trade with the DXY back above 93.50 ahead of the G7 summit. Markets are operating with a degree of caution thus far as lingering tensions concerning US tariffs threatens to isolate US President Trump at  the G7. This also comes amid Trump’s latest tweet-tirade against the EU and Canada in which the President accused EU & Canada of using massive trade tariffs and trade barriers against US, and warned both nations to remove them or they will be matched. Subsequently, the broad flight to quality has seen some support for USD and out-muscling of it’s major counterparts with the exception of JPY. USD/JPY is back below 109.50 and its 10DMA at 109.45 with the Japanese currency being guided more by the broader risk-tone rather than weaker than expected GDP data which printed at a contraction and in-line with the preliminary reading. EUR/USD has given back some of its recent gains and is back below 1.1800 as part of a broader USD move with the ECB now in their blackout period. In terms of market expectations, consensus looks for around a 33% chance of Draghi  announcing an enddate for the Bank’s purchases next week with almost 50% seeing July as a more opportune time. Note, this morning saw yet further disappointing data from the Eurozone with German industrial output falling short of expectations. AUD has also fallen victim to the firmer USD with overnight trade data from China unable to prop up the currency. As a reminder, Chinese trade data saw a smaller than anticipated surplus but firm export/import components suggests that recent trade rhetoric from the US has been unable to make a noteworthy impact on data thusfar. From a technical perspective, the next key level to the downside for AUD/USD is at 0.7576 which marks the 38.2% fib of the move from 0.7413 (May 11th low) to 0.7677 (6-week high printed this Wednesday).

In commodities, oil is erasing some of the gains seen on Thursday trade, with both WTI and Brent down 0.5%. The fossil fuel is seeing some pressure from a rising USD, as well as a general risk off mood ahead of the G7 summit. In the metals scope, Gold is up on the day as a result of this risk-off tone, with the yellow metal up 0.15%. Copper has retreated for the first time in 6 sessions after hitting 4 ½ year highs following supply disruptions, with profit taking pressuring the metal down 1% on the day. Steel has slipped from 6 month highs, but these losses are being capped by ongoing supply concerns in China, the metal is currently down 1%.

Looking at the day ahead, the April wholesale trade sales and inventories data are also due. Meanwhile the ECB’s Mersch and Visco will speak throughout the day. Finally the G7 Leaders’ Summit in Quebec is due to begin, ending on Saturday.

US Event Calendar

  • 8:45am: Bloomberg June United States Economic Survey
  • 10am: Wholesale Trade Sales MoM, prior 0.3%
  • 10am: Wholesale Inventories MoM, est. 0.0%, prior 0.0%

DB’s Jim Reid concludes the overnight wrap

I have a friend who works as a pilot and every flight I get on for that airline I always listen out to hear whether he is captaining my plane. Around 99.5% of the time he is not which makes sense given how many pilots they have. However yesterday I heard his dulcet tones as I was squeezed between two people somewhere near the back of a busy flight from Vienna. Unfortunately he was telling the passengers that we were 30 minutes delayed taking off and we could roam about the plane. I went up to the cockpit and said hello. For the next 30 minutes I took over as Captain, wore the cap and chatted in the cockpit. Pictures are available on request. He then made sure I had an upgrade into business. Moral of the story is to know more pilots.

On that basis I better hope that pilots don’t get taken over by robots one day. On that note yesterday, my team published the latest edition of Konzept, Deutsche Bank Research’s flagship magazine. The title of this latest edition is “Will I take your job…or work with you?” and works best with the visual of the menacing stare on the front cover. Robots and rapid automation is the big theme running through this edition. In the opening piece I reiterate my view that a 35 year cycle of depressed global wages is coming to an end due to the levelling off (and an eventual decline) in the size of the global labour force after a multi-decade surge. However a common pushback is that automation or robotics is on the brink of adding to the woes of the worker. History tells us otherwise though, as it’s now 250 years since the first industrial revolution and constant labour saving improvements has had no structural long-term impact on the unemployment rate. So we say, learn to love your robot colleague rather than feel threatened.

I’m pretty confident that a robot would end up scratching their head as much as me doing my job at the moment as there is no way an algorithm can predict a lot of things that are going on in the world today. Whether it be the tweets of Donald Trump, the reaction of Kim Jong-un or Chinese President Xi Jinping, the actions of populists in Italy or perhaps the most unpredictable of the lot where Brexit will end up. More on Brexit later but perhaps something more predictable in recent times was that as global central bank liquidity was withdrawn you would expose weak spots in a world previously cushioned by ultra loose monetary policy for so long. In particular as we’ve discussed before a Fed tightening cycle alone always historically brings some kind of financial crisis. EM seems to have been at the epicentre of this over the last couple of months without the contagion necessarily spilling over into wider markets.

Argentina and Turkey have been heavily in the spotlight of late and now its Brazil’s turn to join in to some degree. The Ibovespa tumbled as much as -6.3% intra-day yesterday before paring losses to close -2.98%, dragged down by uncertainties from the upcoming October election and concerns for a slowing economy. The yields on the 5y and 10y bonds (USD based) jumped 24bp and 16bp respectively.

Meanwhile the Brazilian Real weakened to the lowest since March 16 (-1.4%; -18% CYTD), although losses were slightly pared back as the central bank sold more FX swap contracts yesterday to reduce pressure on the local currency, marking the second time this week where it has gone above the usual daily offer. Later in an unscheduled press meeting, the Central bank chief Mr Goldfajn noted the bank will use all tools available to provide liquidity to FX markets, such as dipping into the country’s $380b FX reserves if necessary, but added the bank will not use monetary policy to control FX rates.

Meanwhile Turkey went against all expectations to hike the one-week repo rate by 125bps. Indeed not a single economist in the Bloomberg survey expected a hike of that magnitude and in fact the consensus was for no change at all. That willingness to be proactive was taken kindly by markets with the Turkish Lira rallying over 2% at one stage, before closing +1.57%. Turkey’s main equity market also finished +2.03% while hard and local currency 10y bonds rallied 15.4bps and 37.0bps respectively.

Whilst clearly not an EM country, Italy’s bond market continues to show some similarities to it in terms of trading patterns. Since the intraday lows seen earlier this week, 2yr yields are now 95.8bps higher (+25.8bp yesterday), with 10yrs 55.5bps higher (+12.3bp yesterday). It’s been a relatively quiet week politically but there’s been some chatter about big supply next week and also fallout from the ECB comments earlier this week, that next week could see the announcement that QE is ending. This was a hawkish surprise given recent events (although only leaves us back to where expectations were a few weeks ago) and Italy has felt the brunt of this in Europe.

Staying in the world of sovereigns, let’s move to the U.K. and Brexit. Although not an immediate market moving event, one of the most significant stories of the last 24 hours has been the release from the UK Government of the Irish backstop proposal. After what sounded like a heated debate between UK PM Theresa May and Brexit Secretary David Davis – with the latter at one stage supposedly threatening to resign – a fudge in the wording of the backstop proposal was incorporated to avert a crisis. The critical reference was “the UK expects the future arrangement to be in place by the end of December 2021 at the latest”. That appeased both Davis and May by committing to a date but not in the legal sense, hence the fudge. Legally though this backstop could commit the U.K. to remain in the Customs Union and other areas of the Single Market indefinitely unless an alternative solution to the Northern Irish border has been found. The text will now be put before the EU government heads later this month where there’s already been some mixed feedback. It’s getting increasingly possible that we’ll get well into the next decade without knowing what type of Brexit we’re going to get by which time anything could happen to politics and/or public opinion or indeed the EU. Food for thought. Sterling chopped around with the various headlines but ultimately retraced losses to finish +0.07%. Gilt yields also rose 2.5bps although the FTSE 100 faded to finish slightly lower (-0.10%).

In the meantime the rest of the world is likely to turn its focus over to Quebec today with the G7 meeting set to get underway. To be fair it’s looking more and more like a G6+1 given the constant stream of comments from world leaders in recent days with President Trump seemingly isolating himself from the rest of the world order. Expect posturing and headlines aplenty but a big question mark at this stage is whether or not there will be a joint communique, with that looking very much up in the air still. The meeting kicks on into tomorrow so we’ll have to see what the weekend brings. Indeed it’s been reported this morning by Bloomberg that Mr Trump will leave early from the summit which is bound to raise eyebrows.

Markets will also have on eye on next week’s packed calendar which includes central bank meetings from the Fed, ECB and BoJ as well as inflation data from around the world. All the action in markets over the last two days has been in bond markets following that coordinated signalling from ECB officials that next week’s meeting is very much a live one for the QE endpoint debate. Yesterday was more of the same with European bond yields, which was higher across the board with the exception of Spain (-2.9bp). Across the region, core 10y bond yields rose c2bp (Bunds +1.9bp; Gilts +2.5bp; OATs +2.4bp) while BTPs (+12.3bps) and Bonos (+7.9bps) underperformed. The two-day move for Bunds now is +11.5bps which is the biggest two-day move since June 2017. Treasuries were boosted by a flight to quality, partly due to concerns over EM and trade tensions with the 10y yields down as much as c9bp intraday before closing at 2.921% (-5.1bp), which more than reversed Wednesday’s sell off. Meanwhile, the Euro (+0.22%) rose for fourth consecutive day and closed at $1.180 for the first time in 3 weeks.

Moving along, equity markets were largely muted which probably reflects the fact that they didn’t have much to work with yesterday. The Stoxx 600 closed -0.24% although did fade from early gains. The same was true for the DAX  (-0.15%) with some suggesting the much softer than expected German factory orders weighed on sentiment (more on that below). In the US the most notable mover was the Nasdaq which retreated from its record high (-0.70%) and finally caved in to some profit taking after rising +3.32% in the four sessions prior to that. The S&P 500 edged -0.07% lower, weighed down by tech and materials stocks. It’s worth noting that Brent oil was a big mover yesterday too, up 2.6% following a drop in Venezuela oil exports and Reuters reporting that OPEC may not discuss an oil supply boost at its upcoming meeting on 22 June.

This morning in Asia, markets are trading modestly lower with the Nikkei (-0.40%), Kospi (-0.58%), Hang Seng (-1.23%) and Shanghai Comp. (-1.25%) all down. Elsewhere, Argentina has secured the largest stand-by arrangement from the IMF ($50bn) to support its economy. As part of the deal, Argentina will now target a new 2019 fiscal deficit of 1.3% of GDP (vs. 2.2% previous) and an inflation of 17%. Over in the US as mentioned above, President Trump noted he will leave the G7 Summit one day earlier, to head off to Singapore where he may sign an accord with Kim to formally end the 1950’s Korean War at their 12th June meeting. Datawise, China’s May trade surplus was less than consensus at $24.9bn (vs. $33.3bn), mainly due to a stronger than expected growth in imports (26% vs. 18% expected).

Now turning to central bankers speak, the dovish BOE Deputy Governor Ramsden who voted against a rate hike in November seemed more upbeat and signalled a shift towards the MPC’s majority view, where further rate hikes “over the forecast period” will be necessary, although he added this was contingent on the incoming data. Elsewhere, he said that while its ‘early days”, data so far suggests the slowdown in 1Q was “temporary” with a period of “unusually subdued” wage growth coming to an end. Further, he is now “more comfortable with the balance of risks around the MPC’s central assumptions than he had been previously”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the April consumer credit increased at the slowest pace in seven months and was below expectations at $9.3bln (vs. $14bln expected), mainly due to a slowdown in non-revolving credit. The weekly initial jobless claims (222k vs. 220k expected) and continuing claims (1,741k vs. 1,735k expected) prints were slightly higher than consensus. In Europe, Germany’s April factory orders fell for the fourth consecutive month and was much weaker than expected (-2.5% mom vs. 0.8% expected), weighed down by domestic orders (-4.8% mom) and big ticket items in the capex sector. DB’s

Marc Schattenberg noted that while the hard data from the retail and  industrial production sectors point to a sustained German growth cycle, he sees only limited catch-up potential for GDP in the second quarter. Elsewhere, the  final reading for the Euro area’s 1Q GDP was confirmed at 0.4% qoq and 2.5% yoy. Meanwhile, the UK’s May Halifax house price index was up 1.5% mom (vs. 1% expected), leading to an annual growth of 1.9% yoy. Finally, Italy’s April retail sales was below market at -0.7% mom (vs. 0.1% expected) while France’s trade deficit was narrower than expectations at -$4.95bln (vs. -$5.1bln).

Looking at the day ahead, the April trade and industrial production in Germany along with Q1 labour costs data are due, while in France April industrial and manufacturing production is due out. In the US the April wholesale trade sales and inventories data are also due. Meanwhile the ECB’s Mersch and Visco will speak throughout the day. Finally the G7 Leaders’ Summit in Quebec is due to begin, ending on Saturday.

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Smoking Not Your Style? Try a Cannabis Cocktail: New at Reason

Even in places where both pot and alcohol are legal to consume, there are legal barriers that typically prevent bars and restaurants from serving anything with THC, marijuana’s main psychoactive ingredient. Instead, bartenders serving pot cocktails infuse their drinks with cannabidiol (CBD), an oil extracted from hemp. CBD delivers a calming “body high” that goes well with alcohol but leaves your mind alone.

That doesn’t mean real pot cocktails are impossible to come by. You just have to make them at home, writes Peter Suderman.

Be sure to check out Reason‘s guide to making pot brownies.

View this article.

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Reason’s Classic Pot Brownies: New at Reason

If pot cocktails aren’t your thing, you might want to check out Katherine Mangu-Ward’s guide to making your own edibles instead. Writes Mangu-Ward:

The hardest part about making pot brownies is the math. When you’re sitting in your kitchen looking at a jar of bud, a box of butter, and a block of chocolate, the whole project can seem daunting. Fear not: Basic arithmetic and baking skills are all you need to produce your very own edibles.

View this article.

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Apple Slides On Report Of iPhone Order Cuts, Drags Nasdaq Lower

Remember when a few months ago Apple stock slumped amid reports of slumping iPhone 10 demand and a weak orderbook, but investors were quick to forget all about Apple’s growing troubles when Tim Cook’s record stock buyback announcement and Warren Buffet latest investment quickly sent the stock to all time highs even though the fundamentals didn’t justify it? Well, it turns out that despite the generosity of Uncle Warren who is simply chasing after the biggest stock repurchase program he could find, nothing has changed or been fixed at Apple, and this morning Apple’s German ADRs and the stocks of Apple’s European supplier tumbled after Japan’s Nikkei reported that Apple has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the latter half of 2018, “taking a cautious approach toward smartphone shipments compared with last year’s orders, industry sources say.”

“Apple is quite conservative in terms of placing new orders for upcoming iPhones this year,” one of the four sources, who is in the supply chain, told the Nikkei Asian Review. “For the three new models specifically, the total planned capacity could be up to 20% fewer than last year’s orders.”

The U.S. company last year placed orders to prepare for production of up to 100 million units of the new iPhone 8, iPhone 8 Plus and iPhone X, but this year Apple currently expects total shipments of only 80 million units for new models, two people said.

Nikkei also adds that total iPhone shipments, including new and previous generations, declined 1% on the year in the October-December quarter to 77.31 million, Apple’s data showed. The slowdown went beyond Apple, as worldwide smartphone shipments contracted 0.3% to 1.46 billion units in 2017, the first-ever decline in the industry, according to research company IDC.

Some further details:

The Nikkei reported earlier that the U.S. tech titan intends to introduce three new iPhones in 2018. Two will feature the costly organic light-emitting diode screens like the iPhone X, while a cost-effective model keeps the liquid crystal display screen used by the iPhone 8 range. All three models would carry the TrueDepth 3D sensing camera system to activate Face ID similar to the iPhone X model, industry sources say.

Apple’s supply chain was told to prepare earlier for the two OLED models, in hopes of avoiding a delay similar to last year’s, two industry sources said. The company, celebrating the 10th anniversary of the iPhone launch, introduced the premium iPhone X model last year with a price tag starting at $999. But component shortages as well as production quality issues with the 3D sensing feature kept the iPhone X away from shelves until November, more than one month after it was unveiled, likely harming sales of the gadget.

What the Nikkei really meant, is that demand not only for Apple’s high end, high ASP products, but across all Apple products, continues to fade, putting into question just why Apple’s stock is valued at almost $1 trillion.

The news sent Apple’s German ADR sliding as much as 2.1%, which in turn has dragged Nasdaq futures lower. Apple suppliers were also hit, with AMS AG dropping as much as 6.7%, while other European semiconductor stocks including Dialog Semiconductor, STMicroelectronics and Infineon all slipped.

As Nikkei adds, Foxconn remains the largest iPhone assembler for the upcoming models in 2018, and is thus most vulnerable. The company will handle all of the 5.8-inch OLED smartphones, while also holding shares of 80% to 90% for the 6.5-inch OLED model and a 30% order allocation for the LCD version, according to Yuanta Securities Investment Consulting’s supply chain checks. Pegatron, a smaller compatriot to Foxconn, looks to secure 60% of the 6.1-inch LCD offering and 10% to 15% of the 6.5-inch OLED model, while Wistron snares the rest of the orders for this year’s new iPhones.

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Europe’s Nationalism And Trump’s Trade Policies Look Like WWI Prelude

Authored by Mike Shedlock via MishTalk,

In conversations with friends, one thought the current political scene was like the prelude to WWII. Another said WWI.

​

Tuesday evening I struck up a conversation with “Max”, a friend that I frequently see at a Tuesday karaoke bar.

Max is not a reader of my website, so it stuck me when he stated events today remind him of the prelude to WWII. Max is aware of Trump’s trade policies and disputes with Canada and Mexico, but he was not aware of immigration problems in Italy.

Wednesday afternoon, I mentioned that conversation in a podcast with Peak Prosperity’s Chris Martenson. Chris said Max’s comment was quite appropriate but the setup was more like WWI.

Chris is correct. The parallels to WWI are quite amazing.

Seven Causes for WWI

After the podcast with Chris, a bit of digging led me to 7 Causes of the First World War.

It was point number 7 that caught my attention.

7. People Being People

Canadian historian Margaret Macmillan has published a major book, The War That Ended Peace (2013), which presents a synthesis of many different factors: alliances and power politics; reckless diplomacy; ethnic nationalism; and, most of all, the personal character and relationships of the almost uncountable number of historical figures who had a hand in the coming of war.

War That Ended Peace

The above snip led me to the PDF synopsis on The War That Ended Peace.

So you would have thought that increased trade between Britain and Germany would have fostered that sense of having something in common. In fact, it didn’t. What common trade did sometimes was to create fears in both countries that the other was jealous, or that the other was cutting into natural markets.

Nationalism increasingly became a way in which people identified themselves. It was helped by the spread of communications – it was much easier to feel you were part of something called the British nation or the French nation if in your morning newspaper you could read news from all over that nation.

The growth of public opinion was of course fuelled by the spread of communications and literacy, and by the growth of the mass media that made available cheap books and newspapers.

When Italy invaded Libya in 1911, Italians socialists rejected criticism of their government’s “civilising mission”.

We should be warned that with all the best will in the world, clever people, people in positions of power, can make really stupid mistakes. We shouldn’t think we are cleverer than people then, and we shouldn’t think that we can avoid catastrophes. One hundred years later, we should be reminded that people in 1914 thought they’d have a nice short war and could settle things – and didn’t.

​Ethnic Nationalism

​​

  1. Pack Your Bags: Italy Threatens to Deport 500,000 Immigrants

  2. ​Germany Points Finger at “Moochers of Rome”

Power Politics

  1. Constitutional Crisis in Italy as President Rejects Eurosceptic Minister

  2. Spain’s Corrupt Government Falls in Vote of No Confidence

  3. Trump Considers 25% Tariffs on All Auto Imports as Matter of “National Security”

  4. NAFTA is Dead: Trump Seeks Separate Agreements With Mexico and Canada

  5. ​National Security or Insecurity? Trump Tariffs Will Cost 195K to 624K Jobs

Feuds with Allies

Trump Started a Global Trade War Today: Canada, Mexico Responded, So Will Europe

Germany Accuses Italy of “Debt Blackmail”: Hello EU, Time for Reform Expired

​

History Lesson

Please consider Trump invokes War of 1812 in testy call with Trudeau over tariffs

​President Donald Trump and Canadian Prime Minister Justin Trudeau had a testy phone call on May 25 over new tariffs imposed by the Trump administration targeting steel and aluminum imports coming from Canada, including one moment during the conversation in which Trump made an erroneous historical reference, sources familiar with the discussion told CNN.

According to the sources, Trudeau pressed Trump on how he could justify the tariffs as a “national security” issue. In response, Trump quipped to Trudeau, “Didn’t you guys burn down the White House?” referring to the War of 1812.

The problem with Trump’s comments to Trudeau is that British troops burned down the White House during the War of 1812. Historians note the British attack on Washington was in retaliation for the American attack on York, Ontario, in territory that eventually became Canada, which was then a British colony.

War Preparations

In the prelude to WWI every European nation thought war could be prevented if every nation was prepared for it. They were all prepared.

On March 8, in a direct reference to Germany, US President Donald Trump says NATO members that do not meet defense-spending targets will be “dealt with.”

European Commission president Jean-Claude Juncker expressed his desire for a European Army in a State of the Union address.

Conflicting Allies

I have watched with dismay the circular nature of Mideast allies.

The US has friendly relations with Israel, Saudi Arabia, Turkey, and the Iraqi Kurds, most of which are fighting with each other or are in tense relationships at best.

To top it off, Russia has a friendly relationship with Turkey but the EU relationship with Turkey is fading fast.

Note that Turkey is a NATO ally and US missiles are based in Turkey. Meanwhile the EU and Turkey are in a huge feud over immigration and judicial rights.

How is this supposed to work?

Communication

It’s ironic that Margaret Macmillan noted the role of increased communication as a factor in WWI.

Look at all the allegations regarding Russia, Facebook, False News, Google, CNN etc., currently circulating.

Personal Character Hardball

On May 17 2018, I reported Trump Hardball: Europe Pressured to Cancel Russia Pipeline to Avoid Trade War

Flashback July 23, 1914: Austria-Hungary Issues Ultimatum to Serbia.

At six o’clock in the evening on July 23, 1914, nearly one month after the assassination of Austrian Archduke Franz Ferdinand and his wife by a young Serbian nationalist in Sarajevo, Bosnia, Baron Giesl von Gieslingen, ambassador of the Austro-Hungarian Empire to Serbia, delivers an ultimatum to the Serbian foreign ministry.

According to the terms of the ultimatum delivered on July 23, the Serbian government would have to accept an Austro-Hungarian inquiry into the assassination, notwithstanding its claim that it was already conducting its own internal investigation. Serbia was also to suppress all anti-Austrian propaganda and to take steps to root out and eliminate terrorist organizations within its borders—one such organization, the Black Hand, was believed to have aided and abetted the archduke’s killer, Gavrilo Princip, and his cohorts, providing weapons and safe passage from Belgrade to Sarajevo.

Three days later, on July 28, 1914, Austria-Hungary declared war on Serbia, beginning the First World War.

The allies were set. Russia intervened on behalf of Serbia, Germany on behalf of Austria-Hungary, France was an ally of Russia, etc.

You get the picture.

The US, which had no business in the fight at all, actually prolonged the war by entering it. It is unclear if the US and UK even entered on the right side.

Actually, there was no right side, it was none of our business. By medling, we created the ideal backdrop for WWII.

IF Only

David Stockman laments If only the U.S. had stayed out of WWI.

Had President Woodrow Wilson not misled the U.S. on a messianic crusade, Europe’s Great War would have ended in mutual exhaustion in 1917.

Both sides would have gone home battered and bankrupt — but would not have presented any danger to the rest of mankind.

Indeed, absent Wilson’s crusade, there would have been no allied victory, no punitive peace — and no war reparations. Nor would there have been a Leninist coup in Petrograd — or later on, the emergence of Stalin’s barbaric regime.

Likewise, there would have been no Hitler, no Nazi dystopia, no Munich, no Sudetenland and Danzig corridor crises, no need for a British war to save Poland, no final solution and Holocaust, no global war against Germany and Japan — and, finally, no incineration of 200,000 civilians at Hiroshima and Nagasaki.

Nothing Good Comes From War

We do not know what would have happened. But nothing good ever happens from ridiculous wars.

How many times do we have to prove this?

One might have thought that WWI, Korea, Vietnam, Iraq, Libya, Afghanistan, and Syria would be proof enough.

But no!

Trump is itching for a war with Iran and a trade war with the whole world.

Déjà Vu

Trade wars and nationalism are a prelude to real wars. Historically speaking, this is 1913 déjà vu.

That is only an observation, not a prediction. But as with 1914, we better take a different path than the one we are on.

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Ink-ist? Employers Admit Face-Tattoos Lower Your Chances Of Gettting Hired

With American employers lowering their standards – eliminating drug-tests – as the number of job-openings tops the number of job-seekers for the first time in history, it would appear by the aggregate data that getting a job is as easy as fogging a mirror. However, undeterred by how awesome the labor market is, Statista’s Patrick Wagner has some crucial job-getting advice for the average Millennial – don’t get a face tattoo!

Tribal tattoos on your face might scare off employers and hinder your chances of getting a job unless your name is Mike Tyson.

At least that is what a survey by YouGov makes us want to think…

Infographic: Surprise: facetattoos lower your chances of getting hired | Statista

You will find more infographics at Statista

Neck tattoos and inked hands also significantly lower your chances of getting hired.

According to the HRdecision makers taking part in the survey, the safest spot to get a tattoo without risking ongoing unemployment is the lower back.

Anyway, if somebody purposely starts to show off his or her tramp stamp during a job interview, it is highly doubtful whether any employer would stay interested.

We have one question – is this ink-ist? Should there be an affirmative push for more facially-augmented individuals? What about it Howard Schultz?

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