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“The Other 1 Percent”: Morgan Stanley Spots A Market Ratio That Is “Unprecedented Even During The Tech Bubble”

“The Other 1 Percent”: Morgan Stanley Spots A Market Ratio That Is “Unprecedented Even During The Tech Bubble”

Authored by Morgan Stanley’s chief equity strategist, Michael Wilson

The Other 1 Percenters

Income inequality has become a hot topic. The top 20% has done exceptionally well over the past several decades, while the average American has not kept pace. Though this is a political issue, it’s also an economic one. As legend has it, Henry Ford paid his workers more so they could afford to buy his cars. Whether that was his real goal or it was just PR, paying employees a better wage is good for the economy, if not the bottom line.

American workers did pretty well during the second half of the 20th century with regard to getting their fair share. Based on the National Income and Products Accounts, employee compensation as a percentage of Gross Value Added held fairly steady between 61% and 65%. But after 2001 that all changed, and labor’s share began to drop until it reached below 57% in 2012.

What happened? While I wouldn’t attribute all of the decline to just one factor, a big driver was globalization. Companies also faced increasing pressure to be more efficient in a world of deflationary pressures. Since 2012, employee compensation has climbed back the the low end of the old range. As the economy recovered from the financial crisis, labor markets tightened and workers have gotten more of the pie. But we’ve also seen a backlash against globalization and further outsourcing. This reaction has resulted in legislation to increase the minimum wage by 20-50% in many states, with inflation-indexed increases in the future.

We have written a great deal about the rise in labor costs over the past year and the negative impact on corporate margins. In fact, this is the primary reason why earnings growth in 2019 was negative for most US companies while the economy enjoyed another strong year of growth driven by, you guessed it, the consumer. In fact, this shift of profits from capital to labor has led to an unbalanced economy in which consumption boomed in 2019 but capital investment growth actually went negative in the second half of the year.

The bottom line is that the average worker is doing well, thanks in part to the higher ratio of corporate earnings coming their way and a tax cut that benefited the middle class more than the rich, given the $10,000 limitation on real estate and state income tax deductions. Generally speaking, this is a good-news story that suggests we are in the process of dealing with income inequality, even if it’s long overdue and may be happening too slowly.

There’s another form of inequality – corporate – that is much less appreciated.

In a world of low growth, limited pricing power and now rising costs, it’s clear that bigger is better and scale matters. This is also the main reason why we’ve been underweight US small caps since July 2018, a relative trade that is now up close to 20%. Small-cap companies can’t offset rising labor costs with technology as easily as large caps, nor do they have the same access to the record-low cost of capital.

Finally, the rising regulatory and cyber costs over the past decade favor larger-cap companies, who can spread such costs across a larger revenue base. Against this backdrop, it should come as no surprise that new business formation is still well below pre-crisis levels. In short, the big get bigger as they continue to eat the small guy’s lunch. To me, this is unsustainable and potentially a bigger risk to the economy and markets than the very important issue of individual income inequality.

Markets understand this dynamic, which is why small caps have underperformed so significantly over the past 18 months and, quite frankly, over this entire cycle. But this phenomenon is manifesting itself in other ways. Capital concentration is following corporate inequality like never before. Currently, the top five companies in the S&P 500 (the other 1 percenters) make up 18% of the total market cap.

A ratio like this is unprecedented, including during the tech bubble. During 2019, the net income concentration for the 1 percenters didn’t keep pace with their market cap concentration, similar to what happened during the 1999 concentration peak.

I think this divergence is the result of the extraordinary liquidity being provided by the world’s central banks, which is flowing to the most liquid and largest names in the S&P 500. This also recalls 1999, when the Fed expanded its balance sheet at the end of the year and early in 2000 as a precaution against Y2K disruption.

The bottom line: this income/market cap divergence looks likely to continue over the near term, given the Fed’s expected balance sheet expansion through April. More importantly, if we’re right, these companies will then need to deliver on the income side of the inequality divide or risk a sharp decline in price.


Tyler Durden

Sun, 01/12/2020 – 16:00

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Business Finance

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Esper Contradicts Trump: “Didn’t See” Specific Evidence Of Iran Plot To Attack 4 Embassies

Esper Contradicts Trump: “Didn’t See” Specific Evidence Of Iran Plot To Attack 4 Embassies

When late last week President Trump first referenced a Soleimani-directed plot to “blow up” the US embassy in Baghdad, which during a Friday Fox interview became in the president’s words “I believe it would’ve been four embassies” — senators which had been given a classified briefing Wednesday balked, saying no such intelligence was referenced but should have been if there was evidence.

And now no less than Secretary of Defense Mark Esper appears to have publicly contradicted the White House’s rationale for taking out the “imminent” threat of Qasem Soleimani. Esper told CBS’ Face the Nation on Sunday that he “didn’t see” specific evidence for embassy attacks, while adding that he still believes such an attack was likely.

“The president didn’t cite a specific piece of evidence. What he said was he believed,” Esper said. 

“What the president said was that there probably could be additional attacks against embassies. I shared that view,” Esper said. “The president didn’t cite a specific piece of evidence.”

When pressed on whether intelligence officers offered concrete evidence on that point he said: “I didn’t see one with regards to four embassies.” — Reuters

During a separate CNN interview on Sunday, the Pentagon chief continued to awkwardly dance around the question of whether specific intelligence showed such an attack was being planned. Esper described that Trump merely “believed” it to be the case, while refusing to confirm any particular intelligence. 

But earlier statements of Secretary of State Mike Pompeo, who before reporters defended Trump’s assertion about the IRGC targeting the embassies, suggested there was specific intelligence. 

When Pompeo was pressed on Friday by reporters over the nature of the “imminent threat” claims, he said: “We had specific information on an imminent threat and that threat stream included attacks on U.S. embassies. Period. Full stop.” And asked about what made it imminent, Pompeo simply said: “It was going to happen.”

At first it was unclear whether President Trump was claiming to have seen specific intelligence outlining such a threat, or perhaps was just speaking generally and in his usual hyperbolic style (“blow up” the embassy) of the pro-Iranian mob’s actions besieging the US embassy in Baghdad days prior to the Soleimani assassination.

The demonstrators had been filmed setting the outer walls of the compound on fire during the chaotic events nearly two weeks ago which resulted in a contingent of Marines rapidly deploying from Kuwait to bolster embassy security. 

So now Esper appears to be saying it was Trump’s personal belief, while Pompeo appeared to base it on “specific information” — in other words direct intelligence. But which is it?

It can’t be both ways. 

Like the Bush administration’s famously evolving rationale for the war in Iraq, are we witnessing the narrative on Iran made up on the fly? 


Tyler Durden

Sun, 01/12/2020 – 15:35

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Politics

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Public Education as Public Indoctrination

Dana Goldstein of New York Times has an interesting article describing how state governments in both liberal California and conservative Texas work to skew school textbooks in favor of their preferred ideologies. Despite their differences, both seek to indoctrinate students rather than present facts in any sort of evenhanded way:

The textbooks cover the same sweeping story, from the brutality of slavery to the struggle for civil rights. The self-evident truths of the founding documents to the waves of immigration that reshaped the nation.

The books have the same publisher. They credit the same authors. But they are customized for students in different states, and their contents sometimes diverge in ways that reflect the nation’s deepest partisan divides.

Hundreds of differences — some subtle, others extensive — emerged in a New York Times analysis of eight commonly used American history textbooks in California and Texas, two of the nation’s largest markets.

In a country that cannot come to a consensus on fundamental questions — how restricted capitalism should be, whether immigrants are a burden or a boon, to what extent the legacy of slavery continues to shape American life — textbook publishers are caught in the middle. On these questions and others, classroom materials are not only shaded by politics, but are also helping to shape a generation of future voters….

Requests from textbook review panels, submitted in painstaking detail to publishers, show the sometimes granular ways that ideology can influence the writing of history.

A California panel asked the publisher McGraw-Hill to avoid the use of the word “massacre” when describing 19th-century Native American attacks on white people. A Texas panel asked Pearson to point out the number of clergy who signed the Declaration of Independence, and to state that the nation’s founders were inspired by the Protestant Great Awakening….

Texas policymakers feel strongly about giving students a positive view of the American economy; since 1995, state law has required that high school economics courses offer an “emphasis on the free enterprise system and its benefits.” That emphasis seems to have made its way into the history curriculum as well.

California’s curriculum materials, by contrast, sometimes read like a brief from a Bernie Sanders rally. “The yawning gap between the haves and have-nots and what is to be done about it is one of the great questions of this time,” says the state’s 2016 social studies framework.

As a result, California textbooks are more likely to celebrate unionism, critique the concentration of wealth and focus on how industry pollutes the environment.

As the article notes, California and Texas are far from unique. Other state governments make similar efforts to use school curricula to promote their ideologies.

These findings should not surprise anyone familiar with the history of public education. From the very beginning, one of its main purposes was indoctrination in the dominant ideology of the day. In nineteenth-century Europe, the goal was often to indoctrinate the population in nationalism. In the US, it was to indoctrinate European immigrants—many of whom were Catholic or Jewish—in what were seen as genuine American values, which at the time incorporated much of the then-dominant versions of Protestantism.

Today, the goals of public-school indoctrination have shifted somewhat. But the fact persists.

This state of affairs throws cold water on the popular notion that we can use public education to solve the problem of widespread political ignorance. In principle, we might be able to increase voter knowledge of government and public policy by improving the school curriculum and requiring a high level of knowledge as a prerequisite to graduation. But, in practice, state education officials are usually more interested in inculcating students with their own preferred ideologies than in presenting facts objective or increasing political knowledge across the board. They especially aren’t interested in combating the partisan and ideological bias that infects many voters’ judgement of political issues, especially in our highly polarized era. To the contrary, they often seek to exacerbate that bias by promoting the agenda of Team Red or Team Blue (depending on who controls the state government in question).

Of course, school officials might take a different approach if voters closely monitored school curricula and refused to reelect politicians who use public school curricula for purposes of indoctrination. But if voters were that knowledgeable and that free of bias, we would not have a problem of political ignorance in the first place!

The prevalence of efforts at indoctrination is likely one of the reasons why levels of political knowledge have been largely stagnant (and low) over the last sixty years, even though the average adult American today has several years more education than was the case in 1960.

Some reformers propose to fix the problem by having one centralized set of education standards for the entire nation. Then, California would no longer be free to promote left-wing indoctrination in its schools, and Texas would no longer be able to inflict the conservative version on its students. But centralization could easily make things worse rather than better. In the status quo, liberal bias in blue state schools is to some degree balanced by conservative bias in red states, and vice versa. With a single centralized national curriculum, any bias it includes would have a nationwide impact on public-school students around the country, and there would be no counterweight to it, except perhaps among the relatively small minority of students (about 10%) who attend private schools.

One oft-overlooked argument for school choice is that it would make systematic indoctrination of schoolchildren more difficult. The danger of uniform nation-wide indoctrination is the main reason why John Stuart Mill opposed state control of schools, even though he favored government subsidization of education for those unable to afford it. He warned that “[a] general State education is a mere contrivance for moulding people to be exactly like one another: and as the mould in which it casts them is that which pleases the predominant power in the government, whether this be a monarch, a priesthood, an aristocracy, or the majority of the existing generation, in proportion as it is efficient and successful, it establishes a despotism over the mind, leading by natural tendency to one over the body.” Mill may have overestimated the degree to which such indoctrination is effective, but he was right to fear that it would happen, and right to worry that it is inimical to genuine efforts to increase public knowledge.

While many private schools no doubt have ideological biases of their own, a voucher system with competing private schools would make it harder to impose one dominant ideology on all or most students simultaneously. Moreover, some private schools try to make a genuine effort to present a range of different views on political issues, and others might promote views that do not align neatly with the current left-right political spectrum. That would increase the overall  ideological diversity  of the education system, even if many individual schools were not ideologically diverse internally. It would be a nice example of Heather Gerken’s notion of “second-order diversity,” under which homogeneity in individual institutions can help increase the overall diversity of the system, and widen the range of options available to people “voting with their feet.”

The prevalence of indoctrination is just one of several reasons why using public education to overcome political ignorance is far more difficult than many people think. I discuss both this problem and other obstacles in greater detail in Chapter 7 of my book Democracy and Political Ignorance.

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What Are The Odds Of No Winner In The Democratic Primaries?

What Are The Odds Of No Winner In The Democratic Primaries?

Authored by Mike Shedlock via MishTalk,

Let’s investigate the possibility no Democratic candidate will amass 50% of the votes resulting in a brokered convention…

It’s not posted yet anywhere I can find, but I am told those are the results of the latest California poll taken in January.

Regardless, let’s assume something like that represents the current state of affairs.

How would that impact the the Democratic primary process?

Proportional Voting

Republicans have winner-take-all rules but the Democrats generally have some sort of proportional allocation typically with a 15% threshold.

In California, 35% of the votes are statewide, the rest by district.

15% Threshold

The above chart is from Nate Silver 538: 15 Percent Is Not A Magic Number For Primary Delegates.

Democrats allocate their delegates proportionately among candidates who get 15 percent or more of the vote in a given state or district. So, for instance, if Bernie Sanders gets 42 percent of the vote in a certain state, Kamala Harris gets 18 percent, Joe Biden gets 14 percent, Pete Buttigieg gets 11 percent, Cory Booker gets 10 percent and Marianne Williamson gets 5 percent, then only Sanders and Harris would get state-level delegates, with Sanders getting 70 percent of the delegates and Harris getting the other 30 percent.

The part that’s easy to miss is in that term state-level delegates. In the Democratic primaries, only about 35 percent of delegates are actually allocated at the state level. The remaining 65 percent are allocated by district — usually by congressional district, although some states use different methods such as by county (Montana and Delaware) or state legislative districts (Texas and New Jersey).

The following discussion explains the weird looking chart and the big jump that happens precisely at 15%.

California Rules

According to the California Democratic Party 2020 Delegate Selection Overview, the California Delegation will send a total of 495 delegates the Democratic National Convention comprised of 416 Pledged Delegates and 79 Unpledged Delegates.

Of the pledged delegates, 90 are at-large (statewide) delegates. Another 54 are pledged party leaders (mayors, legislators, state officials, etc.) committed to candidates who get at least 15% of the vote.

(90+54)/416 = 35%

Of the pledged delegates, 326 are allocated by district. The 15% rule comes into play, but at the district level.

Let’s run the above math based on the latest California poll.

California Statewide Math

  • 24 + 21 + 20 = 65

  • Sanders would get 24/65ths of the statewide delegates (37%)

  • Warren would get 21/65ths of the statewide delegates (32%)

  • Biden would get 20/65ths of the statewide delegates (31%)

  • Sanders would get 33 statewide delegates.

  • Warren would get 29 statewide delegates.

  • Biden would get 28 statewide delegates.

Those are the statewide allocations.

Pledged Delegate District Math

Sanders would get 24% minimum of 326 district delegates.

Warren would get 21% minimum of 326 district delegates.

Biden would get 20% minimum of 326 district delegates.

Those are approximations for two reasons.

Although there is a 15% minimum, that also applies at the district level. It’s possible that Sanders, Warren, or Biden would not get 15% in every district.

It is also possible some candidates get 15% in some districts without hitting the 15% statewide threshold.

Consider the possibility Buttigieg got 15% in half the districts but only 11% statewide. In that case he would get about 7.5% of the 326 or 24 delegates.

Projections

Project something similar three-way splits across Texas, Illinois, Florida, and New York. Guess what? You have no overall winner and thus a “Brokered Convention“.

The Democratic Party’s 1968 convention might have been brokered if Robert F. Kennedy had not been assassinated. He had won four of the primaries including California, but not enough delegates were then selected by primaries to determine the presidential nominee. President Lyndon B. Johnson, who had decided against running for a second full term, still controlled most of the party machinery and used it in support of Vice President Hubert Humphrey, who did not contest the primaries, although two surrogates won their home states. If Kennedy had lived, the convention likely would have been divided between his and Humphrey’s supporters.

The last brokered conventions were Adlai Stevenson (of the 1952 Democratic Party) and Dwight Eisenhower (of the 1952 Republican Party).

A friend of mine says there will never be another Democratic brokered convention.

I think the odds may be as high as 20% this year. Nate Silver has them as a 15% chance right now.

What Would It Take?

Nearly any three-way or four-way split that lasts long enough.

If Sanders, Biden, and Warren hold a 20% threshold through the California primary, that would likely do it.

Even 15% might be enough.

And it would not even take the same three.

For example, Buttigieg might get 15% in Iowa, Illinois, and Indiana. Perhaps Bloomberg gets 15% in New York and Texas. Give Warren 15-20% in California, Illinois, Iowa, etc.

There you have it, a brokered convention.


Tyler Durden

Sun, 01/12/2020 – 15:10

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Politics

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Iran Says De-Escalation ‘Only Solution’ As Anti-Government Protests In Tehran Turn Bloody

Iran Says De-Escalation ‘Only Solution’ As Anti-Government Protests In Tehran Turn Bloody

The government of Iran signaled that they would prefer to de-escalate tensions with the United States following 10 days of military skirmishes during which Tehran shot down a civilian aircraft.

Iranian President Hassan Rouhani told the visiting emir of Qatar that de-escalation is the “only solution” to the regional crisis sparked by the US killing of Iran’s top general, Qasem Soleimani, according to AFP citing the emirate’s ruler.

“This visit comes at a critical time in the region,” said Emir Sheikh Tamim bin Hamad Al-Thani, adding “We agreed… that the only solution to these crises is de-escalation from everyone and dialogue.”

Rouhani, meanwhile, said “Given the importance of security of the region… we’ve decided to have more consultations and cooperation for the security of the entire region.”

Also on Sunday, Hossein Salami, commander of Iran’s Revolutionary Guards, said the missiles it fired last Wednesday on Iraqi bases hosting US troops were not aimed at killing American personnel.

“Our aim was not really to kill enemy soldiers. That was not important,” he told parliament.

The US said no American personnel were harmed in the attacks.

Across the border in Iraq, the military said rockets slammed on Sunday into Al-Balad, an Iraqi airbase where US forces have been stationed, wounding two Iraqi officers and two airmen. –AFP

While millions of Iranians turned out for the funeral of Solemani, Iran’s call to de-escalate comes as waves of anti-government protesters have taken to the streets to demand that Iran’s leaders, including Ayatollah Khamenei, step down over their initially concealing the truth about the airline downing.

After several days of denial, Rouhani on Saturday admitted that “human error” was to blame after a Ukraine International Airlines Boeing 737 was shot down two minutes after taking off from Tehran, killing all 176 people on board. The Guards’ aerospace commander General Amirali Hajizadeh has accepted full responsibility, however demonstrators quickly filled the streets during a Saturday evening memorial at Tehran’s Amir Kabir University and shouted “death to liars!“

On Sunday, President Trump tweeted: “To the leaders of Iran – DO NOT KILL YOUR PROTESTERS. Thousands have already been killed or imprisoned by you, and the World is watching,” adding “Turn your internet back on and let reporters roam free! Stop the killing of your great Iranian people!”

The protests, meanwhile, have gotten bloody;

Seems like Iran sees the writing on the wall and is trying to head off another colorful revolution courtesy of Regime Change, Inc.


Tyler Durden

Sun, 01/12/2020 – 14:45

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“A Ridiculous Choice” – FISA Court Sparks Firestorm, Appoints Conflicted, Anti-Trump Attorney To Oversee FBI Fixes

“A Ridiculous Choice” – FISA Court Sparks Firestorm, Appoints Conflicted, Anti-Trump Attorney To Oversee FBI Fixes

Update: President Trump has also noticed the ridiculous choice of Kris as FBI overseer…

The President appears to be referencing Maria Bartiromo’s report from earlier this morning:

*  *  *

Sharyl Attkisson, via SharylAttkisson.com,  reports that on Friday, the FISA Court posted an order naming anti-Trump lawyer David Kris to “assist the court” in assessing the FBI’s response to the court-ordered cleanup of lapses and abuses identified by Department of Justice Inspector General (IG) Michael Horowitz.

In a report released last month, the IG found FBI officials violated rules, policies and law in their applications to wiretap former Trump volunteer Carter Page. Horowitz testified the FISA surveillance process needs to be fixed “from top to bottom.”

To some, the appointment of Kris is as mysterious as why the FISA Court’s judges failed to flag the FBI abuses on their own.

In social media posts, Kris has called Republican Congressman Devin Nunes “a politicized, dishonest [Intelligence Community] overseer who attempts to mislead.”

“The Nunes memo was dishonest,” said Kris.

“And if it is allowed to stand, we risk significant collateral damage to essential elements of our democracy.” 

He tweeted that Trump and his advisors should be “worried” that the “walls are closing in on him” regarding the Mueller probe.

Kris also bought into the now-disproven conspiracy theory about Trump colluding with Russia and Putin.

But even more importantly, since that time, Kris has advocated for President Trump’s removal.

Kris’s vocal opinions on President Trump and politics present numerous, obvious conflicts of interest.

In addition, Kris writes for the anti-Trump blog “Lawfare” and called Lawfare’s chief, Benjamin Wittes, “incisive.” Wittes is the man who wrote of the need for an “insurance policy” against Trump prior to Trump’s election.

[O]ur democracy needs a health insurance policy…The courts have a few obvious advantages, starting with hundreds of independent judges of both parties whom Trump cannot remove from office and who don’t have to face his supporters in forthcoming elections…The goal…will be to offer a systematic defense of the values the Coalition of All Democratic Forces holds in common and to have the ability to respond rapidly to actions that threaten those values: to forestall such actions in court as long as possible, to whittle them down, and to block those that can be blocked. The goal is to use the courts to render Trump’s antidemocratic instincts as ineffectual as possible.

Benjamin Wittes, blogger, “Lawfare,” Oct. 24, 2016

Wittes is also a friend of ex-FBI Director James Comey who was referred for criminal charges for mishandling and leaking government information in his anti-Trump efforts. (The Justice Department passed up charges, with officials stating they didn’t believe Comey meant any harm.)

IG Horowitz flagged 17 mistakes in the FBI’s surveillance applications against Page and testified, “I think it’s fair for people to … look at all these 17 events and wonder how it could be pure incompetence.”

Likewise, one could look at the FISA Court’s appointment of Kris to help fix things… and wonder whether it could be pure incompetence. 

The latest FISA Court action could be construed as a moment of chilling charity in the ongoing questions about how these abuses could have occurred, and the challenges with fixing them.

“He’s not going to do anything because in the end Kris doesn’t believe there was anything wrong with what went on at the FBI,” said a former law enforcement official.

“His selection by the FISC is how bureaucrats protect themselves and could care less about the American people or the Constitution.”

Additionally, House Intelligence Committee Devin Nunes’ told SaraACarter.com Sunday, that:

“It’s a ridiculous choice. The FBI lied to the FISC, and to help make sure that doesn’t happen again, the FISC chose an FBI apologist who denied and defended those lies. The FISC is setting its own credibility on fire.”

Read the FISA Court order naming Kris below:


Tyler Durden

Sun, 01/12/2020 – 14:20

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With Stocks The Most Overvalued In History, Goldman Lists The 4 Biggest Risks To Stocks

With Stocks The Most Overvalued In History, Goldman Lists The 4 Biggest Risks To Stocks

With the S&P meltup accelerating into the first full week of the new year, Friday’s modest pullback on the subpar December jobs report notwithstanding, sellside strategists are tripping over themselves to come up with even more reasons to justify the risk surge higher despite S&P valuations (price to sales and EV/EBITDA) which are now at all time highs, surpassing the prior dot com peak (which prompted Bloomberg to write “S&P 500 Bulls Make Peace With Valuations at 2018 Meltdown Levels“)…

… even as retail, institutional, and systematic (CTA/risk parity/vol targeting) investors are now all in the market, just as buybacks are rapidly fading.

Sure enough, in his latest Weekly Kickstart note, Goldman’s chief equity strategist, David Kostin writes that “the combination of accommodative monetary policy, low interest rates, range-bound oil prices, and continued economic expansion is constructive for US equities.”

Still, with the massively overbought SPX rapidly approaching not just his (3,400) but the consensus S&P target (3,318) for the end of 2020 less than half a month into 2020, the risk of a “Feb 2018”-like swoon grows with every passing day of the the melt up euphoria, which is probably why to hedge his bets, Kostin lays out four macro risks – and associated equity strategy implications – that can derail the S&P on its path to Goldman’s year-end target of 3,400 (which is less than 4% away from Friday’s close of 3,265), namely

  1. What if the US and Iran enter into a prolonged conflict and oil prices rise?
  2. What if interest rates rise rapidly in 2020?
  3. What if the dollar strengthens this year?
  4. What if economic growth is weaker than we expect?

Below, we take a detailed look at each of these “biggest risks”:

1. What if there is a sustained period of conflict between the US and Iran and higher oil prices? Oil prices initially rose by 4% alongside US-Iran tensions. But Goldman’s commodity strategists believe the current risk premium is already elevated and they expect Brent oil prices will be roughly flat at $63/bbl during the next 12 months. According to Kostin, oil price shocks should have limited impact on S&P 500 returns, given offsetting impacts from higher Energy earnings and higher gasoline prices for consumers. Separately, in terms of geopolitical risk, the S&P 500 shrugged off the developments this week but a prolonged conflict could eventually weigh on US equities. Using the national security component of the US Policy Uncertainty Index, Goldman finds a loose negative relationship between changes in uncertainty and S&P 500 returns (Exhibit 1).  However, previous notable examples of national security uncertainty also coincided with other exacerbating macro events (the first Gulf War and recession, the September 11th attacks and the Tech Bubble unwind).

And while energy stocks have given back their gains, suggesting little investor belief in higher long-term oil prices, Defense and Cybersecurity stocks have rallied. Energy – the cornerstone of all value investing strategies – was the worst-performing sector last year, lagging the S&P 500 by 20%. Here Goldman points out that although Energy equities have diverged from spot oil prices, they trade roughly in line with 10-year oil prices (Ex. 2).

For this reason, Energy sector rallies alongside the Saudi Arabia facility bombing and the most recent US-Iran tensions, which lifted spot prices but not long-dated prices, have been short-lived. Without a sustained supply shock that impacts long-term oil prices, Goldman maintains its underweight recommendation in Energy stocks. In contrast, Aerospace & Defense and cybersecurity firms with business models more clearly linked to geopolitical conflicts have each rallied by 2% (here Goldman notes the stocks with the fastest 2020E EPS growth: FEYE, RPD, MIME, SAIL, and HII).

* * *

2. What if bond yields rise rapidly in 2020? Needless to say, near record low bond yields have been a boon to equity valuations, driving more than 90% of the S&P 500 return in 2019. Although valuations are elevated in absolute terms, Goldman’s macro model suggests that equities trade at roughly fair value relative to the low level of bond yields (which is ironic because most “experts” claim that while bonds are in a massive bubble, equities aren’t, even though you can’t have one without the other). Goldman’s economists expect the Fed will remain on hold in 2020 and the 10-year US Treasury yield will gradually rise to 2.25% by year-end. For equities, Goldman (and UBS) previously found that the speed of rate changes matters more than the level of rates. Historically, equities have been able to digest gradual increases in bond yields of less than 1 standard deviation in a month (16 bp in today’s terms). However, when bond yields rise by more than 2 standard deviations in a month (34 bp), S&P 500 returns have typically been negative.

Here Goldman points out that its interest rate sensitive basket has lagged since early 2019, consistent with a falling rate environment; the bank’s sector-neutral basket comprises 50 S&P 500 stocks with the highest positive stock price sensitivity to changes in the 10-year US Treasury yield. The basket has continued to underperform since late November even as rates moved higher, reflecting skepticism that rates will rise substantially. However, these stocks should outperform if interest rates rise sharply (even as the broader market tumbles).

* * *

3. What if the US dollar reverses course and strengthens in 2020? The dollar fell by 2% in December as US-China trade tensions eased and global economies showed signs of improvement. And alongside virtually every other Wall Street desk, Goldman’s FX strategists expect the trade-weighted dollar to fall by another 2% during the next 12 months. Why? Because a stronger dollar would pose a headwind to S&P 500 sales, particularly within industries with high non-US sales such as semiconductors. Based on Goldman’s top-down earnings model, the bank estimates that every 10% change in the trade-weighted dollar equals roughly $3 (2%) of S&P 500 EPS.

* * *

4. What if economic growth is weaker than expected? Perhaps the $64 trillion question, Goldman admits that economic data in the US have been mixed. While the ISM non- manufacturing index was above consensus, the ISM manufacturing index unexpectedly declined to the lowest level since 2009. Goldman economists expect US real GDP growth will equal 2.2% in 2020, above consensus of 1.9%, as the easing in financial conditions lifts economic activity; as a result of central bank easing in 2019, the forward P/E multiple expanded from 15x to nearly 19x. Looking forward, Kostin believes economic and earnings growth will drive stock prices higher. Every 1 pp change in US real GDP growth equals $5 (3%) in S&P 500 EPS. Ironically, the muted outperformance of cyclical equities, in particular Industrials, suggests limited growth optimism in equity markets, which in turn means that traders are betting that central banks will again push stocks to new nosebleed highs in 2020. Here Kostin notes that Goldman’s Cyclical (GSSBCYCL) and Defensive (GSSBDEFS) baskets closely track changes in the GS US Current Activity Indicator (Exhibit 4).

And as we have extensively pointed out in recent weeks, the S&P 500 has surged but Cyclicals have only modestly outperformed Defensives, as “bullish” strategies actually generated a negative return in 2019. In Goldman’s view, “receding trade tensions rather than overly optimistic growth expectations have driven equity returns”, which is amusing because the real driver have been central banks. In any case, Goldman sees scope for upside to Cyclicals in the near term if growth reaccelerates towards its economists’ forecast, and as such the bank recommends an overweight in Industrials.

* * *

One final point: just as Deutsche Bank noted yesterday, Goldman confirms that investor positioning in US equities is close to “stretched” territory and could exacerbate equity price moves if one of these risks materializes. Goldman’s Sentiment Indicator (“SI”) combines six weekly and three monthly indicators of stock positioning across institutional, retail, and foreign investors. As equities rallied during the final weeks of 2019, investors added length, bringing the SI to 1.8 standard deviations above the 52-week average. This is notable because as Kostin concludes, “readings in “stretched” territory above +1.0 standard deviations have typically corresponded with below-average equity returns during the subsequent eight weeks.”


Tyler Durden

Sun, 01/12/2020 – 13:57

Tags
Business Finance

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Carter Page Says FBI’s SpyGate Is “Just The Tip Of The Iceberg”, Hints At Future Legal Action

Carter Page Says FBI’s SpyGate Is “Just The Tip Of The Iceberg”, Hints At Future Legal Action

Authored by Sara Carter via SaraACarter.com,

Was President Donald Trump’s short term campaign foreign policy volunteer Carter Page set up by an FBI informant or the informant’s handler at the FBI?

On the The Sara Carter Show, Page discussed the recent revelations in Department of Justice’s Inspector General Michael Horowitz’s report and his interview in The Federalist where questions surfaced regarding his first meeting with Stefan Halper, one of the FBI’s spies in the Trump campaign.

Questions Linger

Questions still loom regarding Halper’s and his FBI handler. It appears that Horowitz’s report raises more answers than questions, said Page, who was not given the opportunity to review the report or discuss his circumstances with Horowitz. Page, who was an officer in the Navy and graduate from Annapolis Naval Academy, assisted intelligence and law enforcement, said all he ever wanted to was “to help his country.”

Unfortunately, Page became the target of some of very corrupted officials within the agencies he had assisted in the past. They did this to target President Donald Trump.

Based on information Page revealed to both The Federalist and The Sara Carter Show it appears that either Halper, or his FBI handler, didn’t tell the truth to Horowitz’s investigators about the circumstances surrounding Halper’s first meeting with Page.

Page told this reporter that the origination of his meeting with Halper must be investigated by Attorney General William Barr’s appointed prosecutor John Durham. Page would not tell this reporter whether or not he’s already been interviewed by Durham but said he has always stressed that he would “cooperate fully” with any investigation.

“The FBI and CIA definitely made some very serious very egregious mistakes, but, you know one of the primary drivers of this was the Democratic National Committee and their operatives,” said Page, referring to the DCN and Hillary Clinton campaign financing the debunked dossier through the private research firm Fusion GPS.

Fusion GPS hired former British spy Christopher Steele to compile the now debunked dossier, which was the main source for leaking false information on Trump and Page to the media. The dossier’s information came from former Russian spies tied to Steele and suggested that Page was an asset of the Russian government, which was patently false.

“I’ve been very cautious,” said Page, regarding his concern over Halper’s contact with him.

“I’ve been very meticulous, as you have been meticulous, Sara in your reporting. I wanna know for sure. I don’t point fingers at people until there is really some very solid evidence and it’s been firmly established that these things have actually happened.”

“Tip of the Iceberg” 

Page, who has received numerous death threats since stories began leaking about him in 2016, told this reporter what the public knows is only “the tip of the iceberg.”

Page said he is “encouraged and appreciative that last month Inspector General Horowitz and his team started uncovering this, but there’s so much more and, to me, these life or death situations that the DNC disinformation campaign created for myself and so many other Trump supporters and volunteers on the Trump team that is a huge issue and I think some of the important revelations you’ve talked about and just mentioned are really the tip of the iceberg.”

Moreover, Horowitz discovered in the course of his investigation that FBI attorney Kevin Clinesmith altered and omitted extensive information on Page when he submitted the Foreign Intelligence Surveillance Act warrant to the secret court in order to spy on Page. The information Clinesmith omitted was that Page had been cleared by the CIA and that he had been assisting the CIA with information on Russians.

“You know, again, I had worked and supported the CIA and FBI for many years and so you know I had a long series of meetings about ten plus hours in March of 2017, just a couple months after the election,” said Page, regarding his meetings with Clinesmith in 2017.

Clinesmith, along with other FBI agents, were well aware at the time that Page was being defamed by the media and that the disinformation being spread through main stream outlets was false.

Interview with The Federalist

During his interview with The Federalist, which listed out the FBI’s 17 significant inaccuracies or omissions in the secret federal surveillance applications, noted that the agents interviewed by the Inspector General reiterated that they launched the July, 31, 2016 Crossfire Hurricane probe and used Halper because of pure coincidences.

What? Really, they expect the public to buy this unbelievable explanation, he stated with regard to the knew information that was inaccurate in the IG report.

Let me explain, Halper’s handler told the IG that it was “serendipitous” that Halper, referred to in the IG report as Source 2, “had contacts with with three of their four subjects, including Carter Page.”

The FBI agents told Horowitz’s team that “couldn’t believe [their] luck.” Halper’s handler said it was during that time that he learned that his source, Halper, also knew Michael Flynn and Paul Manafort. The FBI source also asked Halper to target George Papadopolous and Sam Clovis, a senior campaign aide at the time.

“I hope we start getting some honest answers sometime soon,” he told me during the podcast. “We’ve got some honest answers in the Inspector General report, but it’s very incomplete and there are many inaccuracies in there.”

As for Page’s future and the next steps in his ongoing lawsuits to seek justice against some of the most powerful bureaucracies in the country:

“I’m definitely taking some important actions and I’ve got a great team of great legal experts who are helping me on that and I’ve been literally working round the clock with our team over the last several days and weeks and last couple of months,” said Page.

“I think as you correctly alluded to I’ll have more to say on that real soon so stay tuned.”


Tyler Durden

Sun, 01/12/2020 – 13:30

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Facebook Glitch Reveals Greta Thunburg’s Father Posting As Teenage Climate Activist

Facebook Glitch Reveals Greta Thunburg’s Father Posting As Teenage Climate Activist

A Thursday evening software update at Facebook accidentally allowed anyone to view exactly who is posting under the accounts of public figures, businesses and other entities, according to Wired.

The result? For starters, some 3 million followers of teenage climate activist Greta Thunberg have been reading posts made by her father, Svante Thunberg, and a climate activist in India who serves as a delegate at the UN’s Climate Change organization, Adarsh Prathap. Thunberg, Inc. claims Greta is still the one writing the content.

Greta, Inc. explained this in a Saturday Facebook post purporting to be the young climate activist.

“Some people have been asking who manages this page. First of all, since last spring I only use Facebook to repost what I write on my Twitter and Instagram accounts,” reads the post, in which ‘she’ says she tried Facebook “early on,” but didn’t like it, so she uses “my father Svantes account to repost content.”

“The rest that is shared on Facebook is reposted from Twitter and Instagram by the guy who founded the Greta Thunberg Facebook page long before I knew it existed. His name is Adarsh Prathap and he lives in India. Since a lot of people thought it was my official page in the beginning I asked if I could co-manage it and he said yes.“

Greta claims to have written all the content posted by her father and Prathap.

In other words, “of course it’s not me silly – you should have known I just ‘co-manage’ the fan page.”

Except – by all outward appearances it appeared to be her page alone.

Facebook’s ‘page transparency’ shows Greta as the confirmed owner – with the only clue suggesting she might have help being a page manager located in India.

According to Facebook, the flaw was quickly fixed – but not before the people behind famous accounts were revealed and shared on public forums such as 4chan.

“We quickly fixed an issue where someone could see who edited or published a post on behalf of a Page when looking at its edit history,” said the company in a statement. “We are grateful to the security researcher who alerted us to this issue.”

Facebook says the bug was the result of a code update that it pushed Thursday evening. It’s not something most people would have encountered on their own, since it took navigating to a Page, viewing an edit history, and realizing that there shouldn’t be a name and profile picture assigned to edits to exploit it. Still, despite the Friday morning fix, screenshots circulated on 4chan, Imgur, and social media appearing to show the accounts behind the official Facebook Pages of the pseudonymous artist Banksy, Russian president Vladimir Putin, former US secretary of state Hillary Clinton, Canadian prime minister Justin Trudeau, the hacking collective Anonymous, climate activist Greta Thunberg, and rapper Snoop Dogg, among others.

Facebook points out that no information beyond a name and public profile link were available, but that information isn’t supposed to appear in the edit history at all. And for people, say, running anti-regime Pages under a repressive government, making even that much information public is plenty alarming. –Wired

“People who run sensitive Pages from their own Facebook should now consider that their identity may be known,” said Lukasz Olejnik independent privacy adviser and Oxford University Center for Technology and Global Affairs. “While mistakes happen, this one is unexpected.“


Tyler Durden

Sun, 01/12/2020 – 13:05

Tags
Technology Internet

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The Blue-State Exodus Gains Momentum

The Blue-State Exodus Gains Momentum

Authored by Merrill Matthews, op-ed via TheHill.com,

Nine years ago I published a piece that asserted, “Voters around the country are concluding it’s better to be red than dead,” applying almost the exact opposite meaning to an old phrase referring to communism. New Census Bureau figures appear to confirm my prediction — mostly.

My point was that many voters were, and are, increasingly fed up with the high taxes, heavy regulations and increasing social wokeness that have come to characterize most blue states — i.e., those dominated by liberal politicians and policies.

I argued that voters wanting to live in a business-friendly, fiscally responsible state that minimizes its tax burden would either vote out the liberals destroying their state’s economy or flee to a red state. The latest Census Bureau report highlights the red-state shift.

According to an Election Data Services analysis of the Census Bureau report, “The population projections point toward a ten [congressional] seat change over 17 states across the nation by year 2020.”

Seven states are projected to gain one or more congressional seats after the 2020 election; 10 states are projected lose one seat.

The red-state leader is Texas, with a projected pickup of three congressional seats following the 2020 census — and that after gaining four congressional seats after the 2010 election. Florida will pick up two seats, and Arizona, Colorado, Montana, North Carolina and Oregon will each gain one, according to the analysis.

All 10 losing states — Alabama, California, Illinois, Michigan, Minnesota, New York, Ohio, Pennsylvania, Rhode Island and West Virginia — lose only one seat.

Of the seven states gaining seats, five voted for Donald Trump in the 2016 presidential election. Of the 10 states losing seats, five voted for Trump and five for Hillary Clinton. 

But two of those five losing states that voted for Trump — Michigan and Pennsylvania — surprised most analysts since they have been blue-leaners for several years. And West Virginia is losing population in part because of a struggling state economy that has been so dependent on coal.

Arguably, even some of the blue-state gainers may support my general point.

If you are blue-leaning Californian who wants to escape the Golden State’s drift into madness but stay on the left coast, Oregon might be a reasonable alternative.

Ditto for Colorado, which has turned from red to bluish over the last decade or so as Californians increasingly head for the hills, so to speak.

But that trend also highlights a problem: Some of the people fleeing destructive blue-state taxes and regulations appear to drag their pro-big-government philosophy with them — apparently oblivious to the fact that those policies destroyed the state they are trying to escape. 

One can even see that dynamic occurring in Texas. For a decade or so, liberals have been predicting (not to mention hoping) that Texas’s growing Hispanic population would turn the state from deep red to purple and perhaps even blue.

But there is another factor: Texas has become one of the primary destinations for disaffected Californians, as more and more California businesses have concluded it’s time to go where they will be appreciated.

In addition, many California families have decided to migrate to Texas simply to find more affordable housing, lower taxes and streets that aren’t rife with homeless people, feces and used drug paraphernalia. And Texas even has a 367-mile-long coast!

But we cannot overstate the significance of the Census Bureau’s top-line finding: Texas will gain two or three congressional seats after 2020, while California will likely lose one.

That’s a big deal for California, which has never lost a congressional seat. It is a tacit repudiation of California’s over-the-top taxes and policies. Some of the other blue states, such as New York and Illinois, have been bleeding people for years. 

Several years ago, I interviewed the editor of Chief Executive magazine, which conducts an annual CEO survey of the best and worst states to do business. The editor told me the survey had two constants: Texas always comes in as the best state to do business, and California always comes in dead last. Oh, and Florida, which is projected to gain two seats, usually comes in second place.

It was only a matter of time before both businesses and individuals began voting with their feet. And that time has apparently come.

More importantly, the blue-state exodus is only a snapshot of what dissatisfaction will emerge if those blue-state policies take over the White House.


Tyler Durden

Sun, 01/12/2020 – 12:40

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Social Issues
Politics

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