Month: September 2018

“Anatomy Of A Fusion Smear”: WSJ Exposes Dirty Tactics Of “Steele Dossier” Firm

The Wall Street Journal editorial board has thrown one of their former journalists, Glenn Simpson, completely under the bus over his firm’s political hit-jobs for hire – including feeding twice-demoted DOJ official Bruce Ohr damaging “misinformation” in the Trump-Russia investigation. 

Now we’re learning how this misinformation got around, and the evidence points to Glenn Simpson of Fusion GPS, the outfit that financed the infamous Steele dossier. –WSJ

***

Via the WSJ Editorial Board

Anatomy of a Fusion Smear

Democrats and their media friends made false claims about a lawyer.

Cleta Mitchell is a top campaign-finance lawyer in Washington, D.C. This year she’s also been the target of a political and media smear that reveals some of the nastiness at work in the allegations of collusion between the Trump campaign and Russia.

Cleta Mitchell, a partner at Foley & Lardner in Washington, D.C., Feb. 6, 2014. PHOTO: PABLO MARTINEZ MONSIVAIS/ASSOCIATED PRESS

A partner at Foley & Lardner, Ms. Mitchell was astonished to find herself dragged into the Russia investigation on March 13 when Democrats on the House Intelligence Committee issued an interim report. They wrote that they still wanted to interview “key witnesses,” including Ms. Mitchell, who they claimed was “involved in or may have knowledge of third-party political outreach from the Kremlin to the Trump campaign, including persons linked to the National Rifle Association (NRA).”

Two days later the McClatchy news service published a story with the headline “NRA lawyer expressed concerns about group’s Russia ties, investigators told.” The story cited two anonymous sources claiming Congress was investigating Ms. Mitchell’s worries that the NRA had been “channeling Russia funds into the 2016 elections to help Donald Trump.”

Ms. Mitchell says none of this is true. She hadn’t done legal work for the NRA in at least a decade, had zero contact with it in 2016, and had spoken to no one about its actions. She says she told this to McClatchy, which published the story anyway.

Now we’re learning how this misinformation got around, and the evidence points to Glenn Simpson of Fusion GPS, the outfit that financed the infamous Steele dossier. New documents provided to Congress show that Mr. Simpson, a Fusion co-founder, was feeding information to Justice Department official Bruce Ohr. In an interview with House investigators this week, Mr. Ohr confirmed he had known Mr. Simpson for some time, and passed at least some of his information along to the FBI.

In handwritten notes dated Dec. 10, 2016 that the Department of Justice provided to Congress and were transcribed for us by a source, Mr. Ohr discusses allegations that Mr. Simpson made to him in a conversation. The notes read: “A Russian senator (& mobster) . . . [our ellipsis] may have been involved in funneling Russian money to the NRA to use in the campaign. An NRA lawyer named Cleta Mitchell found out about the money pipeline and was very upset, but the election was over.”

A spokesman for Adam Schiff, ranking Democrat on the House Intelligence Committee, says the “Minority did not speak with Mr. Simpson or Fusion GPS about this,” though he declined to disclose who named Ms. Mitchell. Our sources say they can’t remember Ms. Mitchell coming up in any of the documents collected or witness interviews conducted for the investigation. So how did Mr. Schiff get his tip? Fusion’s media friends? Mr. Ohr? The FBI? Fusion GPS and Mr. Simpson did not answer a request for comment.

Ms. Mitchell says the fallout for her goes beyond inconvenience and a false allegation. Mr. Schiff’s team in May sent her a letter demanding testimony and documents, though no one in Mr. Schiff’s office alerted her before naming her in an official document.

She received similar demands from Senate Intelligence Chairman Richard Burr, who wanted Ms. Mitchell to turn over records related to “the transfer of money, or anything of value” between her and several Russians. After Ms. Mitchell in May responded that she had no information related to any of those Russians and accused the committee of being duped by “Glenn Simpson & Co.,” she heard nothing more.

But social media attacks on her haven’t ended. “That allegation impugns my ethical integrity and professional reputation,” she says, one reason she’s calling for Mr. Simpson to be prosecuted for lying to a federal official.

The Russian collusion accusations ginned up by Fusion at the behest of a law firm working for the Clinton campaign haven’t been corroborated despite two years of investigations. But no one should forget the smears that they and their media mouthpieces peddled along the way.

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Germans ‘Too Lazy’ To Counter-Protest “Racist” Demonstrations After Migrants Arrested In Stabbing

Angela Merkel’s foreign minister effectively called Germans lazy for not counter-protesting thousands of angry East Germans who took to the streets of Chemnitz after two migrants were arrested in a fatal stabbing of a German man, reports AP. 

“We have to get off the couch and open the mouth,” said Foreign Minister Heiko Maas in an interview with weekly paper Bild am Sonntag, adding “Our generation was given freedom, rule of law and democracy as a present. We didn’t have to fight for it; (now) we’re taking it too much for granted.”

The demonstrators have been characterized by both German officials and the MSM as “far right” and “neo-nazis” whose protests are racist, after several people were seen giving Nazi salutes. 18 people, including three police officers, sustained injuries during the rallies – while demonstrators clashed with the few counter-protesters who did show up. Some 300 people were arrested, while 11 were hospitalized. 

“If the Hitler salute is shown on our streets today once again, it will be a disgrace to our country,” said Maas. 

Maas’ comments followed Saturday’s demonstrations by about 4,500 far-right protesters in Chemnitz, who were rallying against migration a week after a German was killed in the eastern city, allegedly by two migrants from Iraq and Syria. Around 4,000 leftist protesters also marched through the city in a counter-protest, and 1,800 police officers were deployed to keep the groups apart. –AP

Tensions flared lsat week over Merkel’s 2015 open-border policy of allowing a million asylum seekers into the country, after 35-year-old German carpenter Daniel Hillig was killed last Sunday. Authorities arrested two men in connection with the stabbing; 21-year-old Yousif Ibrahim Abdullah – who was slated for deportation in mid-2016 only to have authorities miss a six-month deadline to do so, and a Syrian man. 

The murder sparked an initial protest in which several people were arrested and injured. 

Michael Kretschmer, Saxony premier, said the failure to deport the stabbing suspect, a 21-year-old Iraqi man with multiple previous convictions, was the responsibility of federal authorities. A 22-year-old Syrian suspect was also arrested. –Reuters

Saturday’s march was led by members of the AfD party, which is staunchly opposed to Merkel’s open-border policies. Right wing groups such as PEGIDA also said they participated in the march to mourn Hillig’s murder after the leaked arrest warrant revealed that the suspects were illegals. AfD and PEGIDA leaders wore dark suits and carried white roses as they began what they referred to as a “mourning march” on Saturday night. 

Off the couch

Leftists began to counter-protest on the other side of town, marching under the slogan “Heart instead of Hate,” in the center of Chemnitz – known as Karl-Marx-Stadt during the Cold War. 

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Don’t Believe Your ‘Lying Highs’

Authored by Sven Henrich via NorthmanTrader.com,

Who are you going to believe? The data or the lying highs?

This summer markets have again ignored all negative news. Be it trade issues, be it indictments and drama on the political front, you name it. Turkey, Venezuela, Argentina, Italy, Brexit troubles, emerging markets, China, who cares? 5 months of straight gains with little volatility not only retesting January highs, but making new index highs in the process.

And if you believe headline AUM driven punditry you are left with the impression that nothing, absolutely nothing, is going to derail a guaranteed ascent of prices. The bullish argument is rooted in US earnings growth which is fantastic given the backdrop of tax cuts. In context new highs are actually not surprising and were expected. A dovish Fed (still running negative real rates & staying accommodative with a cautious slow rate hike path advertised), trade wars are over (they’re not) 24% earnings growth, buybacks galore, nothing matters. Pullbacks are a thing of the past, get long and buy the highs. We can only go up. Perhaps a bit facetious on my part, but that is the general sentiment propagated. “Buy every dip”, “don’t wait for a dip” and above all: “Don’t sell“.

Given all this it’s of little surprise that investor sentiment is back to euphoric levels:

So why the “Lying Highs” label?

Consider the machinations of these markets. 10 years of virtual non stop global central bank intervention repressing rates, causing the TINA (there is no alternative) effect, forcing yield seeking forces to enter risk assets they otherwise wouldn’t (think pension funds). In a world where volatility compression changed the dynamics of price discovery active fund managers increasingly found their human intellect driven choices inferior to a world driven by algos, ETFs, central banks. Dissatisfied investors tired of lagging returns threw in the towel and threw their assets into ETFs. There are now more ETFs than individual stocks. Everything is indexed and automatic allocations keep buying the ever shrinking float that is out there. Shrinking because there are now significantly fewer individual stocks to buy than 20 years ago. Shrinking because record buybacks keep reducing the publicly available shares outstanding to buy.

In a year with over $1.2 trillion in buyback announcements and August seeing the largest amount of buybacks in any given year is it any wonder buybacks are helping to bid a market in an extremely low volume environment? I submit it’s not:

Passive investing funds flow into ever fewer issues and with a lack of alternatives and cash being toxic due to a continued low yield environment people treat their ETF holdings as savings accounts. After all bear markets are a thing of the past and so are corrections, just buy dips. And it has worked. Over and over again.

And it continues to work and hedge funds again find themselves having to chase index performance. Again.

The end result being that we have now entered an age of unprecedented asset price inflation in favor of the few and this trend is producing some rather obscene dislocations.

Consider: Most people will never be millionaires. Ever. No matter how hard they work, or what they do. Talent, circumstances, connections, luck, etc. The right combination and one become a millionaire. It’s even much harder to become a billionaire. On a planet of over 7.5 billion people there are roughly 3,200 billionaires. Some are born into it, some make it happen out of sheer determination and skill, but also because they are at the right place at the right time.

I believe it was Bill Gates who once mused himself that, if he had been born a few years earlier, there wouldn’t have been a computer at the school lab and he would have ended up being an accountant or something like that.

The reason I mention all this: We all are losing track and perspective of the outsized numbers that are thrown about by these markets. I mentioned how almost impossible it is to become a billionaire. Yet one individual added another $5B to his personal wealth this week. In fact it was $5B in just one day. That’s impossible to do in a lifetime for 99.99999% of individuals on this planet no matter what they do. And yet all it took is one stock upgrade.

I’m of course talking about Jeff Bezos:

$AMZN traded to over $2,000 this week, up over 70% from the 1175 level it entered 2018 with. The stock is now trading at a $981B market cap and JPM is pushing a $1.2 trillion valuation. Could well happen, I can’t say. Nothing has ever stopped this stock. It’s got a 3% profit margin and a 3.5% operating margin with a speculative small cap worthy trailing P/E of 158 and a forward P/E of 78 with a market cap near $1 trillion.

Why now the rapid acceleration in these few mega market cap stocks? Because things changed in the past 2.5 years. Record central bank intervention between 2016 and 2017, then tax cuts in 2018 all amidst the trend shift to passive investing all gathered for the perfect storm of money inflows nurtured by a positive business environment. A few stocks dominate in quasi monopoly status, benefitting from low taxes and strong expansion in their respective spaces.

The mechanics of above described market conditions then consequently produce charts like this:

$AMZN, and I’m only using this stock as a prominent example as I could do the same analysis with $MSFT and others, even during its long standing bull career has always managed to eventually reconnect with its quarterly 5 EMA. You can see it on the chart above. Just a basic reconnect with its quarterly 5 EMA implies a 23% correction from here, this is how far price has extended.

And the market cap appreciations we have just witnessed are historic stunners. Consider:

These companies are expanding in market cap size in mere weeks by amounts that dwarf 99% of listed issues on the global stock exchanges.

Status: Bulletproof. That is the action in prices, it is the attitude of investors and Wall Street. Perpetual asset appreciation. Buy 85 daily RSIs now because trillion dollar stocks are risk free.

Case in point $AAPL:

The net result: Stock valuations have again outgrown the size and growth of the underlying economy:

Let me suggest: It will never get better than this. And perhaps not more dangerous than this.

After all consumer confidence just hit its highest reading since October 2000.

Here’s the historic perspective:

It’s almost as if consumers are at their most confident before things turn sour.

It’s been said that price drives sentiment. And if the stock market is an indicator of sentiment then it’s fair to say that we have an extremely optimistic read here.

Yet we know real wages are not keeping up with inflation:

We also know debt levels keep expanding and we know that people feel safe in their ETFs. It’s a toxic combo that I submit will prove to be the achilles heel of the entire construct.

And the construct may be in trouble sooner than one can imagine as there are a number of other issues underlying the construct of this rally and I’ll walk you through some of these.

Let’s start with the bullet proof Nasdaq. New high after new highs, but on a negative monthly divergence:

And look closely. Leadership went from thin to virtually nonexistent. Leadership went from $FAANG to $AA:

$MSFT is still hanging in there in the growth columns, but slowly we are starting some of the previous leaders lag behind. $GOOGL, $FB, $NFLX are below their July highs.

On the larger $NDX we can observe ever weaker relative performance. New highs vs new lows keep getting weaker, the latest highs again showing a surprising drop:

This is also true for the larger market.  While $SPX made new highs there is no expansion in new highs/new lows:

Components above their 200MA also fail to impress:

It’s the kind of weakening of underlying leadership that has spelled coming market trouble in the past.

With that burst to new highs on $NDX and $SPX we should have expected higher readings. But it didn’t happen.

Why? Because many underlying sectors have not made or failed to make new highs.

The list is long:

$NYSE:

Indeed it smells of a failed break above the trend line:

Transports tried twice several times to make new highs, but have failed so far:

$XLI? No new highs:

Utilities? No new highs:

Financials? No new highs:

Semis? No new highs:

The $DJIA? No new highs:

So let me label market highs as unconfirmed and perhaps disproportionally influenced by 3 stocks: $AAPL $AMZN $MSFT all of which are historically vastly overextended:

That’s nearly $3 trillion in market cap in 3 stocks.

Wall Street and investor sentiment largely expects these price expansions to continue into year end:

All that may be true, but let me also offer an alternative perspective here.

As I’ve outlined repeatedly since January we still have technical risk into 3042:

Yet all new highs are coming on negative divergences.

But not only this, but new highs are coming within a stone throws distance from long time trend lines converging on key charts.

Here’s the $OEX, the S&P100:

And here’s the $SPX:

Note the confluence of these trend lines at the January highs.

In this context let me also highlight that volatility has printed a positive divergence on these new index highs, right in context of its descending wedge.

Here’s the $VXO:

The picture that emerges: Relative strength in volatility as markets make new highs on negative divergences with weakening internal participation.

It’s a toxic cocktail mix that has revealed prior bull market highs to be lies and opportunities to sell.

A key test may come for markets in the September/October time frame. If prices can sustain above January highs the 3042 technical zone may well be reached in 2018.

If not the risk dynamic may shift dramatically especially if volatility is breaking out of its wedge pattern:

To summarize: New highs in select sectors are heavily dependent on a few high mega cap tech stocks which are all historically extended. Many sectors are either not confirming new highs or are not making new highs, volatility is showing relative strength and new highs/new lows are not confirming new index highs as volatility is displaying relative strength with fewer stocks above their 200MAs now compared to January.

Sentiment is extremely bullish and investors appear to see little risk in markets while the above factors are unfolding.

Don’t be surprised if this sentiment is tested in the weeks ahead.

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“Nothing But Lies & Deceit” – US Cancels Pakistan Military Aid Over Refusal To Root Out Militants

Amidst slowly deteriorating relations and after pressure to curtail insurgent cross-border activity into neighboring Afghanistan, Pakistan’s routine military aid from Washington has been cut after the vast chunk an originally planned total of $345 million in aid was temporarily suspended.

The Pentagon revealed Saturday that “it has made a final decision” to cancel $300 million in aid to the country — this after another $550 had been stripped by Congress earlier this year, bringing the total withheld from Pakistan to $800 million. 

It appears President Trump is following up on prior personal threats to do just this, as his first tweet of 2018 had charged the longtime US ally with paying back American foreign aid with “nothing but lies & deceit”. He also vowed, “They give safe haven to the terrorists we hunt in Afghanistan, with little help. No more!”

Image via Hurriyet Daily

The Department of Defense made future delivery of the aid conditional on Pakistan’s willingness and success in rooting out Islamist militants seeking safe haven in the country, and who throughout the 17-year war in Afghanistan have attacked US troops and Afghan national forces from across Pakistan’s porous northwest border region. 

Experts have accused Pakistan of allowing the Taliban-linked insurgents to regroup within Pakistani tribal territory when they are under coalition threat, in order to strike again.

When the suspension of aid was announced and outlined on Jan. 1 it was made known that US generals would reassess Pakistan’s anti-terror cooperation later in the year. 

Trump had identified a total figure of foreign aid to the country at “33 billion dollars in aid over the last 15 years,” according to his January statement.

Pakistan meanwhile, has denied the Trump White House’s charges that it’s harboring militants and facilitating cross-border action. According to Reuters, Defense Secretary James Mattis had opportunity to reauthorize the aid this summer, but did not.

You will find more infographics at Statista

Pentagon spokesman Lieutenant Colonel Kone Faulkner told Reuters, “Due to a lack of Pakistani decisive actions in support of the South Asia Strategy the remaining $300 (million) was reprogrammed.” The spokesman noted the DoD would spend the $300 million on “other urgent priorities” pending approval by Congress.

The move comes after this summer the White House announced it would drastically reduce training and educational assistance to the Pakistani military.

It further appears Washington is trying influence Islamabad’s leadership at a crucially sensitive moment of political transition, with famous former cricket player Imran Khan having just taken office as prime minister. 

Meanwhile, Secretary of State Mike Pompeo and General Joseph Dunford are due to arrive in Islamabad on September 5th for high level talks. Mattis told reporters last week that uprooting militants would be a “primary part of the discussion.”

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Dethroning The King: 5 Ways Trump Could Weaken The Dollar

Authored by Viraj Patel and Chris Turner via Think.ING.com,

Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar.

Key messages: Time to consider how Trump could weaken the dollar

  • President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House’s tolerance level

  • We identify five policies that the White House could employ to weaken the dollar: (1) US FX intervention and building out US FX reserves; (2) Changing the rules of the game for the Fed; (3) Ongoing jawboning and talking down the dollar; (4) Pressuring major trading partners to strengthen their currencies; (5) Creating a US sovereign wealth fund.

  • We don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. The best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower.

  • Given that the current loose fiscal, tight monetary US policy mix is inconsistent with a weaker USD, we think that the US administration may find greater success by addressing one of the root causes of recent USD strength – higher US rates. Constant Fed criticism may keep a downside skew in US rates markets when it comes to pricing in Fed policy tightening – and on the margin, help to keep USD strength at bay.

  • In a normal market environment, we think Trump jawboning could weigh on the dollar via a clearout of speculative long USD positions, weakening the power of interest rate differentials in influencing USD crosses and reducing the incentive for overseas investors to take on unhedged USD exposure. If the short-term fundamental USD factors were to wane as well, then we think a clearout of long USD positioning could be worth a 5-7% decline in the trade-weighted USD index.

  • Alternative ways in which the Trump administration could weaken the US dollar – pressuring major trading partners to strengthen their currencies or even the creation of a US sovereign wealth fund – would be more slow-burning and medium-term in nature.

  • Overall, more active steps from the White House to weaken the dollar could serve to knock the top off of an emerging dollar bull trend. Indeed, such active steps send a strong signal about the White House’s current dollar policy. We think the US administration’s implicit desire for a weaker USD that is consistent with its mercantilist US trade policy will inevitably be self-fulfilling over the medium-term – and is one of the reasons why we remain strategically bearish on the US dollar.

“The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar”

-Former US Treasury Secretary Larry Summers (2011)

White House needs a weak dollar for US trade policy consistency

While the first sentence of the above Larry Summers quote is certainly true, the second sentence is up for major debate. It may be difficult for investors to reconcile (i) a White House adamant in narrowing its trade deficit by boosting US competitiveness and (ii) broad-based USD strength. In theory, the two cannot coincide simultaneously.

Yet, whilst the White House has enforced sizeable tariffs on major trading partners in 2018, the dollar has broadly strengthened since April – with fundamental flows outweighing the uncertainty factor over Trump’s dollar policy (see our note USD: Trade War Trap). We suspect the USD’s recent strength – in particular against the Chinese yuan (CNY) – will have grabbed the US administration’s attention, not least as it is incompatible with their current mercantilist policy agenda (see chart showing FX performance since Trump’s inauguration). As we have seen in recent weeks, the President has ramped up verbal jawboning over a strong dollar and higher US rates as the currency has strengthened – suggesting that current USD strength may be at the upper bound of the White House’s tolerance level.

Dollar strength starting to move into White House jawboning territory

ING, Bloomberg. Note: Performance indexed 20 Jan 2017 = 100.

Dethroning the King: President Trump’s toolkit to weaken dollar

Given Washington’s desire to address the US trade deficit and boost domestic competitiveness, we think it now makes sense to consider the tools that President Trump has at his disposal to keep a lid on dollar strength. We identify five policies that the White House could employ to weaken the dollar:

  1. US FX intervention and building out US FX reserves

  2. Changing the rules of the game for the Fed

  3. Ongoing jawboning and talking down of the dollar

  4. Pressuring major trading partners to strengthen the currency

  5. Creating a US Sovereign Wealth Fund

1. US Treasury FX Intervention | Likelihood: Very Low | Impact: Limited

The most direct way in which the Trump administration could seek to weaken the dollar would be to order the US Treasury (via the New York Fed) to conduct FX interventions. This would involve selling dollars and buying foreign currency most likely via the Exchange Stabilization Fund (ESF) – which permits the Treasury Secretary, with the approval of the President, to “deal in gold, foreign exchange, and other instruments of credit and securities” (see Footnote 1). So in theory, the ESF gives the Trump administration the power to buy and sell foreign currencies – without needing any prior approval from Congress.

Would it be this easy for President Trump to intervene in FX markets? Unilateral FX intervention by US authorities would be politically contentious – not only at home but also abroad. US FX interventions have been sparse since the early 1990s (see Figure 1 below) – with the last two occasions in 1998 and 2000 having been coordinated interventions with major central banks to support relatively weaker foreign currencies in disorderly markets (see Footnote 2). The last time US officials unilaterally intervened to weaken the dollar was in the early 1990s.

The main obstacle to effective US FX intervention via this channel is the size and the mechanics of the ESF. For ESF interventions that involve buying FX assets – which have historically largely been in EUR and JPY – USD assets on the ESF balance sheet need to be sold. As of 31 July 2018, there are just over $22.27 billion dollar-denominated assets held on the ESF balance sheet (all in US government debt). Even if the Treasury Secretary instructed all of these to be used to purchase FX assets, the direct impact on a USD market that has a $4 trillion daily turnover would be fairly muted. 

While we will save the technicalities of US FX intervention for a later note, it is worth noting that there are some out-of-the-box ways for the US administration to bypass the ESF technical constraints – as well as any FOMC approval – to increase the pool of funds available to buy FX assets:

  • While the Treasury can instruct the Fed to intervene on behalf of the ESF, it is unable to force the central bank to intervene under the Fed’s own account (SOMA). One exception would be if FX intervention was deemed a national emergency. While in the current environment this would seem absurd, it is not something we can completely rule out given that the current US administration is seeking to enforce tariffs on the grounds of national security.

  • The other way would be for the administration to officially adopt a policy that seeks to build up US FX reserves buffers. While this makes little sense in the current environment – with the USD a reserve currency and the US running a trade deficit, the White House may see the need for a bigger US FX reserves buffer under its strategic plan to boost the US’s role as an exporting nation. While again this sounds absurd, the Trump administration may be able to ‘sell it’ to Congress by simply pointing to other major trading partners which have bigger reserves buffers – and justifying a similar US policy on the grounds of national security. 

Prior US Treasury FX interventions have marked distinct shifts in dollar policy

ING, FRED, US Treasury Department, Bloomberg

Would unilateral US FX intervention be effective?

Even if we engage in this thought exercise, we don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. Over time, economic fundamentals will prevail – and the administration will find it difficult to fight these forces. 

And right now, US officials have an incoherent policy mix to achieve a weaker USD – loose fiscal and tight monetary policy is typically fundamentally positive for any currency in the short-term. Add on top of this the White House’s own trade policy that has seen the imposition of tariffs on major trading partners and fuelled flight-to-safety flows into USD-assets – and one could easily argue that any ‘leaning against the wind’ US FX intervention to weaken the dollar would be futile.

Therefore, in the current US policy environment, we think unilateral FX intervention by the Treasury would at best keep a lid on USD strength. Indeed, the best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower (with the trade-weighted USD flat over this period).

2. Altering the Fed’s mandate | Likelihood: Very Low | Impact: High

Given that the current loose fiscal, tight monetary US policy mix is inconsistent with a weaker USD, we think that the US administration may find greater success by addressing one of the root causes of recent USD strength – higher US rates. Indeed, a more effective way to weaken the USD in the current environment would be to alter the rules of the game for the Fed in a way that would force them to adopt a slower tightening path.

This again provides legislative hurdles; it’s difficult to see Congress passing any change in the Fed’s mandate that would effectively force the central bank to adopt a higher inflation target (note that it is the FOMC that holds the mandate to set the explicit level for the inflation target). However, further criticism from the White House over the Fed’s tightening approach – as we have seen in recent months – could have two indirect consequences: (1) it could in the short-term force the Fed to more likely than not err on the side of caution whenever the decision to raise interest rates is close and (2) it may get the FOMC re-thinking its long-run monetary framework (a debate that is taking place behind the scenes in the academic world). 

The first factor could keep a downside skew in US rates markets over Fed policy tightening – and on the margin, keep USD strength at bay. But in the absence of forcibly changing the rules of the game for the Fed, interest rate differentials will be one of the main drivers for the USD – and like we’ve seen in recent months, can be quite a powerful positive driver for the currency.

3. White House dollar jawboning | Likelihood: High | Impact: Negligible

Given the legislative difficulties in enforcing an active policy to weaken the USD, the most likely thing that we will see from President Trump is ongoing talking down of the dollar and US interest rates. The effectiveness of this has been mixed (see the timeline of Trump dollar talk table below) – and we think the prevailing market conditions matter for whether the impact is sustained. For example, in a fully-fledged risk-off market, negative Trump comments on the USD would have a negligible – and potentially non-existent – short-term impact. 

In a normal market environment, we identify the following channels through which any Trump jawboning could weigh on the dollar:

  • A clear out of speculative long USD positions

  • Reduced power of interest rate differentials in influencing USD crosses

  • Less incentive for overseas investors to take on unhedged USD exposure

  • A small uncertainty premium over White House dollar policy

However, these channels would only have a sustained impact if the short-term fundamental factors were also pointing to a weaker US dollar. If US leading activity indicators continue to come off the boil as they have been in recent weeks (we’ve seen a sharp drop in the ISM, Philly Fed index and Michigan consumer confidence) – then we think the USD could be vulnerable to a sharp positioning adjustment fuelled by weaker cyclical macro dynamics and Trump jawboning. Indeed, similar long USD positioning clearouts in 1H16 and 2H17 have been worth around a 5-7% decline in the trade-weighted USD (BBDXY) index.

Extreme long spec positioning makes USD vulnerable to Trump jawboning

ING estimates, Bloomberg, CFTC. Note: Positioning data as of 14 Aug 2018

White House jawboning would be more potent and effective in the short-term if President Trump – via Treasury Secretary Steven Mnuchin – were to formally end the long-standing ‘strong dollar’ policy. We see the risks of this as being low ahead of the US midterm elections given that it could cause some backlash within Congress and the Republican party. However, the White House officially ending the ‘strong dollar’ policy could mark a distinct shift in USD dynamics – that could have medium-term repercussions, marginally reducing the incentive of real-money investors (central bank reserve managers) to hold excess USD reserves.

A timeline of Trump administration dollar talk

Source: ING FX Strategy, Bloomberg. Note on colour coding: Orange = dollar jawboning; Purple = talking the dollar up

4. Pressure major trading partners to strengthen their currencies | Likelihood: High | Impact: Medium

A simple, yet effective, policy approach that the Trump administration could take to weaken the dollar is by actively encouraging major trading partners to strengthen their domestic currencies. We have already seen the White House tie currency clauses to any new trade deals – with the updated US-South Korea trade agreement (KORUS) a good example.

Indeed, this may also be a tactic that President Trump is currently employing with China on any forthcoming trade deal – with headlines crossing the newswires last Friday that Washington will put pressure on Beijing to “lift” the yuan as part of upcoming talks. The effectiveness here shouldn’t be underestimated; as we’ve argued, a more stable – and even higher – CNY would be transmitted across other closely-linked currencies.

5. A US Sovereign Wealth Fund | Likelihood: Very Low | Impact: Medium

One final and very left-field idea to weaken the dollar – or at least put a lid on dollar strength – would be for President Trump to establish the United States’ very own Sovereign Wealth Fund (SWF). Critics could argue that China was only able to establish its own SWF in 2007 – the China Investment Corporation (CIC) – with an undervalued renminbi and proceeds from its burgeoning FX reserves during that period. The CIC was capitalised with $200 billion of China’s FX reserves in 2007 and now has close to $1 trillion in assets under management.

Typically SWFs have been created by those nations running huge current account surpluses – largely on the back of natural resource exports – and have chosen to save those export proceeds for future generations. Thus the likes of Norway and the Middle East have some of the largest SWFs in the world and conduct regular FX buying operations to prevent those export proceeds driving the domestic currency a lot higher.

Its typical position of a net debtor on the current account would not make the US a conventional candidate for an SWF. But these are unconventional times and were President Trump to instruct the US Treasury to build up FX reserves for the purpose of capitalising an SWF at some future date, the move could serve to knock the top off of an emerging dollar bull trend. 

Bottom line: Weak dollar policy will be self-fullfilling

Overall, more active steps from the White House to weaken the dollar could serve to knock the top off of an emerging dollar bull trend. Indeed, such active steps send a strong signal about the White House’s current dollar policy. We think the US administration’s implicit desire for a weaker USD that is consistent with its mercantilist US trade policy will inevitably be self-fulfilling over the medium-term – and is one of the reasons why we remain strategically bearish on the US dollar.

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Peso Set For Disintegration After IMF Tells Argentina To Stop Using Funds To Support Currency

On May 11, three days after Argentina secured a $50 Billion IMF bailout – the largest in the fund’s history – we jokingly noted that with the peso resuming its slide, an indication the market did not view the IMF backstop as credible, the ECB would need to get involved.

In retrospect, it now appears that this may not have been a joke, because with the Peso plummeting, and surpassing the Turkish Lira as the worst performing currency of 2018 having lost half its value YTD…

… with the bulk of the collapse taking place in August…

… Christone Lagarde had some very bad news for Buenos Aires and Argentina president Mauricio Macri: the IMF now insists that after burning through billions in central bank reserves, Argentina should stop using funds to support the peso, and float it freely.

According to Infobae, the Argentine foreign currency reserves have declined below the level demanded by the IMF, with Argentine authorities selling $2.5BN to support the peso in August; meanwhile the overall level of reserves has slumped even more, approaching the levels before the IMF bailout and failing to prop up the peso which, as shown below, has collapsed in a move reminiscent of what is taking place in hyperinflating Venezuela.

Worse, the Argentine Peso suffered its latest sharp drop in the days after the central bank unexpectedly hiked rates to 60% – the highest in the world – and another indication that the market is firmly convinced that not even the IMF backstop will force Argentina into a painful, and politically destabilizing structural program.

After all it is less than two decades after the IMF tried the exact same playbook with Argentina and the result was a default.

Meanwhile, as the IMF tells Argentina to let the peso “drop dead”, fears of an economic depression are growing, and as Infobae notes, “unable to defuse the bomb left by the Kirchner regime, the government now faces the obligation to make a painful structural adjustment , as has happened so many other times in Argentina. Everything that the government wanted to avoid with its gradualist policies was ushered in by the market: mega-devaluation, high inflation and a collapse in purchasing power” as IMF enforces another round of austerity in Argentina; the same Argentina which defaulted the last time the IMF was in charge. The result, Infobae laments, is well known: “a fall in activity and increase in poverty.”

Even before the IMF comments, the administration of Mauricio Macri was preparing to implement the painful measures, with TN reporting that after a seven-hour meeting with advisers on Saturday to discuss currency crisis, Macri would raise export taxes to take advantage of the one silver lining from the collapsing currency, a boost to Argentine exports, and close 10 to 12 ministries, including Science and Technology, Culture, Energy and Agro-Industry. The president would also remove deputy Cabinet Chiefs Gustavo Lopetegui and Mario Quintana.

Of course, the export taxes mean that much of the peso devaluation will be offset by the government taking its own pound of flesh, as per IMF instructions.

Here Infobae does not mince its words, warning that the result of this tax reform will be disastrous, as next year the tax pressure will increase again, instead of falling, and will add further pressure on the exchange rate that in less than three months has left the country in the middle of a deep recession.

The deterioration is so great, the publication notes, that all the government can do is hope to avoid a knock out blow.

Now event are set in motion that would result in a new default, which would not only have tremendous consequences for an already weakened economy, but also pose a big question mark how president Mauricio Macri reaches the end of his term.

Meanwhile, further pressuring the economy will be the “strong fiscal adjustment” that will be enacted per IMF instructions in 2019. “Start with 0” , explained the Government when asked how it will achieve a fiscal balance.  That would mean not only higher taxes, but slashing spending, and a wave of popular unrest and political chaos. Indeed, as Infobae predicts, the 1.3% primary deficit is now a thing of the past, and the government is hoping to reach levels between 0.4% and 0.5%, “a fiscal goal that is as ambitious as it is difficult to meet.”

But while the government agrees with the IMF on the need to launch a highly unpopular fiscal adjustment, it certainly disagrees on the IMF’s demands that Argentina reserve be used exclusively for the payment of the debt; here the Government insists on the necessity to have flexibility to intervene in the exchange market when it is necessary.

And this is where the IMF’s unexpected order to stop intervening in the peso came in:

There were heated discussions between the staff of the IMF and the president of the Central Bank, Luis Caputo, as the IMF “bureaucrats” were alarmed not only by the rate of rise of the dollar, but by the loss of reserves, Infobae reports.

Specifically, the IMF is alarmed that in August alone, Central Bank reserves fell by $5.3 billion, from $58 billion at the end of July, to just $52.7 billion one month later. This level is $2.5 billion below the goal of reserves that the IMF had “instructed” the Government to keep by the end of September; this has been seen as a “flagrant breach of the commitments promise to Washington”, as the terms of the agreement did not even last three months.

A big reason for this slide is that, as noted above, the Central bank was extremely active in the market, supporting the peso even as it plunged, and intervened through a series of tenders: throughout August, it sold almost $2.5 billion, even as the peso lost over a third of its value in August.

This prompted the IMF to insist on its original idea: the dollar must float freely, the price of the currency must be fixed by the market, and in addition, the Fund’s loan should not be used to finance the flight of capital.” The message is clear: if investors want to buy dollars, make it very expensive for them to do so.

The bigger problem is that the Argentina Central Bank has already lost control: last Thursday, the dollar soared from $34.50 to $42 against the peso, underscoring the fragility of the exchange policy, because even as the central bank sold $400 million, the currency plunged 20%. Then the central bank was forced to urgently sell another $300 million before the USDARS closed at 40.

Hence the dilemma faced by the IMF and Argentina: for the Fund it is essential to preserve to avoid sending a signal of weakness, and leading to a collapse in the local bond market. But for central bank head Luis Caputo, allowing the dollar to rise so quickly leads to an even worse outcome, generating fear among investors and accelerating the collapse of local assets.

Meanwhile, the recent unprecedented rate hike became irrelevant, as it is useless to offer a 60% rate on pesos if the dollar rises 30% or 40% in a month.

Therefore, to Argentina it is essential that the monthly devaluation be well below the level of rates in the coming months. Only then – the bank claims – it will be possible to attract investors who are willing to buy Argentine risk.

“With bonds that yield 11% annually in dollars and bonds in pesos at 60%, it is the ideal time to awaken greed”. But for that to happen it is necessary to ease the panic the behavior of the exchange rate.

That won’t happen if the IMF does not back off its latest position; in fact, if the market sees the peso as no longer having the support of the central bank, the ARS could disintegrate as soon as the Monday open, plunging by a record amount.

This is why the president of the Central Bank, Luis Caputo, and his deputy, Gustavo Cañonero, scrambled to urgently get on the plane to the IMF’s Washington HQ, where Finance Minister Nicolás Dujovne will also bepresent. The Argentina officials will go to Washington to convince the IMF authorities that they need much more leeway to intervene and calm the exchange market.

If they don’t get it, the Emerging Market currency crisis is about to get far worse, and another Argentina default would be inevitable. As Infobae concludes, “it is an open-ended fight that is keeping in suspense not only the negotiators, but all the Argentines who will suffer the ravages of the mega-devaluation of the last month.”

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Out-Of-Warranty Tesla Owners Left With No Choice But To Fix Their Own Cars

Due to a lack of reputable mechanics, widespread service centers and aftermarket parts, some out of warranty Tesla owners are left with no choice but to try and fix their cars themselves. Such was the case of Model S owner Greg Furstenwerth, a self described “Tesla fan”. CNBC detailedhis journey through repairing his own out of warranty Tesla when the company “treated him like [he] didn’t own a Tesla” after his warranty ran out.

Furstenwerth was one of the first Model S owners, pre-ordering in 2013. He was even one of the first in the state of Hawaii to own a Tesla. Like some fans of the company have done after buying their Teslas, he even undertook a cross-country journey to prove that the world did not need gas powered vehicles and that there was nothing to be anxious about regarding the vehicle’s range capabilities.

“Those were the golden years”, according to Furstenwerth. While the Model S was under warranty, he shared his experience in dealing with Tesla service, which was positive. The interactions with the company were plentiful.

“Tesla used to call me,” he told CNBC. “They’d tell me, ‘hey we noticed that there’s something going wrong with your car.’ Or when I had my flat they did their courtesy roadside service. They really took care of me, actually, as an original preorder.”

But when the warranty ran out, so did the personal attention: “…as soon as I exceeded my warranty, the interactions all went away. I was treated like I didn’t really own a Tesla,” he told CNBC. 

Because he was one of the first to have faith and purchase a Model S, he is now being “rewarded” by being one of the firsts who will need to get repairs done to his Tesla while it is not covered under warranty. The number of customers that are falling out of warranty, like Greg, will increase in coming years.

Greg claims that after he fell out of warranty and needed repairs, the company would not offer him a loaner car or a mobile mechanic to help him when he needed to find a service center outside of Seattle, where he lived.

His next quest was to try and find independent mechanics, but he soon found out that there were very few who were willing and able to work on the Model S. He found out along the way that there are only a few mechanics who can fix the Model S, and they generally do it by buying scrap Model S cars and salvaging parts or reverse engineering parts using 3D printers.

This is apparently because Tesla doesn’t make spare parts, diagnostic tools or repair manuals readily available to people trying to perform service on their cars. And due to the modest size of the car fleet, there is also a surprisingly small aftermarket for Tesla parts.

So Furstenwerth was forced to take it upon himself to figure out how to fix his car on his own.

He learned by “taking it apart and putting it together several times” while at the same time visiting online forums that offered suggestions. He was able to find some parts online, but it was tedious work trying to track them down individually. Among his problems since 2013 have been “leaking tail lights, failing door handles, a passenger window behind the driver that fell out of place and faulty wiring in his driver’s side door,” according to the article.

The process was so painful for him that at one point he even “considered destroying the car”.

The original article includes video showing Furstenwerth disassembling and reassembling his own Model S. 

In terms of quality, Furstenworth claims that when he finally got his Tesla open, it was built like a “lego car” and that disassembling and reassembling it was “like putting together legos [and] taking apart legos”.

“If you can put together Legos you can put together a Tesla Model S,” he told CNBC. 

After resorting to having to fix his own car, Greg, like many other loyal Tesla fans, isn’t getting mad at the company. Instead, he is trying to help other Model S owners learn how to fix their own cars, too. Despite this, he has some advice for the company:

“I want to see Tesla wildly succeed,” he says. “I have no problem with them being vertically integrated, and running things the way they do for cars that are in warranty. But if they want to get in the mass market, unless they’re gonna run every single service center in every single small town, there’s no way it’s acceptable to have people for minor issues drive and kill an entire day to go to the service center, just for some free Keurig coffee.”

We can imagine that the reaction of other Tesla owners who aren’t such vehement fans, will be far less supportive.

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UK: Syrian Terrorists Can’t Possibly Be Planning Chemical Weapons False Flag, Because Russia Said They Are

Authored by Caitlin Johnstone via Medium.com,

In a recent meeting with the press, British ambassador to the United Nations Karen Pierce told reporters that it is absolutely unthinkable that the terrorist factions in the terrorist-held Syrian province of Idlib could possibly be planning a terrorist attack using chemical weapons with the intention of blaming it on the Syrian government.

Her reasoning?

Since the Russian government has been warning of this possibility, the exact opposite must necessarily therefore be true.

Yes, really…

“There are many terrorist organizations in Idlib,” a reporter asked as a follow-up to previous questions regarding Russia’s allegations that terrorist factions had received a large batch of chemical weapons which they intend to use in a false flag attack.

“Why do you rule out that they would perpetrate such an attack?”

“Because this story is coming from the Russians,” Pierce responded, with a straight face, and without honking a novelty-sized bicycle horn and saying “Wocka wocka!”

“It is much more likely for this to be a smoke screen for things that the Syrian authorities are planning to do,” Pierce continued. “The way to deal with any terrorists who are in Idlib is to ask the UN to negotiate safe passage, such as has been done before.”

So let’s recap: it is the British government’s official public position that the extremist jihadist factions who have been holing up in their final stronghold preparing for the long-awaited military confrontation in Idlib would have no incentive whatsoever to stage a false flag chemical attack in order to rally western reinforcements against the Syrian government and thereby escape defeat. Far more likely, in the British government’s estimation, is that the warnings of such an attack are a “smoke screen” to cover for the Syrian government’s plan to perpetrate its own chemical attack in order to accomplish the key strategic goal of suffocating a few dozen children. Oh yeah, and terrorists should be given safe passage to areas where they can safely regroup, because that’s the thing that you do with terrorists now.

Never mind that those terrorist factions would stand everything to gain and nothing to lose in a last-ditch false flag attempt to recruit powerful allies to their cause. Never mind that these are actual, literal terrorists who have no qualms about killing civilians in order to advance their cause. Never mind that US National Security Advisor John Bolton has already effectively guaranteed those same terrorists that the US and its allies will join in their aggressions against the Syrian government by publicly announcing that any chemical attacks will be met with the strongest retaliation yet. All of that is invalidated by Russians having said something about it, because if Russians say something, the opposite of what they said must necessarily be true. Because God is drunk and everyone’s crazy.

We’re all familiar with the classic movie trope of the battle scene in which the protagonists have been beaten back and are surrounded by the enemy hordes, awaiting their certain doom, only to hear a trumpet blast and see reinforcements storming over the hills to save the day. The audience is relieved, and they watch with delight as the villains are attacked from both sides and driven off.

Well, the occupiers of Idlib are in that exact situation, except it isn’t heroes who’ve been beaten back and surrounded, and those reinforcements are not coming.

Unless they can arrange a miracle.

This past April the US, UK and France launched airstrikes against Damascus in retaliation for an alleged chemical attack allegedly perpetrated by the Syrian government against civilians in the city of Douma. The strike was launched with no investigation having taken place whatsoever into the nature of the civilian deaths, and subsequent investigation found no evidence implicating the Syrian government in a chemical attack. This is unsurprising, because the Syrian government had no incentive to use chemical weapons in a battle it had already won at that point and every incentive not to provoke the wrath of powerful western military forces just to suffocate some kids to death.

This is all public knowledge. We know with 100 percent certainty that the terrorist militants occupying Idlib have been made 100 percent aware that (A) the US, UK and its allies will launch an aggressive military assault against the Syrian government in response to any reports of chemical weapons use, (B) such a military assault would take place without any investigation into the nature of the chemical weapons use, which would instead be immediately blamed upon the Syrian government, and c) killing the civilians they are holding hostage with chemical weapons is literally their only hope of escaping the military onslaught that the Syrian government and its allies are preparing to launch.

We know all of these things for an absolute fact. Even if you dismiss the intelligence which Russia supplied to the US saying that a false flag chemical weapons attack is being prepared for in Idlib, it is self-evident that the jihadist militants would have every motive to stage one if given the opportunity.

Keep an eye on this one, please. Syria is a key strategic region that the western power alliance has been plotting to take control of for decades, and it is entirely possible that they will pounce on any opportunity to prevent the Syrian government and its allies from shoring up control of the nation and bringing stability to the region. Stay skeptical.

*  *  *

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Trump Allies Fume Over “Political Hand-Grenades” At Hyper-Partisan McCain Funeral

President Trump’s allies, both in Washington D.C. and across the country, are fuming after the funeral for the late Sen. John McCain turned into an anti-Trump rally.

Meghan McCain, along with former Presidents Obama and George W. Bush, used the somber event to take pot-shots at Trump – who was golfing during the ceremony while his daughter Ivanka sat through harsh criticism of her father – seated next to her husband, Jared Kushner.

McCain’s service was, on one level, a return to old Washington civility, with Republicans and Democrats, past presidents, friends and foes gathered in unity. But as its tributes echoed with overt criticism of the president, it only deepened the hostility between the city’s establishment and the outsider in the White House. –Politico

McCain was perhaps Trump’s most prominent nemesis in Washington D.C. – first withdrawing support for Trump during the 2016 election after the Access Hollywood “pussy tape” was leaked, and later hand delivering the infamous “Steele Dossier” to former FBI Director James Comey (who already had a copy). McCain would fly back to Washington D.C. in July of last year to a standing ovation on the Senate floor – only to cast the deciding vote against Trump’s repeal of Obamacare. 

And after Meghan McCain said during her father’s eulogy that “The America of John McCain has no need to be made great again because America was always great,” and former Presidents Obama and Bush took similar veiled shots at the President – albeit without mentioning him by name, Trump’s allies across the country were left fuming. 

Following the Saturday spectacle, Trump campaign adviser Katrina Pierson tweeted: “@realDonaldTrump ran for @POTUS ONE time and WON! Some people will never recover from  that. #SorryNotSorry Yes, #MAGA” 

American Conservative Union Chair Matt Schlapp tweeted: “I hope I have lots of time but if not: anyone can come, will be about God and not politics, and celebrate.”

Others echoed the disgust: 

 We’re sure McCain would have wanted it this way. 

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The Swedish Election Could Get Very Messy: Here’s Why

By Jonas Golterman and Petr Krpata of ING Economics

A stable foundation

Swedish elections are usually fairly staid affairs and historically, have not been all that interesting from a market perspective. When it comes to economic policy, the differences between the mainstream centre-left and centre-right political blocks in Sweden are arguably not all that significant. The centre-left tends to favor welfare spending when in power while the centre-right is more likely to pursue tax-cuts, but both are committed to a sound budget underpinned by a fiscal rule.

Fiscal policy is constrained by a requirement to run a structural surplus of 0.33% of GDP over the economic cycle and keep government debt anchored around 35% of GDP. In practice, this means there is limited scope for any government to pursue radically different fiscal policies. And key long-term decisions (e.g. pension reform) have historically been agreed by consensus among the major parties.

But an unfamiliar situation

This election is unusual though, for two reasons. First, the rise of the far-right Swedish Democrat party has disrupted the traditional left vs right dynamic in Swedish politics, and is likely to make it difficult for anyone to form a stable government after the elections.

Second, this year the Swedish krona (SEK) has become a bellwether for global risk sentiment, depreciating at signs of escalating trade tensions or emerging market stress. The wobbly housing market, a peaking economy, and the ultra-dovish Riksbank have also undermined SEK.

The trade-weighted krona index has depreciated 10% since last autumn. We think that in this environment, domestic political uncertainty could easily become another factor driving SEK volatility.

No one is going to win a majority

Polls have been pretty clear for some time that neither the current centre-left government nor the centre-right opposition alliance is likely to win a majority in September. Both blocks are polling below 40%, and the leading parties on both sides (the Social Democrats and the Conservatives (Moderaterna) are headed for historically poor showings.  

Neither government nor opposition looks likely to gain a majority

In contrast, the populist far-right Sweden Democrats have gone from strength to strength, and are polling around 20% (having only entered parliament in 2010). Some polls even show they could become the largest party, though there is a discrepancy between polls that use self-selecting online panels (which show the far-right winning the largest share) and the standard polls (which have the Social Democrats in first place).

Among the smaller parties, the Greens, the Liberals, and the Christian Democrats are all at risk of missing the 4% threshold for entering parliament. The Christian Democrats, in particular, look to be struggling, though this is a familiar pattern for them and in previous elections they’ve always managed to squeak past the 4% barrier. If one of the smaller parties drops out of parliament it would alter the balance between the two mainstream blocks, but would not leave either much closer to a majority.

Polls by party

Post-election confusion likely

It is hard to say how the post-election negotiations will go. The positions of the main parties during the campaign imply a deadlock: none of the mainstream parties want to work with the Swedish Democrats, the centre-right parties will not govern with the Social Democrats and the Social Democrats will not allow a centre-right government. If the result reflects current polls, these positions imply an impasse.

In 2014 and 2010, neither of the two main blocks had a majority either, but the mainstream parties agreed that the block with the larger vote-share would form a minority government – in effect ignoring the far-right vote.

That is one plausible outcome this time around as well and would result in either a continuation of the current government or a return to the previous centre-right coalition. But there appears to be less willingness on both sides to compromise in this way, and a realisation that ignoring the far-right has only served to strengthen its position.

So two other options are on the table. The Conservatives could chose to govern with support from the far-right. While they have consistently excluded this option, the temptation may become too great post-election (especially if the Conservatives, Christian Democrats and Swedish Democrats win a majority in Parliament).

The other alternative is a centrist coalition led by the Social Democrats with support from the Liberals, Centre Party, and the Greens (and probably implicit support from the Left). A grand coalition between the Social Democrats and the Conservatives is a more remote possibility, given the two parties have always defined themselves in opposition to the other.

In short, the weeks after the election are likely to be very messy. Forming a new government and passing a budget for 2019 could easily take up the rest of the year. New elections, if the deadlock cannot be resolved, are a clear possibility (this almost happened in 2014, and the current situation looks more difficult). That would prolong the period of uncertainty into the first half of 2019.

Economic policy implications

The Swedish economy is doing well. After several years of strong growth, government finances are in good shape (net government debt is below 30% of GDP). Though we see a slowdown ahead, and the potential for a rather nasty downturn if weakness in the domestic economy were to coincide with a global downturn, the immediate situation facing the new government is fairly benign.

Given the fiscal rule, regardless of what shape the next government comes in, fiscal policy will not change materially. Major reforms (a comprehensive tax reform and a new housing policy have been mooted) would likely be undertaken through cross-party consensus, which will be a slow-moving process and likely a story for 2019 or later.

Deliberate disruption (the Swedish Democrats have called for a referendum on EU membership, while the Liberals want Sweden to join the euro) looks unlikely. Neither is a realistic political proposition: polls suggest Swedes are content with the status quo – less than a quarter would support leaving the EU, and less than 20% want to join the euro.

Looking a bit further ahead, a weak minority government could lead to difficulties in some scenarios. If there was a sharp slowdown (for example, due to the housing market taking a turn for the worse, or the global trade war worsening) and difficult decisions had to be taken, a minority government may struggle to take decisive action.

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