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While emerging markets recently tumbled into a bear market, the US stock market continues to surge, defying all fears of a Chinese slowdown, a global trade war, and peak earnings. But why? As Macquarie strategist Viktor Shvets writes this morning, US resilience is due to its role as the largest supplier of end-user demand, printer of reserve currency, and quality of its corporates. Meanwhile, EMs are an artefact of global forces, and of Chinese cooperation with the US. As a result, for synchronized growth one needs liquidity, trade and reflation. According to Shvets, these three are possible only when the US & China cooperate. He notes that “we are not there yet.“

Below we share more details from Shvets on the most vexing divergence of 2018:

Why are US markets so resilient? Three reasons:

One of the more popular questions that clients asked us recently is why are US equity markets so resilient and when do we think EMs might break out from their bear market trajectory? US resilience is based on three factors.

• First, US’s role as the single-largest pool of global end-user demand. Unlike Eurozone and Japan that are essentially riding China’s reflationary waves, the US (Anglo-Saxons, in general) are the only generators of sustainably high deficits. The US is the other side of excessive savings in the rest of the world.
• Second, US$ role as the global reserve currency. While over the longer term, it is not good for anybody, in the short-to-medium term, it offers the US massive advantage in attracting capital and using it as a lever in negotiations.
• Third, quality of US corporates. More than any other region, the US corporate sector embraced arbitrage opportunities that have become available over the last three decades in global product, labour & capital markets. Consequently, they are asset-light and cash-generative, which explains SPX strength.

EMs performance needs specific outcomes

EMs on the other hand are a tentative future promise but not yet a delivery and they need abundant liquidity, low volatilities, free trade and global reflationary momentum to prosper. While most of these conditions were in place in 2016-17, this has not been the case through 2018. EMs as an investable concept is an artefact of globalization, generally weaker US$ over long stretches for the last three decades as well as rapid global financialization, which lubricated trade and domestic consumption while drastically reducing cost of capital.

However, the global economy is now in a deglobalization phase, as the only strategy to reconcile political dilemma of the world (nation states, local politics and globalization are not compatible), while manufacturing is no longer the king’s road for EM convergence (due mostly to rapid changes in how products are manufactured and traded).

At the same time, CBs are determined to drain liquidity (mostly US$ liquidity, as the Fed ‘burns’ US$50bn per month) while raising cost of capital. We are also seeing the single-most important supplier of demand and printer of global currency (US) refusing to perform its role of lubricating global demand and liquidity.

Only possible when China & US cooperate. Watch US$ & Trade

It is only reversal of these fundamental factors that would get EM equities out of the bear market trajectory. However, to achieve it we need to have a close cooperation between US and China. US determines global liquidity and cost of capital while also providing end-user demand, while China is able to reflate global economy through its intensive commodity & investment business model, sheltered behind capital controls.

We maintain that only severe domestic pain would change the US narrative. The easiest way to see how it might happen is if the US$ massively overshoots, and then blows back via various transmission mechanisms (from liquidity to SPX EPS growth rates). At that point, Trump, the Fed and China would be on the same page. We are not there yet.

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Authored by Carey Wedler via TheAntiMedia.com,

A nuclear power plant in Southern California that was shut down in 2012 continues to leak radioactive material and poses a threat to nearby communities.

The aging San Onofre, located in San Clemente, CA, was shut down in 2012 amid a leak that occurred due to malpractice. According to a report released in 2016, the plant “operated the reactor outside the allowable limits for pressure and temperature, causing the radiation leak that shut down the facility for good,” the San Diego Tribune noted. The shutdown also launched extensive investigations that implicated both the power company and state regulators.

Though the plant is out of operation, it still stores 3.6 million pounds of lethal radioactive waste, and according to a worker who blew the whistle on the plant just last week, a near catastrophe just occurred. As local outlet the Dana Pointer reported, plant worker David Fritch explained what happened at a public meeting:

“On 3 August 2018, a 100-ton canister filled with highly radioactive nuclear waste was being ‘downloaded’ into a temporary transport carrier to be moved a few hundred yards from inside the plant to a storage silo buried near the world-famous San Onofre beach. As the thin-walled canister was being lowered into the transport cask, it snagged on a guide ledge four feet from the top. Crane operators were unaware that the canister had stopped descending and the rigging went completely slack, leaving the full weight of the heavy canister perched on that ledge by about a quarter-inch.

“Had the ledge not held for the hour or more it took workers to realize and address the error, the thin-walled canister of highly toxic nuclear waste would have fallen 18 feet to the ground below.”

Each canister reportedly has as much radiation as was released during the infamous Chernobyl nuclear disaster.

Fritch says the staff is too small — and also undertrained. According to an article published in the Los Angeles Times this week by Steve Chapple, an author, journalist, and fellow at the Samuel Lawrence Foundation:

“The idea is to bury the spent fuel on site, about 100 feet from the ocean and just a few feet above the water table. Edison has already begun transferring the waste from cooling pools into specially designed steel canisters. The containers are prone to corrosion and cracking, and cannot be monitored or repaired. Work crews even discovered a loose bolt inside one of the canisters earlier this year.”

As ocean levels keep rising, Chappelle says, seawater will come closer and closer to the cannisters. Further, “if hairline cracks or pinholes in the containers were to let in even a little bit of air, it could make the waste explosive.”

Further, San Onofre is located directly on an earthquake fault line in an area with a record of tsunamis.

San Juan Capistrano Councilwoman Pam Patterson told President Trump at a roundtable discussion in May that San Onofre is a “Fukushima waiting to happen.” She also expressed concern that the facility, which is a no-fly zone but secured mainly by armed guards, could be a target of a terror attack, noting that terrorists targeted nuclear power plants in addition to the World Trade Center and Pentagon.

Any time of disaster would have far-reaching effects. Shortly after the plant shut down, former prime minister of Japan, Naoto Kan testified in San Diego, noting that during the Fukushima meltdown, he was prepared to evacuate not just Tokyo, but regions as far as 160 miles from the plant. Downtown Los Angeles is only 62 miles away from San Onofre and 50 miles from San Diego. Worse, there are no state or federal evacuation plans in the event of a catastrophe.

Chappelle says that while solutions include moving the waste to a location 80 feet higher than the current plant, which is by the beach, or “maintain a cooling pool on site for emergency transfer efforts in the event of a cracked canister or terrorist attack,” these are all short-term solutions. As of last year, Edison was working on a plan to bury the nuclear waste, but Chapple believes the only way to truly resolve the problem is for Edison to develop storage technology that is not prone to severe leaks.

Though Edison has started that process, earlier this year San Onofre officials found a defect in the design created by Holtec, a contractor whose workers were responsible for the accident earlier this month.

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Canadian Consumer Prices soared 3.0% YoY in July – well above 2.5% expectations – and the highest inflation rate since 2011.

Gasoline prices – up 0.8% in July and 25.4% from a year earlier – have also been a main contributor to the recent acceleration in prices. Excluding gasoline, inflation would be 2.2 percent in July.

As Bloomberg notes, the faster-than-expected gains will test Bank of Canada Governor Stephen Poloz’s resolve to raise interest rates gradually over the next year to avoid a disruption to the economy. Price gains have now reached the upper end of the central bank’s 1 percent to 3 percent inflation range.

And that has prompted an immediate reaction in the loonie – instant buying…

Finally, we note that there was little discernable effect of higher tariffs on consumer prices in July. Statistics Canada released a report on the estimated impacts of Canada’s tariffs on U.S. metal and consumer products and found there would only be a small overall increase — with no more than a decimal point increase to inflation over a limited period of time.

 

 

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Shifting his attention from trade war, military parades, bashing the fake news medial and conducting foreign policy via Twitter, on Friday morning Trump unexpectedly advocated for a proposal suggested previously by several corporate CEOs and most notably BlackRock’s Larry Fink, suggesting an end of quarterly earnings reporting, and shifting to a half year convention instead, which was the US convention starting in 1955 and ending in 1970 when the current quarterly reporting standard was implemented.

In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

— Donald J. Trump (@realDonaldTrump) August 17, 2018

The proposal is not new: in 2015, the influential law firm Wachtell, Lipton suggested the same idea – which while music to the ears of its big corporate clients was a nightmare for investors and analysts – calling on the Securities and Exchange Commission to consider allowing U.S. companies to do away with quarterly earning updates, which it claimed distract executives from long-term goals.

The idea proposed by Wachtell was to combat what it and some others see as an excessive focus on short-term performance that they say has been encouraged by activist shareholders. The investors had widened their influence in recent years and drawn criticism from those, including not only Larry Fink but also then-presidential hopeful Hillary Clinton, who said “short-termism” encourages companies to focus on gimmicks that provide short-term stock gains at the expense of long-term health.

As the WSJ reported in2015, as part of her campaign for the Democratic presidential nomination, Hillary Clinton pledged reforms to “help CEOs and shareholders alike to focus on the next decade rather than just the next day.”

And now it is being picked by up Donald Trump.

Ending quarterly reporting still seems a pipe dream, given the stiff resistance the idea would likely receive from governance advocates and from shareholders and analysts who depend on them. It could also make it more difficult for companies to communicate with their investors, given the need to avoid sharing information selectively. Activists often argue that managers haven’t earned the trust of investors to make decisions without regular oversight.

However, in recent years, to avoid the mad dash scramble to beat some arbitrary “consensus estimate”, some companies have stopped giving quarterly forecasts, hoping to de-emphasize the “beat-or-miss” mentality that is prevalent on Wall Street. But they still reliably report their numbers for every quarter, because it is a legal requirement for public companies in the U.S. In 1934, amid a wave of Depression-era regulations, the SEC forced U.S. companies to file annual reports and disclose more information to investors. In 1955, the mandate became semiannual and in 1970, quarterly.

So is the 10-Q about to be replaced by the 10-H, or will companies report earnings just once a year? While we doubt Trump’s proposal will gain much traction – as the alternative is a lot of bored Wall Street analysts who will have an extra 6 whole months each year in which to do nothing – the alternative does open up several amusing possibilities, starting with this one.

“Great, err, half, guys” https://t.co/5ubjMqG7zQ

— Jeffrey Cane (@Jeffrey_Cane) August 17, 2018

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Hours after The Pentagon confirmed the President’s military parade planned for Veterans Day has been postponed until at least next year, after the DoD released an estimated cost of $92 million, Trump has scape-tweeted local Washington politicians as responsible for the decision to cancel.

As a reminder,  The Hill reports  that the Defense Department released an updated cost estimate for the planned parade, which pegged the price tag for the event at $92 million, including $50 million from the Pentagon and $42 million from interagency partners.

That figure is significantly higher than an initial estimate that three U.S. defense officials provided CNN with last month. That estimate pegged the cost of the parade at closer to $12 million, raising new questions about the overall cost of the event.

And then yesterday evening, Pentagon spokesman Col. Rob Manning said in a statement that the Defense Department and White House have agreed to explore potential dates for the parade in 2019.

“The Department of Defense and White House have been planning a parade to honor America’s military veterans and commemorate the centennial of World War I. We originally targeted November 10, 2018 for this event but have now agreed to explore opportunities in 2019,” Manning said.

Which led to this morning’s Presidential tweet: “The local politicians who run Washington, D.C. (poorly) know a windfall when they see it. “

The local politicians who run Washington, D.C. (poorly) know a windfall when they see it. When asked to give us a price for holding a great celebratory military parade, they wanted a number so ridiculously high that I cancelled it. Never let someone hold you up! I will instead…

— Donald J. Trump (@realDonaldTrump) August 17, 2018

Trump then offered hope for next year: ” Maybe we will do something next year in D.C. when the cost comes WAY DOWN. “

….attend the big parade already scheduled at Andrews Air Force Base on a different date, & go to the Paris parade, celebrating the end of the War, on November 11th. Maybe we will do something next year in D.C. when the cost comes WAY DOWN. Now we can buy some more jet fighters!

— Donald J. Trump (@realDonaldTrump) August 17, 2018

Notably, plans for the parade are widely unpopular with Americans in polls, with 61 percent of voters opposing the plans even before the costs were announced in a survey taken earlier this year. Just 26 percent said they supported the plans in the same poll.

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In a rare, hour-long interview with the New York Times, in which he “alternated between laughter and tears”, Elon Musk provided a unique glimpse into his mind, confirming just how fragile and combustible everything inside of it is right now.

“This past year has been the most difficult and painful year of my career. It was excruciating” a tearful Musk said, apparently forgetting all those documented trips to London, Brazil, Australia, Grimes in tow, to party and blow off steam.

But while Musk may have had his share of self-created turmoil, most of it dutifully reported on his own twitter account, it all blew up in his face when he abruptly declared on Twitter last week that he hoped to take Tesla private “funding secured.” The episode kicked off a furor in the markets and within Tesla itself, launched an SEC probe, “and he acknowledged on Thursday that he was fraying.”

Case in point: at multiple points in the hourlong phone interview with The NYT, Musk “choked up, noting that he nearly missed his brother’s wedding this summer and spent his birthday holed up in Tesla’s offices as the company raced to meet elusive production targets on a crucial new model.”

Asked if the exhaustion was taking a toll on his physical health, Mr. Musk answered: “It’s not been great, actually. I’ve had friends come by who are really concerned.”

Much of the interview was a “self-pity party”, as Musk hopes to garner symapthy points from readers, and perhaps the SEC: he said he had been working up to 120 hours a week recently — echoing the reason he cited in a recent public apology to an analyst whom he had berated. In the interview, Mr. Musk said he had not taken time off of more than a week since 2001, when he was bedridden with malaria.

“There were times when I didn’t leave the factory for three or four days — days when I didn’t go outside,” he said. “This has really come at the expense of seeing my kids. And seeing friends.”

Perhaps, but what the SEC will be mostly focused on is Musk’s admission, and latest revision to the “going private” narrative, that no one saw or reviewed his tweet about the plan to take Tesla private before he posted it.

Musk provided a “detailed timeline” of the events leading up to the Twitter postings on Aug. 7 in which he said he was considering taking the company private at $420 a share. He asserted that he had “funding secured” for such a deal, which it has since emerged was a fabrication, and potential market fraud with the sole intention of “burning shorts.”

That morning, Mr. Musk woke up at home with his girlfriend, the musician known as Grimes, and had an early workout. Then he got in a Tesla Model S and drove himself to the airport. En route, Mr. Musk typed his fateful message.

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

According to the NYT, Musk reached the airport and flew on a private plane to Nevada, where he spent the day visiting a Tesla battery plant known as the Gigafactory, including time meeting with managers and working on an assembly line. That evening, he flew to the San Francisco Bay Area, where he held Tesla meetings late into the night.

Yet while Musk may have brushed it off – after all it sent TSLA stock price surging – in the past 10 days, what Musk meant by “funding secured” has become the most existential question for Tesla, and one which may determine if Musk spends time in prison. That funding, it turned out, was far from secure.

Mr. Musk has said he was referring to a potential investment by Saudi Arabia’s government investment fund. Mr. Musk had extensive talks with representatives of the $250 billion fund about possibly financing a transaction to take Tesla private — maybe even in a manner that would have resulted in the Saudis’ owning most of the company. One of those sessions took place on July 31 at the Tesla factory in the Bay Area, according to a person familiar with the meeting. But the Saudi fund had not committed to provide any cash, two people briefed on the discussions said.

The tweet is now the subject of an SEC inequiry.

So why gamble everything on just two words? Musk said he saw the tweet as an attempt at transparency, and acknowledged “that no one had seen or reviewed it before he posted it.“

Tesla’s shares soared. Investors, analysts and journalists puzzled over the tweet — published in the middle of the day’s official market trading, an unusual time to release major news — including the price Mr. Musk cited. He said in the interview that he wanted to offer a roughly 20 percent premium over where the stock had been recently trading, which would have been about $419. He decided to round up to $420 — a number that has become code for marijuana in counterculture lore.

So was he stoned? Not according to Musk: “It seemed like better karma at $420 than at $419,” he said in the interview. “But I was not on weed, to be clear. Weed is not helpful for productivity. There’s a reason for the word ‘stoned.’ You just sit there like a stone on weed.“

He might not have been stoned then, but he appears to be in a similar state much of the other time: Musk detailed his frequent use of the sleep-aid Ambien – a drug he’s discussed using before, and whose well-known side effects include sleepwalking. “It is often a choice of no sleep or Ambien,” he told the newspaper.  Rather than put him to sleep, the drug has sometimes led Musk to spend his nights on Twitter, worrying some board members, the NYT said.

Musk said in the interview that board members had not complained to him about his tweet. “I don’t recall getting any communications from the board at all,” he said. “I definitely did not get calls from irate directors.”

This, too, was a lie:

shortly after the Times published its interview with Mr. Musk, he added through a Tesla spokeswoman that Antonio Gracias, Tesla’s lead independent director, had indeed contacted him to discuss the Aug. 7 Twitter post, and that he had agreed not to tweet again about the possible privatization deal unless he had discussed it with the board.

And with the story about the tweet changing on daily, if not hourly basis, now also implicating the board for potentially substantiating a misleading narrative, as regulators are out for blood, Musk added that he did not regret his Twitter post — “Why would I?” — and said he had no plans to stop using the social media platform. Some board members, however, have recently told Mr. Musk that he should lay off Twitter and focus on making cars and launching rockets, according to people familiar with the matter.

Well, there is one big reason why Musk should regret his post: this week Musk received a subpoena for more information. The consequences, if the SEC finds that Musk indeed hoped to manipulate the stock higher by posting misleading, inaccurate information, could be dire.

* * *

At times during the interview, Musk would stop talking, “seemingly overcome by emotion” at how miserable this billiionaire’s life had become.

He turned 47 on June 28, and he said he spent the full 24 hours of his birthday at work. “All night — no friends, nothing,” he said, struggling to get the words out.

As noted above: the bulk of the self-pitying interview was an attempt at creating sympathy with the reader, or the regulators. It achieved neither.

Two days later, he was scheduled to be the best man at the wedding of his brother, Kimbal, in Catalonia. Mr. Musk said he flew directly there from the factory, arriving just two hours before the ceremony. Immediately afterward, he got back on the plane and returned straight to Tesla headquarters, where work on the mass-market Model 3 has been all consuming.

Mr. Musk paused again.

“I thought the worst of it was over — I thought it was,” he said. “The worst is over from a Tesla operational standpoint.” He continued: “But from a personal pain standpoint, the worst is yet to come.”

So besides Ambien, who is to blame for Musk’s stress? Why short sellers of course. He said he was bracing for “at least a few months of extreme torture from the short-sellers, who are desperately pushing a narrative that will possibly result in Tesla’s destruction.”

Referring to the short-sellers, he added: “They’re not dumb guys, but they’re not supersmart. They’re O.K. They’re smartish.”

It’s not just short sellers that Musk thinks are “not supersmart” – he reserves that designation for virtually anyone, especially if they happen to disgree with him: in recent months, in addition to wrangling with short-sellers and sendiing David Einhorn “short shorts”, Musk has belittled analysts for asking “boring, bonehead” questions. And after sending a team of engineers from one of his companies to help rescue members of a stranded soccer team, he lashed out at a cave diver who was dismissive of the gesture, deriding him on Twitter as a “pedo guy,” or pedophile.

* * *

So with the board finally paying attention, is Musk’s job in jeopardy?

According to the NYT report, Tesla execs have been trying “for years to recruit a chief operating officer or other No. 2 executive to assume some of Mr. Musk’s day-to-day responsibilities, according to people familiar with the matter. A couple of years ago, Mr. Musk said, the company approached Sheryl Sandberg, who is Facebook’s second-highest executive, about the job.”

Mr. Musk said that “to the best of my knowledge,” there is “no active search right now.” But people familiar with the matter said a search is underway, and one person said it had intensified in the wake of Mr. Musk’s tweets.

The board also chimed in:

In response to questions for this article, Tesla provided a statement that it attributed to its board, excluding Elon Musk. “There have been many false and irresponsible rumors in the press about the discussions of the Tesla board,” the statement said. “We would like to make clear that Elon’s commitment and dedication to Tesla is obvious. Over the past 15 years, Elon’s leadership of the Tesla team has caused Tesla to grow from a small start-up to having hundreds of thousands of cars on the road that customers love, employing tens of thousands of people around the world, and creating significant shareholder value in the process.”

But the last word, of course, belonged to Musk, who said he has no plans to relinquish his dual roles as chairman and chief executive:

“if you have anyone who can do a better job, please let me know. They can have the job. Is there someone who can do the job better? They can have the reins right now.”

And if this interview fails to garner Musk the desired sympathy points from the US public, the regulators and the courts, once the SEC, the legal and bankruptcy process are done with Musk, he may wish he actually meant it.

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A new Pentagon report has sounded the alarm over China’s expanding military reach and says the rival to American power is increasing its ability to send bombers further afield while “likely training for strikes” against the United States and its allies. 

The warning is contained in an annual Pentagon report prepared for Congress called Military and Security Developments Involving The People’s Republic of China 2018, which further notes a defense spending estimate of $190 billion — a third that of the United States — which has in part gone toward the People’s Liberation Army (PLA) “undergoing the most comprehensive restructure in its history”. 

The report comes amidst heightened trade tensions and concerns that China is attempting to gobble up territory in international waters through its militarizing artificial islands in the South China Sea.

“Over the last three years, the PLA has rapidly expanded its overwater bomber operating areas, gaining experience in critical maritime regions and likely training for strikes against U.S. and allied targets,” the report reads. 

In terms of potential targeting, this may demonstrate the “capability to strike US and allied forces and military bases in the western Pacific Ocean, including Guam,” the report adds.

However while generally outlining ways that China is establishing itself as an unrivaled regional power, such as through its Belt and Road Initiative (BRI), the report notes that it’s not clear what message Beijing is projecting by carrying out the flights “beyond a demonstration of improved capabilities.”

The report projects that China’s military budget is likely to expand to $240 billion over the next decade, adding that “The purpose of these reforms is to create a more mobile, modular, lethal ground force capable of being the core of joint operations” that can “fight and win” against a major military power. 

Notably the Pentagon’s annual report also highlights China’s growing space program “despite its public stance against the militarization of space” — something which likely factored into President Trump’s mid-June announcement that he would “immediately” establish a “space force” as an independent service branch of the Department of Defense. 

The report says of the contentious issue of Taiwan, which is claimed by China but maintains de facto independent security ties with the US, that China “is likely preparing for a contingency to unify Taiwan with China by force”.

The assessment spells out China is ready to go to war to protect its claim over the island: “Should the United States intervene, China would try to delay effective intervention and seek victory in a high-intensity, limited war of short duration.” 

Acknowledging the potential for rapid and worrisome escalation between the global powers, the Pentagon report stresses that the US “seeks a constructive and results-oriented relationship with China”.

As Reuters points out, “While Washington and Beijing maintain a military-to-military relationship aimed at containing tensions, this has been tested in recent months, notably in May when the Pentagon withdrew an invitation to China to join a multinational naval exercise.”

However, Washington and Beijing have kept communication channels open, despite a growing trade war, as a Chinese trade delegation is set to visit the US this month to initiate a new round of talks.

The Chinese delegation, reportedly to be led by vice-commerce minister Wang Shouwen plans to meet a group led by US Treasury undersecretary David Malpass amidst aggressive US tariffs on $50 billion worth of Chinese goods, and after Trump threatened tariffs on a further $200 billion worth of imports. 

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