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3% Treasuries, Say Hello To $1 Trillion Deficits

Submitted by Nicholas Colas of DataTrek Research

In two months we will be in fiscal 2019 for the US government, and the OMB projects +$1 trillion/year deficits until 2021. Ten year Treasuries nosed over 3% today on news of some small but unexpected issuance, so where will rates go once deficits kick into high gear? And how will stocks discount higher rates, regardless of reason? Our answers below.

If the 10 Year Treasury were 4.0% at the end of 2019, would you expect US equities to be higher or lower then? It is easy enough to tell a story either way:

  • Bullish for stocks. Rising inflation caused by economic growth lifts both bond yields and corporate earnings. Companies push for greater efficiency to offset labor/materials costs, limiting margin erosion and (finally) increasing workforce productivity. PE multiples contract, but earnings growth more than offsets the decline and stocks rise.
  • Bearish for stocks. Rising inflation caused by escalating trade frictions lifts interest rates, but has a chilling effect on the economy and corporate earnings. The Federal Reserve likely avoids going full Volcker, and simply keeps rates constant in 2019 knowing an inflation-induced recession will take inflation lower without their having to become a political pariah. Multiples contract due to higher rates, but earnings are down 10% rather than the current forecast of +10%. The combination pushes US stocks lower.

Capital markets currently see the bull case as much more likely, and the other end of the yield curve – 2 Year Treasuries – supports that interpretation. It sits at 2.68% today, just 1 basis point off its post-Financial Crisis high, and has been moving upward all year. This is entirely consistent with the view that the Federal Reserve will respond to a strengthening US economy with higher rates through 2019. A trade war recession isn’t priced in at all.

The Fed Funds Futures market tells a similar story:

  • The odds of 2 more rate hikes in 2018 is up to 67% versus just 44% a month ago.
  • Futures also price in an all-but certain 50 basis point increase in 2019 (2 hikes), and a growing chance of 3 rate increases.

So far we’ve tread familiar ground, but we also want to point out one risk factor for Treasury yields that doesn’t get enough attention: rising levels of new issuance. This was one less-reported factor in today’s move over 3.0% in 10-Year bonds. The US Treasury surprised debt markets by announcing a new 2-month bill, an increase in the size of this quarter’s note auctions by $1 billion/month, and an August increase in bond auctions of a similar amount. More paper coming, in other words, and higher yields needed to clear them.

This announcement sent us to the Daily Treasury Statement (essentially the nation’s checkbook) to assess YTD tax/withholding receipts. These have been harder to predict in 2018, given tax reform and changes to withholding tables. The data:

  • 2018 Calendar YTD Tax/Withholding (Individual and Corporate): $1,752 billion
  • 2017 Calendar YTD: $1,769 billion
  • Difference: $17 billion, or 1% lower this year
  • This decline, while small, compares to a modest expected increase (0.2%) in 2018FY receipts as published by the Office of Management and Budget in their Mid-Session review last month.

The bottom line is that Treasury’s announcement likely stems from a revenue shortfall in 2018. Again, this is understandable. Tax reform happened at the very end of last year, and many companies were slow to change withholding tables or have their employees complete new tax forms.

This unexpected revenue miss is important, because it ties to how poorly the US balance sheet is set up for the next recession. Small shortfalls are OK, but the 2000-2003 recessionary experience (a pretty normal recession) saw a 12% decline in receipts over 3 years. Part of that was fiscal stimulus, and part was lower receipts. In total these swung the US deficit by $614 billion into the red.

The US faces a larger challenge now, because the OMB is looking for +$1 trillion deficits from 2019FY to 2021FY and there are no recessions baked into their numbers. Debt held by the public – the sort that markets actually have to absorb – rises by $3.4 trillion over that 3-year period. And remember that government fiscal years start in October, so we are 2 months away from a $1 trillion deficit run rate sitting here in August.

Pulling this discussion back to US equity prices, we have one question from all this: are markets ready for higher US Treasury rates if they are caused by incremental issuance and (perhaps) overly optimistic revenue estimates? Long-term rates are important mechanisms that allow the economy to self-correct in a recession. And whenever that comes, deficits will be larger than during any other non-recessionary period in history.

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Senators Seek “Crushing” Sanctions For Russia In New Bill

In the latest effort to punish Moscow over alleged election meddling, as well its role in both Ukraine and Syria, a bipartisan bill has been introduced in the Senate Thursday that seeks to be so far reaching that it’s being widely described as “crushing”.

Predictably, it has as sponsors such Congressional hawks as Senators Bob Menendez, John McCain, and Lindsey Graham — the latter which announced the bill’s goal is to “impose crushing sanctions and other measures against Putin’s Russia until he ceases and desists meddling in the U.S. electoral process, halts cyber-attacks on US infrastructure, removes Russia from Ukraine, and ceases efforts to create chaos in Syria,” according a statement. 

Via Google News

According to lawmakers’ statements, the Graham-Menendez bill introduces harsh new restrictions on sectors ranging from energy and oil projects to uranium imports and on sovereign debt transactions. And the new sanctions further target various Russian political figures and oligarchs. 

Bob Menendez (D) of New Jersey called the measure the “next step in tightening the screws on the Kremlin” so Putin understands “that the U.S. will not tolerate his behavior any longer.”

Other supporters include Sens. Cory Gardner (R-Colo.), Ben Cardin (D-Md.), and Jeanne Shaheen (D-N.H.) among those previously mentioned. 

In a statement Sen. John McCain said, “Until Putin pays a serious price for his actions, these attacks on our democracy will only grow. This bill would build on the strongest sanctions ever imposed on the Putin regime for its assault on democratic institutions, violation of international treaties, and siege on open societies through cyberattacks and misinformation campaigns,”

Notably, part of the legislation would require the State Department to make an assessment on whether Russia should be designated as a state sponsor of terrorism.

It might have trouble passing, however, as even though a broad spectrum of legislators have lately criticized President Trump for meeting Russian President Vladimir Putin in Helsinki last month and have charged Russia with seeking to interfere in US elections, there’s concern that it could inadvertently impact markets beyond Russia’s borders. It would further have to pass the House of Representatives before going to Trump’s desk. 

According to Reuters:

The Banking and Foreign Relations Committees are planning hearings in advance of legislation coming to the floor. Some senators have expressed concern new sanctions might go too far or not succeed in getting Putin to change course.

The Treasury Department has warned Congress against legislation that would block transactions and financing for Russian sovereign debt in part because of the pain it would wreak across markets outside Russia’s borders.

The bill is considered the broadest and most far reaching of any Russia sanctions bill previously considered. Sen. Graham had previously described that it would include everything but “the kitchen sink.” 

Meanwhile the ruble and Russian local bonds were shaken moments after the bipartisan legislation was announced Thursday: the ruble traded down by as much as 0.9 percent against the dollar, and bond yields jumped to the highest level since July last year.

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Good Morning America Shouldn’t Encourage Parents to Worry All the Time

BrooksGood Morning America did a follow-up story on The New York Times piece about Kim Brooks, who was arrested for letting her son wait in the car for five minutes.

In her piece, Brooks explored why we seem so determined to harass parents for leaving their kids in a statistically very safe situation. (How safe? Far safer than the kids were while getting driven to the store.)

Unfortunately, Good Morning America may have encouraged people to reach for their pitchforks. For the final word on this story, it turned to its expert, ABC News Senior Legal Correspondent and former Federal Prosecutor Sunny Hostin.

Hostin recalled a time she had accidentally left her child in the car for two minutes and felt terrible, which is understandable. She meant to take the kid but forgot. (Which is one reason a “never leave your kids in the car” law is pointless: the forgetters don’t realize they have left their kids in the car). But from this she concludes:

Listen, I don’t think you can be too nosy when it comes to little kids. I think we are a village…. Err on the side of protecting your child.

To which the host replies:

Correct, because that’s the intention of anyone who’s getting involved typically is to protect your child.

But of course, forgetting your kid in the car isn’t the topic of debate here. Making an informed judgment is.

We should not err on the side of protecting the child in cases where the children don’t need protecting—like when a parent knows they’re running a short errand and deliberately decides to let the kid wait briefly in a car. If you’re worried the parent isn’t coming back, wait a little bit and see. Don’t reflexively call 911. And when the parent does come back, don’t treat them like an outlaw for doing something statistically very safe.

Defaulting to an absolutist position of safety first means we would have to keep our kids in bed in bubblewrap all day. It’s ridiculous to remove good judgment from the equation, and yet that is what Good Morning America recommends: always assume a child is in danger and that the parents are bad.

When we overestimate danger, we treat everyone like they are fragile and in need of supervision. This is neither prudent nor kind.

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The New York Times Shouldn’t Fire Sarah Jeong for Racist Tweets About White People

JeongAnother day, another attempt to get somebody fired over offensive tweets. This time the target is Sarah Jeong, a journalist who recently joined the editorial board of The New York Times.

Jeong, an expert on tech policy and internet culture, is the author of The Internet of Garbage, a book about online harassment. Yet Jeong, who was born in South Korea, has a habit of tweeting disparaging things about white people. “Dumbass fucking white people marking up the internet with their opinions like dogs pissing on fire hydrants,” she wrote in November 2014. “#CancelWhitePeople,” she hashtagged around the same time. “It’s kind of sick how much joy I get out of being cruel to old white men,” she tweeted a couple months earlier.

I strenuously objected to Disney’s firing of Guardians of the Galaxy director James Gunn over his offensive tweets about pedophilia. Gunn was obviously joking; he was trying to provoke or amuse, not communicating something he actually believed. Similarly, Jeong claims her statements were satire. She was responding to harassing tweets she had received by mimicking their tone and structure and substituting “white people” for whatever slur the trolls had directed at her. This was not an especially wise course of action, and it’s one she regrets.

The New York Times addressed the controversy in a statement on Thursday:

That ought to be enough. A culture in which people are allowed to seek forgiveness, grow, and go on with their lives without losing their jobs is vastly preferable to one in which armies of trolls are constantly hunting for that one career-ending tweet, statement, or association.

One wonders, however, why Jeong is allowed to come out of this unscathed when the same dispensation was not granted to Quinn Norton, who was asked to join the New York Times editorial board as a tech specialist last February and fired immediately after her ill-advised tweets were publicized. Norton had used an anti-black slur and an anti-gay slur (she claimed she belongs to the LGBT community, so this was in-group usage), and she was friends with the alt-right hacker weev (she claimed she did not share his pro-Nazi views and hoped she could persuade him to abandon them). When these facts came to light, The New York Times and Norton went their separate ways.

Part of the problem here is that people with a special expertise in technology policy are likely to have spent a lot of time on social media, and the more time one spends on social media, the greater the opportunity to say something career-ending. Again, I don’t think anyone is solely defined by their worst moment or stupidest opinion, and both Jeong and Norton probably have much of value to contribute. The same goes for Kevin Williamson (speedily dumped by The Atlantic for some offensive comments about women who have abortions) and Ben Shapiro (rejected as a plausible candidate for “reasonable conservative that liberals should pay attention to,” in part because of some gross and juvenile statements he made, some of which he has renounced).

I’m tempted to think there’s a pretty fundamental reason that Jeong weathered the storm, while Norton and Williamson drowned at sea. Norton and Williamson committed thought crimes against intersectional progressivism. But “white people” are not an exploited category, according to the kind of thinking popular on college campuses these days, and many leftists therefore do not think it is wrong to malign them. Calling out this hypocrisy is a worthwhile exercise; supporting the lynch mob against Jeong is not.

One could certainly make the argument that woke anti-whiteness is an important strand of leftist thought that deserves representation at The New York Times. Bad opinions, after all, should be grappled with and argued against. Unfortunately, Jeong’s job at the Times will consist of researching and writing the paper’s unsigned editorials. That means we won’t see her byline, and it will be harder to directly contend with the views she holds. Instead, they will be subtly influencing the paper in ways that are difficult to parse. But that’s an argument for getting rid of unsigned editorials, not an argument for getting rid of Jeong.

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Inflation Everywhere As Americans Feeling Pain Over Tariffs, Gas Prices And Lumber

Despite holding rates steady on Wednesday, the Federal Reserve signaled future rate hikes with its upgraded assessment of the US economy – describing it as “strong” with “solid” growth. Inflation is close to their 2% target based on the Fed’s preferred metric, the Personal Consumption Expenditures (PCE) – while its cousin, the Consumer Price Index (CPI) rose 2.9% year-over-year. 

And while the official figures suggest inflation is well in check, Americans seem to be having a totally different experience at home – as rising gas prices and an escalating trade war are already putting a serious dent in disposable income (with $200 billion in Chinese goods at risk of a new, 25% tariff). And while industries tied to discretionary spending such as luxury goods and RV’s have already taken a hit, Americans should probably strap in – as goods exposed to tariffs as well as higher fuel and raw-material costs are set to cause more pain in consumer wallets, reports the Associated Press. 

Thanks to steel and aluminum tariffs imposed in May aimed at boosting America’s manufacturing base, steel and aluminum prices have risen by 33% and 11% respectively – trend which could cost the US beverage industry nearly $348 million, according to The Beer Institute.

Meanwhile, higher prices across several industries have already taken their toll on household budgets.

Janette Hendricks said she has noticed higher prices on “just about everything” in the past three months or so. That’s put a little pressure on the recently retired nurse in Washington. So she goes shopping less often, “makes things stretch,” and she always shops for things on sale. She said she has also considered going back to work to have more cushion in the budget.

“The economy is doing great, so why is everyone doing so poorly?” she asked. –AP

And as we reported on Tuesday, Americans are already facing higher prices for key staples. Last week, Coca-Cola CEO James Quincey said tariffs are going to inflate drink prices. “Clearly it’s disruptive for us. It’s disruptive for our customers,” Quincey said.

Proctor & Gamble similarly warned of squeezed profit margins due to higher costs and rising competition. As a result, the prices of Bounty paper towels, Pampers diapers, Charmin toilet paper and Puffs tissues are going up and average of 4%. 

Price hikes on other key items are also causing pain throughout the economy, such as gasoline, which has surged over 24% in the last year, while June rents and other housing costs were up 3.4% year-over-year, and auto insurance spiked over 7% during the same period. To cope, people are cutting back wherever they can. 

Hendricks said she and her husband also drive far less as they’ve noticed gas prices on the rise. Halla Byer, 28, has also seen the cost of filling up her car go up. The recently unemployed Portland, Oregon, resident feels optimistic about opportunities in the city, but joked of higher prices “making broke people more broke.”

Thanks to rising fuel costs, airlines have been cutting unprofitable flights from schedules, as spot prices for jet fuel are 50% higher than they were a year ago. American Airlines suffered a huge hit to its second-quarter profits, which fell by over 1/3 as spending on fuel surged. In response CEO William Douglas Parker warned about rising fares – while Delta CEO Edward Bastian anticipated prices rising around 4% over last year. 

“Pricing is certainly a function of cost, and with higher fuel prices, you’re going to expect to see ticket prices go up as well,” he told investors in July.

Homebuilders are anticipating pain as well, as Tariffs Trump imposed on Canadian softwood lumber (which Canada was heavily subsidizing to undercut US producers), have boosted the average cost of home construction by $7,000 – an increase which will undoubtedly be passed along to home buyers, which may translate to a possible slowdown in home construction. AP notes that both building permits and ground  breakings slowed in June, according to the Commerce Department.  

“Any higher costs for material comes right out of our profit,” said Randy Noel, a custom builder in Louisiana and chairman of the home builders’ board.

Higher costs mean his company has only sold 30 homes this year, rather than the normal 40. He’s been using fewer subcontractors on projects — which means those workers lose income.  –AP

“They’re sitting at home and looking for remodeling jobs,” Noel said.

Real wages stagnating

Meanwhile, real hourly wages have fallen 0.2% in June from a year earlier among production and nonsupervisory employees – a category which includes blue-collar workers. 

“It’s the boiling-frog metaphor,” said Marc Hall, a 58-year-old writer and corporate-communications specialist at a software firm in Rockville, Md. “You notice it a little at a time, here and there, and then at the end of the year, you say, ‘Yeah, things went up a lot, didn’t they?’”

Mr. Hall said that while he received a 2% pay raise in the past year, he senses that his earnings haven’t kept up with the cost of living, adding, “It’s a net loss.”-WSJ

Last month, JP Morgan chief global strategist David Kelly noted “Wage growth remains surprisingly weak,” which he suspects is a net plus for producers. “The remarkable ability of firms to lure more workers back into the labor force and get stronger productivity gains from them without raising wages is a clear positive for profits.”

Workers, on the other hand, may find themselves “enjoying” their winter bundled up with a nice hot cup of Ramen noodles. 

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Freedom of Speech Is Important, the ACLU’s Top Lawyer Explains to So-Called Liberals

David Cole, the American Civil Liberties Union’s national legal director, tells New York Times readers they shouldn’t “lose faith in the First Amendment.” Although Cole’s op-ed piece is explicitly directed at “liberals or progressives,” it can also be read as an oblique rejoinder to libertarians and conservatives who worry that the ACLU itself has lost faith in the First Amendment.

That concern is not new. Back in 1990, Reason published a cover story in which Charles Oliver argued that the ACLU’s commitment to freedom of speech had been compromised by its pursuit of progressive causes. “In recent years,” he wrote, “the ACLU has adopted an expansive definition of ‘civil liberties’ that dilutes its absolutist commitment to free speech. The ACLU, critics say, is now more committed to goals such as comparable worth, government aid to the homeless, and nuclear disarmament than to defending the First Amendment.” Oliver noted that critics, including longtime ACLU members such as Nat Hentoff and Alan Dershowitz, were complaining that “greed and left-wing ideology have corrupted the union,” which had “diluted its message, compromised its mission, and, in some instances, abandoned its commitment to the First Amendment.”

Nearly three decades later, the argument about the ACLU’s support for freedom of speech continues, which tells us two things: The organization is still divided on the question, and the stalwarts are influential enough that the ACLU is still willing to defend the First Amendment rights of people who offend progressives.

As Robby Soave noted in June, the latest evidence of internal qualms about free speech is a staff memo revealed by Wendy Kaminer, a former member of the ACLU’s national board, that says the organization’s lawyers, in selecting First Amendment cases, should consider the impact of speech on “other values advanced by the ACLU,” such as equality and racial justice. While the memo repeatedly affirms the ACLU’s commitment to defending speakers whose views its members find repugnant, the very idea that the organization’s goals conflict with each other is a license to prioritize some of those “other values” over freedom of speech. “In deciding how to use our limited resources,” the memo says, “no civil liberties or civil rights value should automatically be privileged over any other. There is no presumption that the First Amendment trumps all other amendments, or vice versa.”

The assumption that the “rights” defended by the ACLU inevitably conflict with each other is not only troubling but incoherent, since the whole point of rights is to avoid conflict by delineating each person’s legally enforceable claims. If one person has a right to spout racist bile, it cannot be true that another person has a right to silence him. Yet the memo implies that freedom of speech conflicts with other rights. “Speech that denigrates [marginalized] groups can inflict serious harms,” it says, “and is intended to and often will impede progress toward equality.” It is not hard to see why such loose, compromise-inviting talk bothers critics like Kaminer and former ACLU Executive Director Ira Glasser.

Cole’s response to Kaminer reaffirmed “our commitment to defending speech with which we disagree,” but it also repeated the memo’s thesis that First Amendment cases can “pose conflicts between our values.” In his New York Times piece, Cole argues that the ACLU still takes a viewpoint-neutral approach to First Amendment cases:

In just the last year or so, my organization…has invoked the First Amendment to defend high school students disciplined for walking out from school to call for gun control, as well as other students penalized for posting pictures of guns on social media; a student newspaper denied funding after publishing a satire of “safe spaces,” as well as fans of a hip-hop band labeled gang members; Milo Yiannopoulos and the animal rights group People for the Ethical Treatment of Animals, both of whom were denied permission to advertise on the subway by the Washington Metro Authority; and anti-Trump as well as pro-Trump demonstrators. We’ve defended flag desecraters, union organizers, and citizens blocked from their representatives’ Facebook sites for their criticism.

Cole wants progressives to understand the value of this approach, which defends a principle that is useful to the left as well as the right. “When the Roberts court ruled that the First Amendment prohibited holding the Westboro Baptist Church liable for displaying anti-gay signs outside a military funeral,” he writes, “its rationale would equally protect Revolutionary Communist Party demonstrators holding anti-Christian signs outside the Westboro Baptist Church.”

Cole rebuts the idea that neutrality is suspect because it favors the rich and powerful. Actually, he says, “the First Amendment favors people without power and influence. In a democracy, the rich and those in the majority don’t need constitutional protections; they can generally enact their desires through ordinary political processes. The targets of censorship are typically dissidents, outsiders, the marginalized.”

All of this is good to hear from the ACLU’s national legal director, although Cole’s defense of the First Amendment is purely instrumental. He says progressives should support freedom of speech because it helps advance their goals, not because using force to silence offensive speakers is unjust or immoral.

That omission may just mean Cole knows his audience. “The fact that conservatives benefit from the First Amendment is not something to bemoan,” he says. “It is part of the constitutional bargain.” Cole does not assume that so-called liberals will understand there is a principle at stake here, or even what a principle means. That would indeed be a dangerous assumption, judging from the grumbling within his own organization about the freedom that white supremacists and other unsavory characters enjoy under the First Amendment. While Cole’s defense of free speech is encouraging, the need for it is depressing.

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One Trader Scoffs “This Isn’t Even Close To A Real JGB Crisis”

Authored by Kevin Muir via The Macro Tourist blog,

Given the reporting regarding the recent action in the Japanese government bond market, you would think that another late 1970s style bond bear market had descended upon Japan.

“Biggest plunge since Lehman…”

“The 1% Threat in Japan That Has Global Bond Markets On Edge…”

“BOJ Policy Change Speculation Roils Markets”

The breathless commentary about the large standard deviation move in JGB futures has reached a feverish pitch. The highlighting of the massive Z-score move that has resulted from the Bank of Japan expanding the range of their 10-year JGB yield peg is filling my inbox.

But let’s step back and think about this logically.

If you peg an asset or a rate, then by definition, it will be less volatile. Since the BOJ has pegged the 10-year JGB yield for the past couple of years, any change from that level will cause an abnormally large move in terms of recent volatility. Therefore all these comments about how this is the largest move in years are useless. Of course the Z-score move is through the roof. No shit Sherlock. It’s like reporting on the Z-score for the price of a sofa. It’s stable, stable, stable, stable, then boom – the store marks it down 25% in a Labour Day sale. Holy smokes -the largest Z-score move since Lehman! The world is coming to an end, better stock up on canned food and ammo.

JGBs have long stopped being a real market, so don’t apply traditional market metrics to it.

Now on to my next pet peeve. Given the commentary, you would think there is a real crisis occurring in the JGB market.

There have been tons of charts like the following that show the “JGB Crash”:

Sure looks scary. That’s quite the collapse.

But is it really?

It’s all a problem with scale.

Don’t forget that the JGB market has been extraordinarily stable since the BOJ peg.

Let’s back up and look at the JGB 10-year yield chart over a longer time period:

I don’t know about you, but I am having a difficult time finding this “crisis” on the chart.

And the whole idea about this JGB sell-off being anything more than a blip is laughable when you look at the JGB futures chart with the carry incorporated into the continuous chart:

I can already hear the pushback to my argument. This is just the start. The warning shot across the bow. It’s not just the effect on the JGB market, but Japanese investors have caused sell-offs in other sovereign bond markets.

Sure, that could be. I have no doubt that this move caused some ripples in global bonds.

Yet let’s not kid of ourselves. To call this recent JGB move a big-deal is insulting to true market dislocations. Lord help us if this is what now counts as a crisis.

I am not some sort of Pollyanna who thinks all is rosy in the world and you shouldn’t be worried about the massive distortions caused by central banks. But to think this anything more than a minor tweak to a truly nut-bar policy is naive. Kuroda will settle the JGB market down and within a week the world will have forgotten about this JGB bond crisis. At that point, there will be some new topic with an equally dire headline that get pundits hyperventilating which takes over the front page of the financial news media.

Don’t mistake my comments as a belief you should buy bonds. I wouldn’t touch long-dated sovereigns of any stripe. This global bond bubble will end badly. But let’s not pretend that this recent move resembles anything more than a tiny hiccup.

I personally can’t wait until central banks truly lose control of the bond market. At that point 4 bps JGB moves will look like child’s play.

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NYT Hires Editor Who Absolutely Hates “Dumbass Fu*king White People” 

The New York Times has hired a flaming bigot, whose tweets from just 48 months ago would have gotten Roseanne Barr excommunicated from the planet were the race simply changed. 

On Wednesday the paper announced the addition of Sarah Jeong to their editorial board as the “newest in a fab group of recent additions.” As the Daily Caller‘s Amber Athey notes, Jeong previously wrote for the Verge and authored a book about online harassment and free speech titled “The Internet of Garbage.” 

One of Jeong’s tweets from 2016 reads: “Dumbass fucking white people marking up the internet with their opinions like dogs pissing on fire hydrants.” Another reads “oh man it’s kind of sick how much joy I get out of being cruel to old white men“

And while words don’t hurt anyone, so who cares – the left has established that anyone’s tweets can qualify them for a witch hunt, which is why director James Gunn is no longer employed by Disney after several very pedocentric tweets were unearthed. 

Jeong is apparently a chartist as well:

As a thought exercise, let’s simply change the race Jeong hates so much to black people, as the Twitter account @NotRacistWhen does, and see how she comes off: 

“Dumbass fucking black people marking up the internet with their opinions like dogs pissing on fire hydrants” 

“oh man it’s kind of sick how much joy I get out of being cruel to old black men” 

“I dare you to get on Wikipedia and play “Things black people can definitely take credit for.” It’s really hard.” 

“1. black men are bullshit” 

“Black people have stopped breeding. You’ll all go extinct soon. This was my plan all along.” 

“#CancelBlackPeople” 

“These are inconvenient truths but we should thoroughly examine them instead of giving onto the PC lie that black people don’t smell bad” 

Now you might be thinking – “Maybe the NYT simply overlooked these tweets when hiring her, and she’ll surely be fired like they did with Quinn Norton after her derogatory tweets about black and gay people were unearthed.”

Nope, In fact, the paper not only says they knew about the tweets as part of her vetting process – they said her bigoted tweets were simply imitating other racists! 

“Her journalism and the fact that she is a young Asian woman have made her a subject of frequent online harassment. For a period of time she responded to that harassment by imitating the rhetoric of her harassers.” 

Jeong provides two examples of such harassment that justified her dozens of rants about white people, along with a statement which reads “I engaged in what I thought at the time as counter-trolling. While it was intended as satire, I deeply regret that I mimicked the language of my harassers. These comments were not aimed at a general audience, because general audiences do not engage in harassment campaigns. I can understand how hurtful these posts are out of context, and would not do it again.”  

Roseanne Barr, meanwhile, said she didn’t know former Obama admin staffer Valerie Jarrett was black when she compared her to a character from “Planet of the Apes,” resulting in ABC swiftly firing her from the reboot of her eponymous show. 

She should have just said she was mimicking racists!

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New Iran Protests, Clashes With Police Gaining Steam After Week Of Plummeting Rial

Here we go again… The AP reports on a new round of protests now spreading to multiple cities in Iran after the dramatic drop in the rial early this week, based on emerging social media footage:

The videos were being circulated on Thursday. They show dozens of demonstrators said to be on the streets in the town of Gohardasht, west of Tehran. The protesters are seen setting fire to police vehicles and shouting “death to the dictator.” Police respond with tear gas.

Iran’s state-run media briefly acknowledged the pockets of unrest in scant reports noting the protests were “without official permission” and isolated, but a series of social media videos emerged Wednesday and early Thursday which appear to show protests and clashes with police gaining steam across multiple cities. 

Demonstrations in Iran’s third-largest city, Isfahan on Wednesday. Image source: Radio Farda via VOA News

The Iranian rial dropped to an historic low this week just ahead of a new round of renewed US sanctions set to begin Monday, August 6. 

Previously in July protesters clashed with police in short-lived demonstrations outside of parliament in Tehran as merchants of the Grand Bazaar shuttered their stores while economic woes amidst looming sanctions renewal and runaway inflation meant they lost money by merely staying open.

Those prior protests lasted only three days and included a swift crackdown by authorities; however this week’s protest will likely continue to grow through the weekend. 

Demonstrations involving crowds of hundreds were reported on Wednesday and Thursday in a handful of locations, including in the northern city of Rasht, as well as the city of Karaj, adjacent to Iran’s capital.

Both cities witnessed fierce clashes with police deploying riot control measures, according to unverified social media accounts. 

Activist accounts have also claimed government messages were sent to cell phones in the country accusing the United States and Saudi Arabia of stoking domestic turmoil. 

The US government-funded news source VOA has featured this week’s social media protest footage out of Iran and noted anti-regime slogans, including chants of “The silence of any Iranian [in response to Iran’s current problems] is a betrayal against the country.”

Iran’s currency is now nearing collapse ahead of sanctions. Days ago an elite top military commander urged President Hassan Rouhani to take “revolutionary actions” to prop up the falling rial.  

Protesters appear to be responding primarily to a sharp hike in prices on imported products after the dollar’s surge to record highs against the rial in black market trading. The unofficial rate of the Iranian rial plummeted to a record low at estimatesof between 112,000 and 120,000 rials against the dollar on concerns over the imminent return of full US sanctions.

Addressing Iran’s president, Islamic Revolutionary Guard Corps (IRGC) commander Mohammad Ali Jafari said,“The unique and extensive backing you benefited from in past weeks shouldn’t preclude you from taking revolutionary actions to control prices and prevent the enormous increase in the price of foreign currency and gold,” in an open letter published by the privately owned Tasnim news agency. “Decision-making in today’s difficult circumstances necessitates revolutionary determination and decisiveness in dealing with certain managers’ weaknesses,” the IRGC top commander said. 

With protests possibly in the early phases and as the August 6 US sanctions are set to take effect, things in Iran are likely about to get a lot worse.

developing…

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Was Q2 GDP Really All That Extraordinary?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, while I was on vacation, I penned a report prior to the release of the second quarter GDP report in which I noted the following:

“Tomorrow, the US Department of Commerce will report its advance estimate of 2Q GDP which will be the long-awaited evidence that “Trumponomics” is working. The current estimates for the initial print run the gamut from 3.9% to over 5% annualized growth. Regardless of the actual number, the White House spokesman will be quick to take credit for success in turning America’s economy around.

But is that really the case? First, there are several things to remember about the initial print on economic growth.

  • The initial estimate is based on the collection of estimates from Wall Street economists.  With no real data in just yet, the initial estimate just a “guess.”

  • The number is annualized. So, a growth of 1% in the economy is reported as 4%. However, as we know from the first quarter, quarterly growth can vary widely in a given year.

  • Lastly, a one-quarter surge in economic growth doesn’t make much difference in the long-term trajectory of economic growth, or in this case, ongoing weakness.  The chart below shows the change in economic growth by decade.”

As noted, the 1% growth rate in the second quarter was multiplied by 4-quarters to reach the proclaimed 4.1% growth rate. However, there is little evidence to support the notion that such mathematical projections have much validity. The chart below shows inflation-adjusted GDP growth on a quarterly basis as compared to economist expectations of sustained growth over the next 3-quarters. Not surprisingly, economic growth tends to vary widely from those expectations. More importantly, spikes in economic growth tend to lead lower rates over subsequent quarters. 

As we now know, the actual first estimate aligned with the 4% assumption made last week along with the expectation the current Administration, and media pundits, would go “all giddy.”

However, from a portfolio management standpoint, I am more interested in the “devil in the details” as economic growth is key to sustained growth in corporate revenue and profits. From an investment standpoint, it is more important to understand the sustainability of economic growth when projecting forward returns and modeling asset allocations around those assumptions. There are also several other important considerations with respect to the most recent GDP report.

Economy Gets A $1 Trillion Boost

With the release of the Q2 GDP report, and not covered by any of the mainstream media, was an adjustment the economic data going all the way back to 1929.

As noted by Wolf Richter:

“What the Bureau of Economic Analysis released Friday as part of its GDP report was a huge pile of revisions and adjustments going back years. It included an adjustment to the tune of nearly $1 trillion in ‘real’ GDP. And it lowered further its already low measure of inflation.

Comprehensive updates of the National Income and Product Accounts (NIPAs), which are carried out about every five years, are an important part of BEA’s regular process for improving and modernizing its accounts to keep pace with the ever-changing U.S. economy. Updates incorporate newly available and more comprehensive source data, as well as improved estimation methodologies. The timespan for this year’s comprehensive update is 1929 through the first quarter 2018.“

Where did a bulk of the change come from? A change in the calculation of “real” GDP from using 2009 dollars to 2012 dollars which boosted growth strictly from a lower rate of inflation.  As noted by the BEA:

“For 2012-2017, the average rate of change in the prices paid by U.S. residents, as measured by the gross domestic purchasers’ price index, was 1.2 percent, 0.1 percentage point lower than in the previously published estimates.”

Of course, when you ask the average household about “real inflation,” in terms of healthcare costs, insurance, food, energy, etc., they are likely to give you quite an earful that the cost of living is substantially higher than 1.2%. Nonetheless, the chart below shows “real” GDP both pre- and post-2018 revisions.

Importantly, the entire revision is almost entirely due to a change in the inflation rate. On a nominal basis, there was virtually no real change at all. In other words, stronger economic growth came from a mathematical adjustment rather than increases in actual economic activity.

Population Matters

When the media reports on economic growth, employment gains, retail sales, personal consumption expenditures or a variety of other measures, there is little consideration given to increases in the population.

With respect to economic growth, population increases matter. In an economy that is 70% driven by personal consumption expenditures, adding more consumers to the population will positively impact economic growth. The increase in demand from additional consumers will lead to an increase in retail sales, employment gains, etc. However, as we showed previously, while there is much “hype” about employment gains in the economy, the reality is that employment has failed to keep pace with population growth.

The chart below shows the difference between “real” GDP growth and “real” GDP growth per capita.

As you can see, once you adjust for population, the growth rate of the economy looks very different. However, we can see a clearer representation of the difference when looking at the average growth rate per decade. I have projected the data out, based on current assumptions, through 2025.

There is a significant difference between reported economic growth rates and GDP per capita. Currently, at just a 1.4% annual growth rate in GDP per capita going forward, the expectations for higher returns on investments must be reconsidered. It is unlikely, with debt to GDP ratios elevated, interest rates rising, and wages stagnant that higher rates of growth can be sustained.

It Wasn’t Really 4%

As was quoted previously, the second quarter GDP report was inflated by a number of one-off factors that will dissipate in the quarters ahead.

“An unusually large number of one-off factors appear to have boosted 2Q GDP, many of which are directly related to escalating trade concerns. As companies and countries race to secure supplies that may become expensive later on, exports have surged and inventories have swelled. If these trends are one-time adjustments (and our economists believe they are), the ‘payback’ in 2H could be significant. Enjoy the 2Q GDP number, which may be the last best print for a while.”

Our friends at the Committee for a Responsible Federal Budget provided a good piece of commentary showing the impacts of recent legislation and political actions.

“Most of this growth comes from the one-time surge in consumption that accompanies deficit-financed legislation. We recently estimated that other deficit-financed bills would generate a further 0.2 percent of growth.

At the same time, many analysts believe the second-quarter growth numbers are artificially inflated by shifts in consumption to avoid the new tariffs announced this quarter. Most significantly, China appears to have accelerated purchases of soybeans, crude oil, and other exports before new tariffs went into effect. Pantheon Macroeconomics estimated the soybean surge alone could account for as much 0.6 percentage points of the growth rate. These accelerated purchases mean faster growth now at the expense of slower growth later.

Assuming CBO’s numbers apply evenly on a quarterly basis and Pantheon’s numbers are correct, these temporary factors alone account for 1.4 percentage points of annual growth – meaning without them the second-quarter growth rate would fall to 2.7 percent. Even this 2.7 percent figure is likely inflated by the accelerated export of other goods, as well as one-time recovery effects.”

“Growth of 4.1 percent is a fast quarterly growth rate, the highest since the third quarter of 2014 (4.9 percent). Nevertheless, it’s notable that this growth rate is based on several temporary and predictable factors. But importantly, growth often fluctuates quarter to quarter – and over the course of the year, economic growth is likely to be significantly slower.”

We concur with that outlook and expect a significant softening of economic growth over the next couple of quarters. Furthermore, while a one-quarter anomaly is certainly good for media sound bytes, it is a far different matter when it comes to investing capital. The recent pop in economic growth did little to change the long-run dynamics of the economy as I showed previously. More importantly, the quality of economic growth continues to deteriorate due to structural shifts in the economic backdrop.

In modeling assumptions for future returns on invested capital, expectations of weaker economic growth rates must be considered. As we discussed in our third chapter of “Myths of Stocks For The Long Run” if:

  • GDP maintains a 2% annualized growth rate, AND
  • There are NO recessions….ever, AND
  • Current market cap/GDP stays flat at 1.25, AND
  • The current dividend yield of roughly 2% remains,

Using Dr. John Hussman’s formula we would get forward returns of:

(1.02)*(.8/1.25)^(1/30)-1+.02 = 2.5%

But there’s a “whole lotta ifs” in that assumption.

More importantly, if we assume that inflation remains stagnant at 2%, as the Fed hopes, this would mean a real rate of return of just 0.5%.

Economic growth matters, and it matters a lot.

As an investor, it is important to remember that in the end corporate earnings and profits are a function of the economy and not the other way around. Historically, GDP growth and revenues have grown at roughly equivalent rates.

Forget the optimism surrounding “Trumpenomics” and focus on longer-term economic trends which have been declining for the past 30+ years. The economic trend is a function of a growing burden of debt, increasing demographic headwinds and, very importantly, declining productivity growth. I see little to make me believe these are changing in a meaningful way.

Lastly, do not forget that interest rates, despite recent increases, are near historical lows and the Feds balance sheet is still 4 times as large as it was before the financial crisis of 2008. Further, the U.S. Treasury will borrow $1.3 trillion this year which will directly feed economic growth. Just ask yourself where would the economy be if this extreme monetary and fiscal policy were not in place.

Still think everything is “hunky dory?”

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