In Latest Shock To Beijing, Chinese Credit Growth Is Lowest On Record

In recent months, China has been desperate to inject more credit into its financial system and failing that, to at least give the impression it is doing that. Recall that last month the PBoC adjusted its definition of aggregate financing (or Total Social Financing) by including net financing through local government special bond issuance, which in turn took place just two months after it added asset-backed securities (ABS) and non-performing loan write-offs into this measure.

Why did China revise its TSF yet again? Simple: the purpose was to “pump up” the credit numbers and telegraph to the market and consumers that Chinese credit is growing faster, and thus represent a stronger economy, than it is in reality. And indeed, the September jump in TSF was driven mainly by a faster local government bond issuance, while based on the previous definition, it fell to a weaker-than-expected RMB1,467bn from RMB1,518bn and below the RMB1,554 consensus, weighed upon by continued contraction of shadow banking financing and a decline in net corporate bond financing.

Fast forward to today when overnight the PBOC reported its latest money and credit data, and even under the latest and broadest definition, October money and credit data surprised sharply on the downside, mainly due to the ripple effects of the initially over-zealous deleveraging programme and despite pressure by regulators on banks to help keep cash-starved companies afloat, pointing to further weakening in the economy in coming months.

And while October is typically a slow month for Chinese credit, growth in key gauges such as total social financing and money supply fell to record lows, reinforcing views that policymakers will need to step up efforts to revive flagging investment.

According to the PBOC, new RMB loans dropped in half to RMB697bn in October from RMB1,380bn in September, with new loans to the corporate sector tumbling to RMB150bn from RMB677bn in September, in which new medium- to long-term loans eased to RMB143bn from RMB380bn, and new short-term loans fell to -RMB113bn from an increase of RMB110bn. New loans to the household sector also eased, to RMB564bn from RMB754bn in September, and its long-term loan component was down to RMB373bn from RMB431bn. New loans to non-bank financial institutions were -RMB27bn from  RMB60bn in September.

Household loans accounted for 80.9% of total new loans in October, versus 54.7% in the preceding month.

One reason for the sharp drop in new loan growth: Chinese banks have become wary of a fresh spike in bad loans after years of pressure from regulators to reduce riskier lending. Last Friday, Chinese bank shares tumbled on fears they will be saddled with more non-performing loans following an unprecedented regulatory directive to allocate one-third of new loans to private companies.

In its financial stability report earlier this month, the central bank highlighted the sharp rise in household debt in recent years, noting it needed to be monitored, which is bizarre coming just as Beijing is hoping to flood the system with even more cheap credit. Analysts have warned the jump could undermine Beijing’s efforts to spur consumer spending.

Outstanding short-term consumer loans rose 37.9 on-year in 2017 and the total household debt to GDP ratio was at 49 percent at the end of last year, the central bank said in the report.

Meanwhile, the far broader aggregate financing index tumbled to RMB729BN from RMB2,168BN in September…

… mainly weighed on by a sharp fall in local government special bond (LGSB) financing (RMB87bn from RMB739bn in September) and continued shadow banking shrinkage. 

In fact, China’s outstanding total social financing (TSF) slowed to 10.2 percent from a year earlier, another all-time low  suggesting the increased lending barely compensates for shrinking “shadow” loans.

The amount of newly increased broad TSF (non seasonally adjusted) was the lowest since October 2014.

As noted above, headline aggregate financing slumped to RMB729bn in October (Consensus: RMB1,300bn) from RMB2,168bn in September. Growth in outstanding aggregate financing slowed further by 0.4% points (pp) to 10.2% Y/Y in October. If central and local government bond financing is included, growth in the aggregate financing measure fell to 10.7% Y/Y to 11.2%.

By category, new entrusted loans and trust loans combined were -RMB222bn in October from -RMB234bn in September, indicating that shadow banking activity continued to contract. Net corporate bond financing rose to RMB138bn from RMB49bn in September, but was still some way off the average October level in 2015-17 of RMB233bn. Net equity financing remained sluggish, at RMB18bn from RMB27bn in September (average October level: RMB62bn).

One key reason for the decline was that local governments had maxed out their bond quotas after a rush of debt issuance in the third quarter, Capital Economics said. After a lengthy clampdown, Beijing has been pushing local governments to spend on infrastructure projects again as part of its growth boosting measures. China will release investment data on Wednesday along with industrial output and retail sales.

Meanwhile, looking at traditional outstanding loan growth eased to 13.1% y-o-y from 13.2% in September (Figure 1), while money supply growth was also markedly weak, in further evidence that companies are reluctant to make fresh investments as U.S. tariffs on Chinese goods add to uncertainties about the demand outlook at home. Broad M2 money supply grew 8.0 percent in October from a year earlier – a record low, and far below the consensus estimates of 8.4%, edging up from September. 

Including central and local government bond issuance, growth of the augmented aggregate financing measure dropped to 10.7% y-o-y in October from 11.2% in September. Both posted the lowest growth on record.

The weaker trend also suggested overall credit conditions in China tightened last month despite recent easing in monetary policy, including moves by the central bank to bring down market interest rates and four cuts in banks’ reserve requirements so far this year.  Indeed, one likely explanation for the shockingly poor new credit numbers is that according to the PBoC’s Q3 monetary policy report last week, weighted average lending rates for general loans and mortgage loans rose to 6.19% pa and 5.72% in Q3, respectively, from 6.08% and 5.60% in Q2, although those for corporate bill financing fell. Rising financing costs signal further downside pressures on investment and property sales, and as a result, Nomura believes that the economy has not yet bottomed.

In its China credit growth commentary, Bloomberg said that the “shockingly” weak new loans number, which was worse than any surveyed economist expected, “explains why policy makers have projected a sense of urgency lately to support growth. It suggests that the credit market is clogged as the government cracks down on shadow banking while lending to private firms has more or less frozen.

Looking ahead, headwinds to growth remain, especially from weakening domestic demand, rising credit defaults, the cooling property market and escalating China-US trade tensions. Although headline activity numbers may have held relatively well in recent months (benefiting from a front-loading of exports and a significant easing of the anti-pollution campaign this winter), Nomura expects a more visible growth slowdown starting from the spring next year.

“With credit growth still cooling, economic activity looks set to come under further pressure in the coming months,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note.  “We expect officials to step up policy easing in response, including benchmark lending rate cuts and off-budget fiscal stimulus.”

Most analysts, however, don’t expect policymakers to cut benchmark rates any time soon, but could step up tax cuts and infrastructure spending to put a floor under the slowing economy.

According to Nomura, further policy easing/stimulus measures that Beijing could pursue include:

  • More direct liquidity injections via RRR cuts, the medium-term lending facility (MLF) and open market operations;
  • Increasing commercial bank loan quotas;
  • More bond issuance and faster fiscal spending, especially on infrastructure investment;
  • Less restrictions on quasi-fiscal measures for infrastructure investment (e.g., public-private partnership projects and policy bank lending);
  • Cutting VAT, corporate income tax and social security tax to boost corporate investment and production; and  
  • Implicitly allowing some major Chinese cities to ease property price controls and scrap other measures that distort the property market.

“October credit data is weaker than expected,” said Merchants Securities analyst Luo Yunfeng. However, Luo believes the room for further policy easing is limited as Beijing remains concerned about controlling debt and financial risks, which were fuelled by past spending binges.

The question, of course, is what happens if China’s credit remains clogged up: that could be a major problem for China, which as discussed over the weekend, already has over 50 million vacant apartments. What is strange is that unlike in 2009, 2012 and 2015 Beijing has shown little appetite for housing-led stimulus – the type that would also bolster the broader emerging markets – as shown see in this chart comparing China’s credit impulse and the number of cities with rising home prices.

This means that infrastructure-led stimulus has far less bang for the buck, according to UBS. And if the new credit injections are unable to make their way into the economy, it’s only a matter of time before home prices follow China’s credit impulse deep in the red, potentially unleashing the biggest housing-led Chinese recession observed in over a generation, one which may or may not be accompanied by a working class insurrection.

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Juul Announces Preemptive Restrictions on Its E-Cigarette Flavors

Today the company that makes Juul e-cigarettes announced a “Youth Prevention Action Plan” that includes withdrawing most of its flavors from brick-and-mortar stores in response with the Food and Drug Administration’s demands that it do something about underage vaping. The concession illustrates the FDA’s power to impose restrictions on e-cigarette manufacturers even without bothering to issue formal regulations.

“We launched flavors like Mango, Fruit, Creme, and Cucumber as effective tools to help adult smokers switch from combustible cigarettes,” Juul Labs says. “However, we are sensitive to the concern articulated by [FDA] Commissioner [Scott] Gottlieb that ‘[f]lavors play an important role in driving the youth appeal,’ and understand that products that appeal to adults also may appeal to youth. As of this morning, we stopped accepting retail orders for our Mango, Fruit, Creme, and Cucumber JUUL pods [from] the over 90,000 retail stores that sell our product, including traditional tobacco retailers (e.g., convenience stores) and specialty vape shops.”

That move goes beyond the restrictions that the FDA is expected to announce this week, which ban e-cigarette flavors except for tobacco, menthol, and mint from stores that admit minors but allow their sale by tobacconists and vape shops. Altria, which makes MarkTen e-cigarettes, has already said it will stop selling pods in flavors other than tobacco, menthol, and mint anywhere until the FDA approves them. The two companies together account for nearly four-fifths of the U.S. e-cigarette market.

It is still not clear what form the FDA’s new rule will take. The National Association of Convenience Stores notes that the Family Smoking Prevention and Tobacco Control Act, the 2009 law that gave the FDA authority over tobacco products, says the agency may not “prohibit the sale of any tobacco product in face-to-face transactions by a specific category of retail outlets.” But since the FDA has threatened to move up the deadline for approval of e-cigarettes or take flavored varieties off the market altogether, it has a lot of leverage to demand changes short of those actions.

In addition to removing most of its flavors from offline vendors, Juul says it is “adding additional age-verification measures to an already industry-leading online sales system that is restricted to people 21 years old” or older; limiting customers to “two devices and fifteen JUUL pod packages per month, and no more than ten devices per year” in an effort to prevent bulk purchases of e-cigarettes that may be diverted to minors; and “attacking the presence of JUUL Labs on social media in two ways—eliminating our own social media accounts and continuing to monitor and remove inappropriate material from third-party accounts.” That last item suggests the FDA can indirectly censor constitutionally protected speech by holding the threat of ruinous regulatory action over the heads of e-cigarette companies.

Juul evidently has calculated that it will do better in the long run by heading off more drastic measures aimed at fighting what the FDA, based on data the public still has not seen, describes as an “epidemic” of underage vaping. But the immediate effect will be to limit the options available to smokers who might be interested in switching to e-cigarettes, making these harm-reducing products less accessible and less appealing, which may lead to more smoking-related disease and death.

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Nenner Warns “Dow Is Going Back To 5,000” But “Life Is Not Going To Stop”

Via Greg Hunter’s USAWatchdog.com,

World renowned geopolitical and market cycle expert Charles Nenner said three months ago that interest rates would not rise when everybody else was fearing a spike. Nenner was right.

What is Nenner seeing now? Nenner says, “…we expected a bounce, and there is a better low the middle of December…”

So, we should have a rally into January, but longer term the market is down for a couple of years. I just remember in 2000 when the market tanked, it was an expansion of 11 years, and I still remember on CNBC them saying how could we be so stupid, we thought it would never end. So, it’s the same thing now. The expansion is so long, people think it will never end…

I wouldn’t count on it. Our cycles also show that GDP should go lower, unemployment should go up and inflation is not going to be there.

On the contrary, I am more worried about deflation than inflation when the economy turns down. It’s a whole different ball game than anybody thinks.

Lots of people have been concerned that interest rates are going up, but that is the opposite of what Nenner’s charts show. Nenner says,

“No, interest rates are going down, especially on the long side.”

In the stock market, Nenner is sticking to his long time prediction of a huge correction with a downside target of DOW 5,000. Nenner explains,

“You know that has been my prediction for the last couple of years, and it should take until the end of 2021 to the beginning of 2022. Based on my cycles, it is not going to start happening until the end of this year. On the contrary, we should start some bounces soon…

In the 1990’s, the DOW was 5,000 to 6,000, and don’t think it will be the end of the world. Life is not going to stop.”

On gold, Nenner predicts prices going up during the coming deflation. Nenner says,

It will take a little time to rally, but our target is $2,500 per ounce. People say how can you look for no inflation and also see gold going up in price? If you look at the history of finance, most bull markets in gold were in deflationary periods, not inflationary periods. Why gold in deflationary periods? If everything loses value, people will run to gold because at least they will have something.

On the U.S. dollar, Nenner says, “Short term, the dollar should start getting weaker…”

“I think the dollar in the U.S Dollar Index is around 96, and I think it goes below 96, and I think it will go lower. I think next year the euro will surprise on the upside.”

On the enormous global debt of $250 trillion, Nenner warns,

“In the 1930’s, Roosevelt had the same problem. He had a lot of debt, but because of inflation, he paid maybe 15 cents on the dollar. The problem here is there is no inflation. There is going to be deflation. With liquidity problems, when rates go up, we are really going to have a major problem because the money that you owe doesn’t go down, and you have to pay everything back. That is very concerning.”

Join Greg Hunter as he goes One-on-One with cycle expert Charles Nenner.

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Euro Slides After Italy’s Salvini Says No Change To Budget Proposal; Midnight Deadline Looms

With the midnight deadline for Italy to resubmit its budget proposal to Brussels fast approaching, one of the two men who are effectively running Italy has just offered the clearest suggestion yet that Italy will not change its deficit and growth projections for its 2019 budget plan – setting Europe’s third-largest economy on a path that could lead to billions of fines from Brussels and the prospect of a feared ‘Italeave’.

In comments at the palace of the prime minister, where members of Italy’s council of ministers have been holed up on Tuesday, Deputy Prime Minister and La Lega leader Matteo Salvini told a group of reporters that Italy would move forward with its budget plans, regardless of what Brussels thinks, according to Italy’s ANSA newswire.

Salvini

Reiterating the long-held position of the Italian government, Salvini said Italy’s fiscal stimulus is essential to creating more jobs, offering better pension benefits and cutting taxes for many – but not all – Italians.

“We are working on a budget which guarantees more jobs, more right to a pension, less taxes, not for everyone, but for many Italians. If Europe is ok with that, we’re pleased, otherwise we continue straight ahead.”

If Italy doesn’t submit a new budget proposal with a deficit below 0.8% of GDP, in accordance with EU fiscal rules, the European Commission could seek to punish the populist government by levying billions of euros in fines, a burden that would further strain the finances of a country with the second-largest debt burden in Europe relative to GDP (second only to Greece). Salvini’s comments followed remarks from his co-Deputy PM Luigi Di Maio, the leader of the anti-establishment Five Star Movement, as well as the more measured Economic Minister Giovanni Tria, who both have said that cutting the stimulus would be tantamount to “suicide” for the Italian economy.

And presumably disappointing Q3 growth print, which suggested that the Italian economy stagnated last quarter, have only strengthened the populists’ resolve.

Italy

The euro pared its earlier gains following Salvini’s comments, which effectively confirmed what many have long expected: That the Italians will thumb their noses at the European Commission after it took the unprecedented step of rejecting Italy’s budget proposal last month.

EUR

Meanwhile, Italian redenomination risk, which measures the likelihood that Italy will abandon the euro and resort to using the lira to pay down its debt, ticked higher as the prospect of all-out economic war with the European financial establishment prompted some to question Italy’s future in the eurozone. 

Italy

The upshot: Based on CDS markets, the risk of Italy exiting the euro is soaring.

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Citigroup Moving Long Island Employees To Make Room For Amazon HQ2

Citigroup on Tuesday announced that they will move approximately 1,100 employees out of its offices at One Court Square in Long Island over the first two quarters of 2019. 

The financial giant currently leases 30 floors of the Long Island City tower’s 42 floors, while Amazon wants to use 23 floors according to Bloomberg, citing a person with knowledge of the matter. 

According to the press release, Citigroup will move some of their employees to other floors at One Court Square, while others will end up at their Tribeca headquarters and other nearby offices. 

Citi CEO Michael Corbat said, “given what it would mean to New York and Long Island City to have Amazon establish a significant presence here, we want to do our part to make this possible.” adding “As a company that has been based here since our founding 206 years ago, we couldn’t be happier to welcome Amazon to the great City of New York.” 

Amazon formally announced plans on Tuesday to split its second headquarters between Arlington, VA and Long Island. They will also create over 5,000 jobs in Nashville, Tennessee with a new operations center. 

Between the two HQs, the tech giant invest $5 billion and create more than 50,000 jobs across the two locations, with more than 25,000 employees each in New York City and Arlington, according to a blog post. The new locations will join Seattle as the company’s three headquarters in North America.

***

Some more details: the new Washington, D.C. metro headquarters in Arlington will be located in National Landing, and the New York City headquarters will be located in the Long Island City neighborhood in Queens. Amazon’s investments in each new headquarters will spur the creation of tens of thousands of additional jobs in the surrounding communities. Hiring at both the new headquarters will begin in 2019. The Operations Center of Excellence will be located in downtown Nashville as part of a new development site just north of the Gulch, and hiring will also begin in 2019.

In other words, investing $5BN to grow while getting over $2BN back in direct incentives, with potential upside for more.

Finally, Amazon dedicates a section of its blog post to answer “what role did economic incentives play in Amazon picking these locations and what incentives have been agreed?” and answers: “Economic incentives were one factor in our decision—but attracting top talent was the leading driver. Our agreements with each location may be downloaded:”

  • New York City, New York here
  • Arlington, Virginia here and here
  • Nashville, Tennessee here and here

Read the full blog post from Amazon here.

 

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“Past The Point Of No Return” – Snider Cautions On Contango, Currency, & Contagion

Authored by Jeffrey Snider via Alhambra Investment Partners,

At the end of June, the crude curve really got out of hand. WTI futures had returned to backwardation many months before, and then the eurodollar/collateral explosion May 29 sapped some crude strength. Over the following month, curve backwardation would become extreme as the benchmark price seemed ready to skyrocket.

After getting up near $80 a barrel, the price reversed. During the several weeks of weakness, the futures curve remained in steep backwardation – the expectation that the recovery (narrative) would continue whatever any short-term profit taking.

But as prices did rebound through September, there was already trouble underlying. The curve was changing shape, flattening out even beyond normalizing that pretty ridiculous backwardation spike late June/early July.

WTI would nearly match its earlier high on October 3, by then the curve was already a little threatening becoming unlike its shape from July. Since that day, it’s been a steep incline down in price as the futures curve has shipped back into contango.

It has continued to flatten out at the back and “fish hook” at the front. These are quite concerning signs about perceived future imbalance in the oil markets. Those concerns are not altogether about the oil markets.

Of course, in the booming global economy of the mainstream this is the product of success; too much success. The US is pumping out a record amount of oil and the rest of the world (OPEC) has started to normalize to $100 oil expectations. It’s another supply glut.

Stop me if you’ve heard this before. It should sound very familiar, too familiar. We need only go back four years for all the same general soundbites: the economy is booming, the energy sector is pumping record amounts, and WTI contango is the least of anyone’s concerns.

Obviously, it didn’t quite turn out that way which raises the interesting question as to whether the same mistakes will be repeated. I’d bet they will, right up until the bitter (cycle) end.

If we look at one very close calendar spread, say the 3-month, it can give us a sense of just how far this imbalance might have been running. This particular spread is the difference in contract price between the front month futures price, whatever happens to be first on the board at any given time, and the one three months behind. If either contango or backwardation swings in the opposite direction at a 3-month interval, then that’s something to pay attention to.

This started to happen in October 2014. Oil prices had overall come down from highs in June, and the curve had flattened a little bit through September that year. Then early October.

You might remember those few weeks for other reasons, none of which had anything to do with US shale output. There were collateral disturbances in repo at the end of September 2014 and then the big, disruptive “buying panic” in UST’s on October 15. Global currency markets returned to life for all the wrong reasons, soon to make the disruptions of 2013 appear quaint and lovely by comparison.

When the oil curve started to reshape during that time, WTI (front month) was still ~$95 a barrel. On October 2, 2014, it had fallen to $91.02. Then as the futures market rethought the whole narrative the reappearance of contango would coincide with the oil market’s worst crash since the second half of 2008 (another period fraught with funding and dollar difficulties).

By the time the 3-month calendar spread reached $1 contango (the CL4 contract price $1 more than CL1, the front month) in mid-December, the oil price had dropped 38% from October 2 and was down 48% from the June high. Less than a month later, the 3-month spread was $2 contango with CL1 under $48.

A week after that, on January 15, 2015, the Swiss National Bank shocked the world by removing the franc’s peg to the euro. Though the dollar wasn’t directly involved in that effort, it was the reason for the trouble. I wrote the month before, all the while contango was deepening, about Switzerland’s therefore oil’s setback:

In that respect, the SNB is now in the same kind of conundrum (in opposite directions) as the Banco do Brasil in trying to ward off a currency problem that is not its own. The “dollar” missteps in the past six months are too immense for any one central bank to address. That is the problem here as this is not just a run of “dollar” disorder, though that is the primary symptom and means of “contagion”, but rather the global financial system is in a state of high pessimism and contraction. With currency crises raging all across the planet, it is a desperate warning that too much financial imbalance is unsustainable for the given economic reality as measured against prior economic expectations.

I could have written the same thing yesterday, exchanging Switzerland (no longer pegged to the euro) for China and its RRR fight. The action in oil as eurodollars in December 2014 and January 2015 announced the arrival of the severe stuff. It was only the beginning of what was to come, but by the start of 2015 there was really no chance for things to go any other way. It was past the point of no return.

How close are we to something like that? Inching closer every day, perhaps right on the cusp. Janet Yellen would say throughout the time that these were just “transitory” factors that wouldn’t impede expected global economic acceleration. She would spend the balance of 2016 confused, cautious, and regretting much. Jay Powell says the same thing now, only he hasn’t used the word “transitory” yet. Eurodollar futures are guessing he will at some point.

Contango and currency. But supply glut or something.

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Michelle Obama Felt ‘the Shadow of Affirmative Action’ as Princeton Undergrad

Michelle Obama felt “the shadow of affirmative action” as an undergraduate student at Princeton University, the former first lady writes in her new book, Becoming.

Obama, who graduated in 1985, says she sometimes wondered why she had been accepted into Princeton, a majority-white school, in the first place. “It was impossible to be a black kid at a mostly white school and not feel the shadow of affirmative action,” Obama writes. “You could almost read the scrutiny in the gaze of certain students and even some professors, as if they wanted to say, ‘I know why you’re here.'” This was often “demoralizing,” Obama says, while acknowledging she “was just imagining some of it.”

“It planted a seed of doubt. Was I here merely as part of some social experiment?” she asks.

The former first lady says she gradually realized that affirmative action wasn’t the only way the school filled quotas. “As minorities, we were the most visible, but it became clear that special dispensations were made to admit all kinds of students whose grades or accomplishments might not measure up to the acknowledged standard,” she writes. Obama cites student-athletes, as well as the “legacy kids” who attended Princeton like their “fathers and grandfathers” before them, “or whose families had funded the building of a dorm or a library.”

Princeton probably did use affirmative action to raise enrollment numbers for minority students, but the school apparently didn’t do a great job. “There were so few of us minority kids at Princeton, I suppose, that our presence was always conspicuous,” Obama writes. She adds that this drove her to “overperform” in order to “keep up with or even plow past the more privileged people around” her.

This is not the first time Obama has talked about her experience as a black student at Princeton. In May, she posted on Instagram about how “scary” it was to be a black “first generation college student” at a school consisting of “generally white and well-to-do” students.

She was also interested enough in race relations that she wrote her Princeton senior thesis on the topic. The thesis surveyed black Princeton alumni to see how they “felt about race and identity after being at Princeton,” Obama writes in Becoming. In 2013, National Affairs provided more details on the thesis, which was titled “Princeton-Educated Blacks and the Black Community”:

Black alumni were asked whether they felt “much more comfortable with Blacks,” “much more comfortable with Whites,” or “about equally comfortable with Blacks and Whites” in various contexts during three different periods in their lives—before attending Princeton, while students at Princeton, and after leaving Princeton.

Her senior thesis aside, Obama’s experience at Princeton is a good example of why affirmative action policies aren’t a good idea. Citing Jonathan Haidt, a social psychologist and professor at New York University, Reason‘s Robby Soave explained in 2016 that racial quotas can cause white students to look down on their black classmates. Soave wrote:

[W]hen administrators artificially sort people according to race in a manner ordained by race-based college admissions, they will inflame tensions by creating a false race-based achievement gap. In this way, efforts to increase diversity and combat racism are actually worsening the problem.

To be clear, Obama certainly deserved to get into Princeton. By all accounts, she was a brilliant student who went on to become an accomplished lawyer. But the fact that people looked down on her because of Princeton’s affirmative action policies is unfortunate, just as it is for all deserving minority students who wonder whether they’re just filling a quota.

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Amazon Snags $2 Billion in Bribes and Tax Credits From New York and Virginia

Amazon is getting some prime real estate.

In exchange for more than $2 billion in economic incentives, the online shopping giant will locate a pair of new corporate headquarters just across the Potomac River from Washington, D.C., and just across the East River from Manhattan. Tuesday’s much-anticipated announcement of the locations for Amazon’s “HQ2” also included details—which had previously been kept from the public—about the economic incentives that successfully lured the Seattle-based firm to the east coast’s political and economic hubs.

Amazon says it will invest $5 billion and create more than 50,000 jobs across the two new locations, with at least 25,000 employees at each of its new corporate campuses, to be located in Virginia’s Crystal City and New York’s Long Island City. Nashville wins a consolation prize: a new supply chain and logistics center that promises 5,000 jobs in exchange for $102 million in economic incentives.

In New York, Amazon will receive $1.2 billion in refundable tax credits through a state-level economic development program and a cash grant of $325 million that’s tied to the construction of new buildings at the Long Island City location over the next 10 years. In Virginia, the state is ponying up $573 million in tax breaks tied to the creation of 25,000 jobs, and the city of Arlington will provide a cash grant of $23 million over 15 years funded by an existing tax on hotel rooms.

Yes, the numbers are staggering—New York state’s pledge of $1.52 billion for 25,000 jobs works out to more than $60,000 in taxpayer support per new job created—but Amazon appears to have selected New York and the D.C. area based on more than just how many zeroes local officials agreed to put on the giant cardboard check.

After all, New Jersey offered Amazon $5 billion (with another $2 billion from Newark), and Maryland offered $8.5 billion. Yet Amazon passed them both over to pick their neighbors.

“At the end of the day, it suggests that even New York City and Virginia and Nashville didn’t really need to offer those subsidies, because Amazon is chasing other factors,” Michael Farren, a research fellow at the Mercatus Center, a free market think tank housed at George Mason University, tells Reason. Although most of the Amazon HQ2 bids were kept secret—sometimes in direct violation of state open records laws—Farren’s research estimates that the average offer to Amazon from the 20 finalist cities totaled around $2.15 billion from cities and $6.75 billion from states over the next 15 years.

For that amount of spending, the average state could cut its corporate income tax for all businesses by 29 percent, says Farren. That’s the sort of thing a place like New York (home to one of the nation’s worst business tax climates) could have used. But instead of helping businesses from the Bronx to Buffalo to be more competitive, New York taxpayers will help a wildly successful company bring more jobs to Long Island City.

The fact that Amazon was willing to accept a smaller incentive package for a more ideal location should send a message to politicians everywhere. Namely, landing major employers has more to do with running a thriving, sustainable city than it does with how much of other peoples’ money you throw around.

Of course, being close to the seat of political power matters too. Virginia’s deal comes with the unwritten promise that Amazon will be just a stone’s throw away from not only the country’s top lawmakers, but from the most important lobbying firms too. It’s yet another unfortunate side effect of an all-powerful central government that seemingly draws all aspects of American life closer to it, both literally and metaphorically.

Add to that the fact that New York City has been the center of American economic and cultural life for hundreds of years. When it comes right down to it, Amazon’s decision to plop down new headquarters in these two locations is something of a no-brainer. It’s also a symbolic transition for a company that was born in the start-up culture of Seattle but has now become the symbol of American capitalism in the 21st century. Even though most of Amazon’s business can be done from anywhere—indeed, that’s the very essence of Amazon—location still matters.

Of course, the $2 billion in other peoples’ money doesn’t hurt either.

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Merkel Defies Trump, Backs Macron’s Call For European Army

Two days after French president Emanuel Macron snubbed President Trump, slamming nationalism as the antithesis of patriotism during a closely watched speech with Trump sitting just a few feet away, and which prompted a flurry of provocative and taunting tweets by the US president demanding that Europe pay for its own defense (or else Paris would now be speaking German), Germany’s Angela Merkel set out her own vision of a more assertive European Union, one which aligned with that of Macron and included a European army.

Donald Trump has for the second time blasted Emmanuel Macron’s call for a “real European army

After spending the weekend commemorating the end of World War I in Paris alongside more than 60 global leaders and witnessed first hand the tensions between Trump and France’s Emmanuel Macron, the normally understated chancellor took an uncharacteristically bold stance as she addressed EU lawmakers in Strasbourg.

In Paris, Merkel defended her world view against the U.S. president’s barbs as he sparred with Macron. And, as Bloomberg reports, she went a step further in the EU parliament on Tuesday, telling deputies they need to adapt to a world in which Europe’s traditional allies may no longer guarantee the continent’s security.

“We should also work on the vision of one day creating a genuine European army,” Merkel said. “The times in which we could unconditionally rely on others are over.”

While most europhile lawmakers applauded, the comments drew loud jeers from euroskeptic lawmakers at the margins of the chamber.

Meanwhile, as reported earlier, on Tuesday Trump unleashed another torrent of tweets, grousing about the perceived slights from his weekend in Paris. At 6:50 a.m. in Washington, he tweeted another attack on the French leader, mocking the idea of a European army and implying that the French had needed the U.S. to rescue them from the Germans in both world wars.

Trump wasn’t done and over the next few hours, the president sent out a series of further jibes, accusing Macron of stirring up controversy to distract from his poor approval rating, complained about French tariffs on U.S. wine and offered an explanation for pulling out of a visit to a military cemetery due to bad weather.

In response, a senior aide to the French president said he was glad that Trump had taken the time to study some history. Former Belgium Prime Minister Guy Verhofstadt gave Trump another history lesson on his own Twitter account.

According to Bloomberg, the French official said he thought the tweets were aimed at Trump’s domestic audience, noting that the two leaders speak several times a week and their relationship is fluid, even if it isn’t always easy.

As for Merkel, the German Chancellor – well aware of the optics of German pushing for an army in light of what happened 100 years ago – insisted that the EU military wouldn’t be directed against NATO allies, but would be “a positive extension of NATO.” 

The German leader has been urging her European colleagues to build new structures that will enable them to stand up for themselves since last year, when Trump castigated NATO leaders in Brussels and withdrew from the Paris climate accord.

Not everyone is on board: the U.K. government, which is negotiating its exit from the EU, won’t support the idea of an EU army, a spokeswoman said.

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Wall Street Expects S&P To Peak At 3,056; Will Rotate Into Bonds When Yield Hits 3.7%

One day after Bank of America released its latest, and quite bearish Credit Investor Survey, on Tuesday the bank has published its latest, and far broader, Fund Managers Survey which polled a total of 225 panellists with $641bn AUM during the period of November 2-8. According to the survey administrator, BofA CIO Michael Hartnett, there were three key takeaways:

  • Investors forecast the S&P500 to peak at 3056 (give or take) and are waiting for the 10-Year yield to reach 3.7% before rotating from stocks into bonds
  • Cash levels fell in Nov… To BofA this suggests that positioning is not bearish enough for Big Low (which will likely take place in Q2 2019 at the earliest)
  • Perhaps most notable is that the allocation to tech plunged to the lowest since Feb’09 even though investors still see “Long FANG-BAT” as the most crowded trade; Meanwhile, investors are long US$ & not yet long global recession

Some more detailed observations together with charts:

On when the market finally tops, investors think the S&P 500 will peak at 3056 (a weighted average of the responses) suggesting 12% upside from today’s level, even though – like the market – this level appears to be rolling over …

…but as BofA notes, 1 in 3 FMS investors (30%) now think US stocks have already peaked, double last month’s reading (16%). This likely also means that there are quite a few who see the S&P rising as high as 3500 or more.

Next, when looking at the big risk cited by credit investors, namely rising rates, Wall Street investors said they don’t expect a rotation from equities to bonds until 3.7% on the 10-year Treasury (also the averaged weighted response); This is about 20bp higher than the response back in April 18.

Contrary to reports of asset liquidations, survey respondents said that their cash level actually fell to 4.7% from 5.1% (just above the avg of the past 10 years of 4.5%) and hovering just above neutral even as investors reportedly stay bearish. To BofA this means that the Cash Rule has been in “buy” territory for the past nine months. As a reminder, the FMS Cash Rule works as follows: when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.

The survey also reveals an interesting split: on one hand, the percentage of FMS investors saying they are net overweight tech has fallen to just 18%, the lowest since Feb’09…

… even though for the 10th consecutive month, “Long FAANG+BAT” (Facebook, Amazon, Apple, Netflix, Google + Baidu, Alibaba, Tencent) remains the answer to what investors believe is the most crowded trade (the August reading was most crowded trade outright since Long USD Dec ’15).

One reason for the revulsion away from tech may be the following: When asked “What do you think will be the best performing asset class in 2019?” the most popular response by far is “non-US equities” (45%), followed by the S&P in distant second at 17%, and commodities third with 15% of respondents.

There was less certainty on the other side: when asked “What do you think will be the worst performing asset class in 2019?” 25% said Corporate bonds, followed immediately by Government bonds with 24%. The S&P was third with 18% of the answers.

In this vein, 61% of respondents expect high-quality to outperform low-quality (up from 59% last month) – a “deep late cycle” prediction, while 46% expect large cap stocks to outperform small cap stocks (up from net 42 last month, and a new 2-year high).

And in another confirmation of a late cycle market, the percentage saying value will outperform growth next 12 months jumped 19% MoM to 39%, the highest since Feb’17

In another surprising twist, even though investors have benefited greatly from corporate shareholder payout generosity, a net 33% of them also think corporate payout ratios are too high, a record high, reflecting concern about US corporate debt, which is also at a record high @46% of GDP.

Taking a step back and looking at the global economy, FMS macro expectations are bearish with 44% of survey respondents expecting global growth to decelerate in the next 12 months, the worst outlook on the global economy since Nov’08.

At the same time, 54% of FMS investors think Chinese growth will slowdown in 2019, the most bearish outlook since Sept’16.

And while they may be bearish, they are not too bearish, as just 1 in 11 (11%) of FMS investors expect a global economic recession in 2019.

One possible reason: too many still believe that inflation and not deflation remains the major concern for the economy: indeed, the consensus view among investors is for higher inflation; net 70% expect core CPI to rise over the next 12 months, but conviction has slipped since the recent peak of 82% in Apr ‘1.

A note for the contrarians: investors are concerned that US stocks, and global healthcare equities are most vulnerable to a deeper bear market; and last domino to drop in ’19 likely US dollar (most overvalued since 2006); trading bulls should play year-end rally via China plays (Eurozone, industrials, materials). That’s because in November, investors bought the Oct correction & increased exposure to US & EM stocks, REITs, and healthcare…but as noted above, the allocation to global tech sector collapsed to lowest level since Feb’09… and despite investors predicting that value will outperform, ominously there have been no signs of investor rotation from tech to “value”, i.e. banks, small cap, industrials, EAF.

In other words, investors continue to say one thing, and do the opposite.

Commenting on the latest survey, BofA’s Michael Hartnett said that “we remain bearish, as investor positioning does not yet signal ‘The Big Low’ in asset markets.”

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