President Trump announced early this week that the US will withdraw from the deceptive Iranian nuclear deal. President Trump made his position on the terrible Iran deal clear during his 2016 campaign.
This didn’t stop former Secretary of State John Kerry from acting as a rogue government agent against the Trump administration, in order to redeem the lame deal with the oppressive Iranian regime.
Many have referred to this as “Shadow diplomacy,” we prefer to call it treason.
The President was quick to call Kerry out:
The United States does not need John Kerry’s possibly illegal Shadow Diplomacy on the very badly negotiated Iran Deal. He was the one that created this MESS in the first place!
During his speech to the NRA, Trump criticized Kerry for his fundamental role in negotiating the Iran deal.
“We have the former administration as represented by John Kerry, not the best negotiator we’ve ever seen,” Trump stated.
“He never walked away from the table, except to be in that bicycle race where he fell and broke his leg.”
Naturally, the Iranian regime is extremely upset with President Trump and his decision to re-impose a great number of sanctions on Iran.
Here’s where it gets good…
Iran’s Foreign Ministry Spokesman Hossein Jaberi Ansari has just warned Western politicians that if they do not put pressure on the Trump administration the Iranian regime will leak the names of all officials who accepted bribes to pass the disastrous deal in the first place!
H.J.Ansari Zarif’s senior advisor: “If Europeans stop trading with Iran and don’t put pressure on US then we will reveal which western politicians and how much money they had received during nuclear negotiations to make #IranDeal happen.”
That would be interesting.#JCPOA
No wonder Kerry is in a panic trying to salvage deal. Obama and rest of BenRhodesian crew must be on list too. I want to know how many network CEOs got captured. #ABC#CBS#CNN#AMJoy#inners#AMR
How does a social club business model that relies on exclusivity grow itself quickly?Get a little less exclusive and invite more masses to join and then, pitch to people that your best quality is that you aren’t like a club at all – at least, this is what Soho House is doing. The famed “exclusive” private social club that caters to people in industries like entertainment and media has figured out a not so creative way around the constraints of having a limited membership (and the resultant limited revenues): simply open the doors to more people.
As the Wall Street Journal reported, this is exactly what Soho House & Co. is doing, and it is paying off for them:
Soho House & Co. Ltd., known for chic, members-only properties catering to those in creative industries such as entertainment and media, is in the midst of a counterintuitive strategy: expanding its limited-entry club model into a global empire.
The 23-year-old London operation says its 19 locations in nine markets around the world currently have 71,000 members, who pay $1,050 to $3,200 each in annual dues for access to the club and its hip events and social networks. (Food and drink not included.)
The company plans to open as many as five new clubs each year in major cities around the world, and is considering a public stock offering in the U.S. as a way to fund that expansion, said founder and Chief Executive Nick Jones. The company’s current locations include London, New York and Istanbul, and new sites are planned in Amsterdam, Hong Kong and Mumbai, among others.
“We really do feel there are some good, long legs here,” said Mr. Jones, who opened the first Soho House in London in 1995. Location No. 20 is set to open later this month in Brooklyn’s Dumbo neighborhood. “There is a lot of white space for us. There are a lot of countries, a lot of cities where there could be more clubs.”
Soho House’s core business model isn’t new. Private social clubs have been around for centuries, popularized in British high society in the 19th century and later in university and city clubs initially tailored to elite businessmen in the U.S.
Since the “selective” process of taking in new members isn’t based on any type of formula and reportedly seems to be completely discretionary, simply opening up the doors to those hungry to pay $3,200 a year to congregate with others who think this is a great use of capital is an easy revenue floodgate for the company to open:
Membership in Soho House is selective. Admission requires a lengthy application and interview process, and the waiting list hovers around 27,000, the company said. But unlike elite private clubs of the past, membership isn’t based primarily on wealth or family status.
There’s no set formula for new admissions. Membership committees for each house meet quarterly and decide how many new members to admit, considering factors such as overcrowding. Members include Matthew Rhys, star of the FX series “The Americans,” and actress Jodie Foster.
Soho House has purged its ranks when members don’t fit the image it wants to portray. In New York after the financial crisis, it removed about 100 bankers from its rolls, the company said. Membership committee decisions are final.
Its average member is 36 years old and getting younger, the company said, compared with an average age of above 50 for the typical U.S. private club, according to data from the National Club Association. Executives say Soho House is tapping into a desire for flexible workplace arrangements such as those offered by WeWork Cos.
At the same time the Soho Club is pushing a posh atmosphere for its members, the company itself has been taking on more debt in order to pursue its expansion plans. This debt has led to ratings downgrades and jostling with the company’s bondholders:
Soho House is majority-owned by billionaire investor Ron Burkle’s Yucaipa Cos., which took a 60% stake in the company in 2012. London fashion and restaurant impresario Richard Caring has a 30% stake, and Mr. Jones owns the rest.
The company posted $371 million in operating revenue in 2016, up 21% from a year earlier, according to data provided to the U.K. government. Approximately half of revenue comes from food and beverage, 20% from membership and the remainder from hotel rooms and other services, according to the company.
As it has pursued global expansion plans in recent years, Soho House has taken on significant debt that led to ratings downgrades by Standard & Poor’s and Moody’s in 2016. Those firms found that the company’s construction and development costs for new properties were quickly eating up its cash.
In early 2017, the company agreed to a consolidation of its debt with one of its bondholders, Permira Debt Managers, according to a person familiar with the matter. The agreement extended the company’s debt maturity to 2022, from 2018, and reduced its average cash cost of debt by 30%, the person said.
But the business model for private clubs – despite the average age and average enrollment of members in the U.S. declining – seems to be in tact.
At least, that’s what someone who is the President of a company who consults for private clubs would argue. Here’s some rock solid logic that should be good enough to help pull off another bond offering with “informed” investors – namely that the best part about the club is that it isn’t like a club at all:
Frank Vain, president of the McMahon Group, which consults for private clubs, said the new generation of urban clubs has found a way to create a mystique around membership without being overtly exclusive or stuffy.
“People always want what they can’t have, and they want something that’s special,” said Mr. Vain. The new clubs “have redefined special. There’s an anticlub aspect to them that is creating a buzz.”
While the idea of a “exclusive” private social club opening its doors to less exclusive members in order to expand its growth seems completely counterintuitive, surprisingly in the day and age of record levels of debt, deficit spending and “companies” like Theranos, it isn’t the worst business model we’ve heard of.
Early Wednesday morning I penned a “Quick Take” discussing the breakout of the two-month long consolidation process. To wit:
“The bulls are ‘attempting a jailbreak’ of the ‘compression’ that has pressured markets over the last two months.
This breakout will provide a reasonable short-term trading opportunity for portfolios as I still think the most probable paths for the market currently are the #3a or #3b pathways shown above.
If we get a confirmed break out of this ‘compression range’ we have been in, we will likely add some equity risk exposure to portfolios from a ‘trading’ perspective. That means each position will carry both a very tight ‘stop price’ where it will be sold if we are wrong as well as a “profit taking” objective if we are right.”
On Thursday, that “jailbreak” occurred with a move above resistance and the previous closing high downtrend.
From a bullish perspective there are several points to consider:
The short-term “sell signal” was quickly reversed with the breakout of the consolidation range.
The break above the cluster of resistance (75 and 100-dma and closing high downtrend line) clears the way for an advance back to initial resistance at 2780.
On an intermediate-term basis the “price compression” gives the market enough energy for a further advance.
With the market close on Friday, we do indeed have a confirmed breakout of the recent consolidation process.Therefore, as stated previously, we reallocated some of our cash back into the equity side of our portfolios.
From a bearish perspective the are also several points to consider:
The volume and breadth of the market rally has been “okay” but not stellar, which suggests this was more of a forced “short-covering” rally than a turn in overall conviction.
The rally, as Doug Kass notes below, was led by a surge in energy prices due to the Iran escalation over the nuclear agreement.
With everyone seemingly short the U.S. dollar, short Treasury bonds and long oil prices, a reversal of that excess positioning seems likely from a contrarian point of view. Such would definitely pressure stock prices lower.
Complacency has once again returned to the market very quickly following such a long consolidation process as noted in the chart below, not only is there a breakout in stocks but also volatility.
“Despite the recent corrective process, investors still remain primarily allocated to equities as shown by the Rydex allocation measures below. With the market testing its longer-term bullish trendline from the 2016 lows, Rydex Bear and Cash allocations remain at low levels while bullish allocations have not fallen much from their recent highs.”
What is clear is there was actually very little “capitulation” by investors over the last couple of months which potentially limits any advance in the markets from current levels.
But, while “everyone loves a good bullish thesis,” let me restate the reduction in the markets previous pillars of support:
The Fed is raising interest rates and reducing their balance sheet.
The yield curve continues to flatten and risks inverting.
Credit growth continues to slow suggesting weaker consumption and leads recessions
The ECB has started tapering its QE program.
Global growth is showing signs of stalling.
Domestic growth has weakened.
While EPS growth has been strong, year-over-year comparisons will become challenging.
Rising energy prices are a tax on consumption
Rising interest rates are beginning to challenge the valuation story.
“While there have been several significant corrective actions since the 2009 low, this is the first correction process where liquidity is being reduced by the Central Banks.”
Pathway #1 is the most bullish of potential outcomes. With earnings continuing next week, and short-term conditions mildly oversold, the market is able to push through resistance and rally back towards old highs. (Probability = 20%)
Pathway #2 is the most bearish with the market failing at the cluster of overhead resistance once again but this time violating the 200-dma. This decline begins a process of a deeper correction as we head into the summer months. (Probability = 30%)
Pathway #3a and #3b suggest a further rally to the 100-dma, a pullback to the previous downtrend and then either an advance that breaks above the 100-dma and begins a more bullish rise, OR a failure and another test of the 200-dma. (Probability =50%)“
While we have been giving the most weight to a version of pathway #3, it was pathway #1 that came to fruition, at least for now. Over the next week, I will begin to map out the next three most probable paths as #2 and #3b have likely been invalidated unless we get a sharp breakdown next week.
On an intermediate-term basis, both of our weekly “sell signals” remain, and as shown below, despite the sharp rally last week, the market remains confined within an intermediate-term consolidation process.
While the break above the previous resistance and moving averages is indeed “bullish” in the short-term, the intermediate-term setup is not as favorable just yet. When, and if, the current “sell signals” reverse, then becoming much more aggressively allocated will make sense.
For now, be careful where you step.
Follow Market Strength At Your Own Peril
It is this longer-term backdrop which keeps us cautious for now, and while we are “trading” the short-term breakout in our portfolios, we are well aware of the more deteriorating conditions on a long-term basis.
As my friend Doug Kass so aptly penned last week.
“I like to write that buyers live higher and sellers live lower because of the structural change in our markets in which passive strategies (quant strategies like volatility trending, risk parity and ETFs, etc.) now dominate over active strategies (hedge funds and mutual funds).
But so do non-passive strategies and far too many retail investors – many of whom worship at the altar of price momentum – buy higher and sell lower. And so do strategists and “talking heads” too often bend with the market winds.
Personally, I don’t think a lot on my bearish checklist has changed since the Spyders (SPY) made another successful test at about $259 only a week or so ago and now are trading at $272. Prices have risen and reward versus risk has eroded.
I continue to look for a down second half of the year.
The political, geopolitical, economic and corporate profit concerns which I have highlighted over the last several months remain very much intact. So does the outlook for interest rate risks, inflation and other fundamental issues present headwinds to a new Bull Market leg.
My view is that the market and economic cycle are maturing.
Rather, I prefer to be opportunistic in the new regime of volatility – buying when others are fearful and stocks are at the lower end of my trading range and selling (now) when others are greedy and stocks are at the upper end of my trading range.
With S&P cash now at around 2720, against an estimated near-term trading range of 2550-2725, a broader projected range over the balance of 2018 at 2200-2850 with a “fair market value” projected at about 2400 — the upside reward versus the downside risk has once again turned negative in all three of these calculations:
Within the context of the short-term trading range (2550-2725) there is limited upside and about 165 S&P points of downside.
Looking at “fair market value” (2400) versus the top end of the 2018 trading range (2850) there is upside of about 130 S&P points compared to 320 S&P points of risk – for a negative ratio of 2.4x.
Finally, when viewed against the low end of the full year range (2200) and the top end (2850) there is upside of only 130 S&P points and downside risk of 520 points – for a negative ratio of 4x.
Let some rationalize the advance and grow more bullish, just as they rationalized the decline (and grew bearish). Though I have enjoyed the ride recently and while I am still net long in net exposure, my foot is now off the accelerator (as discussed in this morning’s opener) as I approach a tactical market exit (likely through defined risk puts).
As always I approach my market view without the sort of hubris and self-confidence that many conduct themselves – recognizing that the only certainty is the lack of certainty and that I do not have a concession on the truth.
I recognize my infallibility especially as it relates to Mr. Market – who often punishes the most and brightest investors at its whim.
I deal with probabilities, not relative strength.
Here are my core observations and current views:
Investor sentiment is growing more bullish with higher prices and investor complacency is now swelling
In a market dominated by passive and momentum based strategies – buyers live higher and sellers live lower
Mr. Market may be approaching the top end of an intact trading range – and reward vs risk has, again, deteriorated
We are in a new regime of volatility that will likely reign over the balance of the year
We remain in a trading sardine market and not an eating sardine market
With machine/algo domination I am giving Mr. Market a wider berth in my trading strategy – that is to say that I am not trying to capture every zig and zag
I may be wrong!
Moreover, and importantly, the most recent leg higher has been led by energy stocks – historically a signpost of caution and another possible arrow for the Bearish cabal.”
While we are more “reactive” than “predictive,” I couldn’t agree with Doug’s sentiment more. We are long-term investors and seek to buy “value” when such is present.
Currently, value is a scarce commodity so we remain both patient and highly sensitive to the risk of a bigger correction action coming in the months ahead.
Just to be clear, we have modestly increased equity exposure, but we do so from a “trading” perspective with very tight “stop-loss” levels while we still continue to hold a higher level of cash. If the market repairs itself and begins to resume its “bullish trend,” these “trades” will become “investments” over a longer-term time horizon and we will use our stored cash to continue to build into things that are working.
We follow one of the simplest rules for successful investing:
“Don’t more of what works and less of what doesn’t.”
Submitted by Eric Peters, CIO of One River Asset Management, as excerpted from his Weekend Notes letter to investors
Bell Bottoms
“Three things drive changes to your deficit,” said the CIO. “Economic growth, unemployment and military spending,” he continued. “At the 2000 cycle peak, all three were around today’s levels, yet back then America ran a 2% budget surplus.” The Bush tax cut, equity collapse and recession soon flipped surplus to deficit.
“But now you’re running a 4.5% budget deficit, which if you cyclically adjusted to the 2.3% surplus at the 2000 cycle high, you’re running a 6.8% deficit at the height of your 9yr expansion. America’s numbers make no sense.”
“When you’ve lent money to someone whose numbers no longer make sense, you look for things to cut,” continued the same CIO. Only entitlements, healthcare and military spending cuts have a material impact on US deficits.
“Then you need to assign a probability to any of these things being cut.” He laughed, because we all know there’s a 0% probability that the US will cut anything.
“So your numbers won’t work, which means the adjustment will come through a bond collapse which the Fed will prevent, or a dollar collapse, which it can’t prevent.”
“Trump is channeling Reagan, but from a far worse starting point,” continued the same CIO. “The 1970s and 1980s had very high tax rates, and a case was made that cuts paid for themselves.” They didn’t.
“Now tax rates are much lower, and debt-to-GDP is much higher.” Asset prices are dramatically higher, interest rates are far lower, infrastructure is crumbling. Reagan spent 6.5% of GDP on military, the US spends 3.5% now, heading higher too.
“Nothing you’re doing makes sense. And it will lead us all back to the dollar volatility of the 1970s-80s.”
A man claiming to be a federal agent was found posted up in a Waikiki hotel with a large cache of weapons, knives, and armor, much like Stephen Paddock and Francho Bradley who also possessed their own large weapons cache and were likely sheep-dipped
Police and FBI are investigating a 38-year-old man after finding a large cache of weapons during a raid of a Waikiki hotel room after authorities were alerted of several disturbing social media posts in which the man claimed to be a federal agent who’s hunting terrorists.
The man’s arsenal included a high-powered rifle, a tactical shotgun, and an assortment of other guns, military style knives, and body armor, along with fully-loaded magazines and 800 rounds of ammunition.
(Honolulu Police Department)
It was the FBI that tipped off local police which prompted the raid in room #803 in the Equus hotel at 1696 Ala Moana Blvd.
The weapons were found to be legally registered to the man which prompted police to release him without incident pending a mental evaluation at a local hospital after authorities discovered a psychiatric medicine inside the man’s room.
According to police, the man has been living in a Makiki apartment for three years but was only recently staying at the Equus.
Withal, the man’s weapons will be rightfully returned if he’s deemed mentally stable, according to a local report.
The scenario seems to mimic that of the Las Vegas shooter Stephen Paddock’s stay at the Mandalay Bay and Francho Bradley’s stay at a Massachusetts hotel where large weapons caches and tactical military gear were also found. It also seems likely that all three men were working under the FBI’s direction and may have been cut loose or detached for reasons unknown (possibly to be used as patsies).
Last week, when commenting on the world’s response to Trump’s decision to pull out of the Iran nuclear deal, we said that while Europe still remains in no-man’s land – after all Putin still remains the biggest supplier of Europe’s energy needs, especially in the winter, Trump’s decision to withdraw has officially pitted the US, Israel and Saudi Arabia against not only both Russia, but also China, whose interests in the region were until now, mostly dormant. And, as a next step, we said that “we now look forward to China deploying troops and military equipment to Syria and Iran as the inevitable next step in this escalating global proxy war.“
But first, China will deploy a far more nuanced Iranian invasion force consisting of… its mega corporations.
According to Iran’s PressTV, China’s state-owned CNPC – the world’s third largest oil and gas company by revenue behind Saudi Aramco and the National Iranian Oil Company – is set to take over a leading role held by Total in a huge gas project in Iran should the French energy giant decide to quit amid US sanctions against the Islamic Republic.
China’s state-owned CNPC is set to take over a leading role held by Total in a huge gas project in Iran in case the French energy giant decides to quit amid US sanctions against the Islamic Republic.
Industry sources quoted by Reuters siad that while it was not clear if CNPC had received approvals from Beijing to take over from Total, they said chances that the move could strain relations between the US and China were already high.
“The possibility of Total’s pullout is quite high now, and in that scenario CNPC will be ready to take it over fully,” Reuters quoted a senior state oil official with knowledge of the contract as saying. The news wire also quoted an executive with direct knowledge of the project as adding that planning began “the day the investment was approved.”
“CNPC foresaw a high probability of a reimposition of (US) sanctions,” the executive said.
Last December, Reuters reported that CNPC had already started talks with Iran over replacing Total in South Pars. Under the alleged terms of the agreement to develop Phase 11 of South Pars, CNPC could take over Total’s 50.1% stake and become operator of the project. CNPC already holds a 30% stake in the field, while Iranian national oil company subsidiary Petropars holds the remaining 19.9%. So far, Reuters said, the Chinese oil giant, which already operates two oil fields in Iran, has spent about $20 million on planning to develop the field.
Meanwhile, the question is what Total will end up doing: a source “close to Total” was quoted as saying that the French company was analyzing the impact of new sanctions and whether it could get a waiver that would allow it to keep its stake. That however may prove extremely problematic following the threat earlier today by Trump’s new National Security Advisor, John Bolton, that EU firms would face US sanctions if they continued to work with the Iranian government.
And if Total calls it quits, China is already prepared to swoop in: according to PressTV, CNPC will use its banking unit Bank of Kunlun as a funding and clearing vehicle if it takes over operation of South Pars; the bank was used to settle tens of billions of dollars worth of oil imports during the UN sanctions against Tehran between 2012 and 2015, and is thus well-equipped to skirt US sanctions.
Sure enough, the US Treasury sanctioned Kunlun in 2012 for conducting business with Iran, however since most of the bank’s settlements during that time were in euros and Chinese renminbi, there was little it could do in terms of credible punishment.
If CNPC goes ahead, it would also likely have to develop crucial equipment, such as large-powered compressors needed for developing gas deposits on this scale, on its own. And since leading manufacturers like U.S. firm GE and Germany’s Siemens could be barred from supplying to Iran under US sanctions, it means even more Chinese companies will find willing demand for their services in Iran.
* * *
And just to make sure that trade relations between China and Iran only accelerate, China on Thursday launched a freight train service that connects its northern regions to Iran’s capital Tehran in what could be a major connectivity project of vital importance to the flow of trade between the two countries.
The freight train service would take cargoes from Bayannur in the Inner Mongolia Autonomous Region to Tehran, PressTV reported. China sent an inaugural train toward Iran carrying 1,150 tonnes of sunflower seeds. It would travel a distance of around 8,000 kilometers through Kazakhstan and Turkmenistan and would arrive in Iran within two weeks.
China has launched a new freight train service from its northern Inner Mongolia Autonomous Region to Iran’s capital Tehran.
The new train route will shorten transportation time by at least 20 days compared with ocean shipping, according to a report by Xinhua news agency.
Establishing new train routes toward the Islamic Republic is accordingly seen as a gesture by Beijing that it wants to maintain trade with its biggest trade partner even when the sanctions are put into effect.
“While the United States is now urging foreign companies to wind down their operations in Iran, China appears to be doing the opposite,” wrote the Washington Post in an analysis. And for once, the WaPo was spot on, even without assistance from FBI or NSA leaks.
“Thursday’s launch of a freight train connection was only the latest measure that Beijing has taken to intensify trade relations with Iran, and there seem to be no plans so far to give in to US demands.”
In February 2017, China also launched a long-distance train service that would take cargoes from its east to Iran through a route of above 10,000 kilometers – what could be one of the world’s longest rail routes.
Iranian officials have indicated that the ultimate aim is to extend the rail route to Europe, positioning Iran on a key stretch to the continent, the Guardian wrote in an analysis on the development. These are seen as part of China’s efforts to revive the ancient Silk Road – a trans-Asian trade route that connected the east to Europe and the Mediterranean Sea.
Back on March 4, the Euro was spooked and Italian bonds tumbled, if only briefly, following the shocking outcome from the Italian elections which saw the eurosceptic 5-Star party and the anti-immigrant League party win an outright majority. The only thing that prevented an even more violent reaction was the market’s “expert” take that a joint Italian government between these two forces was highly unlikely.
5-Star founder (left) Beppe Grillo and current party leader Luigi Di Maio after the March 4 election.
Well, as of this moment, a coalition government between the anti-establishment 5-Star Movement and right-wing League party is no longer not only likely, but appears to be a virtual certainty after the two political forces reached an agreement on a government program, one which was catalyzed by Sylvio Berlusconi’s blessing late last week, greenlighting what may be the biggest shock in European politics since Brexit.
As the WSJ frames it, “the formation of a new government—which is expected in the coming days—between the two groups marks one of the biggest wins yet for the political insurgencies shaking Europe’s establishments.” The alliance between the two parties follows more than two months of bickering among political leaders following March elections that handed no clear majority to any single party or coalition.
5-Star Movement leader Luigi Di Maio at the Quirinal Palace in Rome, Italy, on April 12
And since both parties have, at their core, an anti-immigrant platform, Angela Merkel can pat herself on the back for yet another job well done, by unleashing the unprecedented anti-immigrant, populist revulsion wave which swept across Europe with the chancellor’s “open door” policy to admit over 1 million mostly Syrian refugees inside Germany’s, and Europe’s, borders.
As the WSJ details, the two parties struck a deal Sunday evening on a pact that would underpin a government coalition between the two.
Leaders of the two groups, however, are still negotiating the members of a government cabinet, including the prime minister. An announcement of those names should come early this week, according to weekend statements by leaders of both groups.
With the general agreement now reached, leaders of 5 Star and League will meet on Monday with Italy’s President Sergio Mattarella, who will guide the formation of a new government. And while the coalition must then win votes in both houses of parliament, that shouldn’t be a problem as the League and 5 Star together enjoy a comfortable majority in each house.
Meanwhile, as we described earlier, the coalition agreement includes measures such as a universal basic income for the unemployed, a rock-bottom flat tax and the revocation of a sweeping pension reform introduced in 2011.
* * *
To be sure, what happens next is unclear as Italy’s soon-to-be-governing coalition has made economic promises that seem incompatible with Europe’s fiscal rules and will be hard, if not impossible, to keep or even implement. These, as Reuters details, include:
slashing taxes for companies and individuals,
boosting welfare provision,
cancelling a scheduled increase in sales tax
dismantling a 2011 pension reform which sharply raised the retirement age.
Yet while these two pre-election adversaries spent the last few days trying to meld their very different programs into a “contract” of mutually acceptable policy commitments, what they have in common is that they are extremely expensive.
On the face of it their plans, which they say may also include a form of parallel currency, could push the budget deficit far above targets agreed with the EU, setting up a clash with the European Commission and Italy’s partners.
“We will need to renegotiate EU agreements to stop Italy suffocating,” League leader Matteo Salvini said on Saturday after a day of talks with his 5-Star counterpart Luigi Di Maio. Separately, 5-Star’s flagship policy of a universal income for the poor has been costed at around 17 billion euros ($20 billion) per year. The League’s hallmark scheme, a flat tax rate of 15 percent for companies and individuals, is estimated to reduce tax revenues by 80 billion euros per year.
That’s just the start of the new costs: scrapping the unpopular pension reform would cost 15 billion euros, another 12.5 billion is needed to head off the planned hike in sales tax. But the biggest wildcard is that the parties are considering printing a new, special-purpose currency to pay off state debts to firms.
It is entirely unclear how any of that can happen, or be approved, under existing the European framework.
“If implemented, it would be the biggest shake-up of the Italian economic system in modern times,” said Wolfgang Munchau, head of the London-based Eurointelligence think-tank.
* * *
To be sure, some of the parties’ negotiators now suggest a more pragmatic approach will probably prevail, by implementing their pre-election proposals only partially and gradually. In the face of voter disappointment, each group will be able to say it was forced to compromise with its partner. Even so, it is still unclear how all this will square with Italy’s commitments to reduce its budget deficit and its public debt, which at more than 130% of gross domestic product, is the highest in the euro zone after Greece.
Worse, growing signs of an economic slowdown will make the new government’s task even harder. Industrial output stagnated in the first quarter and business confidence fell in April to a 14-month low.
In fact, the only thing Italy may have going for it is that Italy’s borrowing costs are currently the lowest on record, despite the political storm clouds that are about to be unleashed. But that will only persist as long as the ECB is active in the market, soaking up any Italian bonds offered for sale.
Commenting on the Italian developments, Barclays over the weekend said that news of a coalition among the anti-system parties quickly brought investors’ attention back to Italy, and that should the economic policies disclosed in the campaigns be enacted, “this outcome would very likely be negative for markets and a direct challenge to the European fiscal compact.” To wit:
[The two parties] campaigned on a number of expensive fiscal promises, including the roll-back of the pension reform, the implementation of a universal income and a flat income tax. Altogether, these measures would cost about EUR100bn, according to our preliminary estimates.
Without offsetting fiscal measures, this outcome would very likely be negative for markets and a direct challenge to the European fiscal compact. While market positioning, decent growth and QE have cushioned Italy from an adverse market reaction thus far, growth needs to remain supportive for the fiscal position to be sustainable and prevent history from repeating itself
The good news for Italy, at least for now, is that the ECB’s QE continues to monetize virtually all Italian net bond issuance, making the likelihood of a crash remote. That, however is also the biggest problem facing Italy, because as we have shown previously, for well over a year, the only marginal buyer of Italian debt was the ECB.
As Citi said last December looking at the future of Italian bonds, it is “pretty likely that there will need to be an adjustment in prices” once the the ECB’s purchases of Italian bonds start to fade, resulting in an exponential jump in risks. Quote Citi:
To our minds, this remains one of the most significant political risks to € credit in 2018. Most likely the spillover on credit would be concentrated on Italian and other periphery names, banks in particular. The scenario of a full-on funding crisis is a much lower probability in our view, but would obviously have more systemic implications across the € credit market.
And, as we said last week, “a governing coalition between the Five Star and the League is all that would take to launch the first steps of this funding crisis.” The only question is when will the market react accordingly and “price out” the soothing effect of the ECB?
Today in “free-market capitalism actually benefits consumers” news, rents are being slashed across the board in Queens as landlords make concessions to deal with a supply glut and keep tenants renting. This lowering of rents taking place in Queens – to the tune of 12% YOY – was reported on by Bloomberg on Thursday morning:
For New York City apartment hunters, April was another good month to find a deal on rents. But no one fared better than those in northwest Queens.
Rents there dropped 12 percent from a year earlier, to a median of $2,646 a month after landlord giveaways were subtracted, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Those giveaways were offered on 65 percent of all new leases signed in the area, excluding renewals, a record share in data going back to the beginning of 2016.
The result from the price deflation that our Fed pins as the devil incarnate? More renters, more business and higher quality tenants:
The enticements brought in more renters. New leases in northwest Queens — Long Island City, Astoria, Sunnyside and Woodside — jumped 11 percent to 272, the firms said.
“More customers who were originally looking in Manhattan and Brooklyn are considering Queens,” said Hal Gavzie, Douglas Elliman’s executive manager of leasing. “It used to be just 100 percent a different consumer.”
New York City tenants are crossing borders to compare deals in a market groaning under the weight of new supply. Landlords, who’ve accepted they need to compete to keep their units filled, are working to attract new tenants and offering sweeter renewal terms to keep the ones they have, Gavzie said.
Who knew this could happen to industries and sectors where the government is not subsidizing or interfering with the pricing – and where free market capitalism is actually, in some facet, allowed to run its course?
The consumer now has the control because the concessions landlords are making are benefiting the them. Bloomberg continued:
In Manhattan, 44 percent of all new leases came with a landlord concession, such as a free month of rent or payment of broker fees. In Brooklyn, the share was 51 percent, a record for the borough.
Still, the number of new leases in Manhattan and Brooklyn fell 3.5 percent and 1.6 percent, respectively, a sign that renters there found good reason to stay in their current apartments, Gavzie said.
“Tenants negotiating a renewal, they’ve looked around to see what deals they can get,” he said. “So their landlord gives them a sweet offer to stay.”
Manhattan rents in April, after subtracting concessions, fell 2.2 percent, to a median of $3,236, the fifth consecutive month of year-over-year declines. In Brooklyn, where rents have also fallen for five months, the decline was 2.9 percent, to a median of $2,686.
This comes just about one month after we reported about downtown Manhattan basically turning into a ghost town due to just the opposite – prices rising and government overreach. Pricing out of tenants in some main downtown areas and shopping districts have caused vacancies in areas that have been occupied for decades.
The Fed loves to repeat how necessary and vital inflation is for economic prosperity, but in the case of midtown Manhattan’s “prime” retail real estate, it is doing nothing but helping cause once extremely prominent shopping areas become the very same “ghost towns” they turned into during the 2008 housing crisis.
Mayor DeBlasio’s asinine solution to this issue created in part by faulty government policy: more government and more regulation.
So much for the recovery.
As if brick and mortar retail didn’t have enough problems to deal with being methodically decimated by the ever growing behemoth that is Amazon, store owners are now facing rent that is simply so high it makes it impossible for most to open retail stores and do business in once prominent areas of downtown Manhattan.
If you want to see the future of storefront retailing, walk nine blocks along Broadway from 57th to 48th Street and count the stores.
The total number comes to precisely one — a tiny shop to buy drones.
That’s right: On a nine-block stretch of what’s arguably the world’s most famous avenue, steps south of the bustling Time Warner Center and the planned new Nordstrom department store, lies a shopping wasteland.
To be sure, none of this comes as a surprise to us – or our regular readers – because in late March we recalled our own 2009 tour of Madison Avenue to discover that it also had turned into a ghost town. Just a week ago we told our readers that the ghost town that was New York’s “Golden Mile” was not surprising: after all the US economy had just been hit with the worst recession since the Great Depression, and only an emergency liquidity injection of trillions of dollars prevented a global financial collapse.
What is more surprising is why nearly 9 years later, at a time of what is supposed to be a coordinated global recovery, a walk along Madison Avenue reveals the exact same picture.
We would love for these two sets of facts to bludgeon the government and regulators over the head and make them realize that inflation isn’t the solution. Rather, they should realize from this that deflation can actually be a reward for capitalism, causing prices to fall, increased competition between sellers, and benefits for buyers.
The opening panel of the Stigler Center’s annual antitrust conference discussed the source of digital platforms’ power and what, if anything, can be done to address the numerous challenges their ability to shape opinions and outcomes present.
Google CEO Sundar Pichai caused a worldwide sensation earlier this week when he unveiled Duplex, an AI-driven digital assistant able to mimic human speech patterns (complete with vocal tics) to such a convincing degree that it managed to have real conversations with ordinary people without them realizing they were actually talking to a robot.
While Google presented Duplex as an exciting technological breakthrough, others saw something else: a system able to deceive people into believing they were talking to a human being, an ethical red flag (and a surefire way to get to robocall hell). Following the backlash, Google announced on Thursday that the new service will be designed “with disclosure built-in.” Nevertheless, the episode created the impression that ethical concerns were an “after-the-fact consideration” for Google, despite the fierce public scrutiny it and other tech giants faced over the past two months. “Silicon Valley is ethically lost, rudderless and has not learned a thing,” tweeted Zeynep Tufekci, a professor at the University of North Carolina at Chapel Hill and a prominent critic of tech firms.
The controversial demonstration was not the only sign that the global outrage has yet to inspire the profound rethinking critics hoped it would bring to Silicon Valley firms. In Pichai’s speech at Google’s annual I/O developer conference, the ethical concerns regarding the company’s data mining, business model, and political influence were briefly addressed with a general, laconic statement: “The path ahead needs to be navigated carefully and deliberately and we feel a deep sense of responsibility to get this right.”
A joke regarding the flawed design of Google’s beer and burger emojis received roughly the same amount of time.
Google’s fellow FAANGs also seem eager to put the “techlash” of the past two years behind them. Facebook, its shares now fully recovered from the Cambridge Analytica scandal, is already charging full-steam ahead into new areas like dating and blockchain.
But the techlash likely isn’t going away soon. The rise of digital platforms has had profound political, economic, and social effects, many of which are only now becoming apparent, and their sheer size and power makes it virtually impossible to exist on the Internet without using their services. As Stratechery’s Ben Thompson noted in the opening panel of the Stigler Center’s annual antitrust conference last month, Google and Facebook—already dominating search and social media and enjoying a duopoly in digital advertising—own many of the world’s top mobile apps. Amazon has more than 100 million Prime members, for whom it is usually the first and last stop for shopping online.
Many of the mechanisms that allowed for this growth are opaque and rooted in manipulation. What are those mechanisms, and how should policymakers and antitrust enforcers address them? These questions, and others, were the focus of the Stigler Center panel, which was moderated by the Economist’s New York bureau chief, Patrick Foulis.
The Race to the Bottom of the Brainstem
“The way to win in Silicon Valley now is by figuring out how to capture human attention. How do you manipulate people’s deepest psychological instincts, so you can get them to come back?” said Tristan Harris, a former design ethicist at Google who has since become one of Silicon Valley’s most influential critics. Harris, who co-founded the Center for Humane Technology, an organization seeking to change the culture of the tech industry, described the tech industry as an “arms race for basically who’s good at getting attention and who’s better in the race to the bottom of the brainstem to hijack the human animal.”
The proliferation of AI, Harris said, creates an asymmetric relationship between platforms and users. “When someone uses a screen, they don’t really realize they’re walking into an environment where there’s 1,000 engineers on the other side of the screen who asymmetrically know way more about their mind [and] their psychology, have 10 years about what’s ever gotten them to click, and use AI prediction engines to play chess against that person’s mind. The reason you land on YouTube and wake up two hours later asking ‘What the hell just happened?’ is that Alphabet and Google are basically deploying the best supercomputers in the world—not at climate change, not at solving cancer, but at basically hijacking human animals and getting them to stay on screens.”
This “fiduciary relationship,” in which one party is able to massively exploit the other, is best exemplified by Facebook, which is akin to a “psychotherapist who knows every single detail in your life, including the details of your inner life, in the sense that it doesn’t just know who you click on at two in the morning and what you post and your TINs and your photos and your family and who you talk to the most and who your friends are. It also intermediates every single one of your communications. It knows what colors your brain lights up to if I give you a red button or a green button or a yellow button. It knows which words activate your psychology. It knows an unprecedented amount of information about what will manipulate you. If there’s ever been a precedent or a need for defining something as being an asymmetric or fiduciary relationship, it’s this one.”
Facebook’s ad-based business model, Harris argued, is “obviously misaligned” with its asymmetric power. “Would you want to be paying that psychotherapist or would you want that psychotherapist to instantly take all that personal information about you, the most intimate details of your life, and then sell it to car salesmen?”
“The reason you land on YouTube and wake up two hours later [asking] ‘What the hell just happened?’ is that Alphabet and Google are basically deploying the best supercomputers in the world—not at climate change, not at solving cancer, but at basically hijacking human animals and getting them to stay on screens.”
It’s not that Silicon Valley lacks in goodwill, he said. In 2013 Harris, then a product manager at Google, prepared a presentation that argued that Google, while having the power to shape elections and societies, often exploits users’ psychological vulnerabilities instead of acting with their best interest in mind. The presentation went viral and got Harris promoted to the role of “design ethicist.”
Ultimately, though, the company quickly reverted to business as usual. The problem, said Harris, was the incentive to maximize users’ time and attention. “If you’re at YouTube, you’re incentivized to get people to spend time on videos, even if those videos are conspiracy theories. The product manager—25 years old, going to stay at YouTube for two years, went to a good school—their job is just to show on their resume that they made the engagement numbers on videos go up. Then you wake up two years later and YouTube has driven 15 billion views to Alex Jones’ videos. That’s not videos people sought out themselves. That’s actually YouTube driving the recommendation.”
“The Search Engine Is the Most Powerful Source of Mind Control Ever Invented”
Robert Epstein, a senior research psychologist at the American Institute for Behavioral Research and Technology in California and the former editor of Psychology Today, is one of only a few scholars who have conducted empirical studies on the ability of digital platforms to manipulate opinions and outcomes. In a 2015 study, Epstein and Ronald E. Robertson reported the discovery of what they consider “one of the largest behavioral effects ever identified”: the search engine manipulation effect (SEME). Simply by placing search results in a particular order, they found, voters’ preferences can shift dramatically, “up to 80 percent in some demographic groups.”
“What I stumbled upon in 2012 or early 2013 quite by accident was a particular mechanism that shows how you can shift opinions and votes once you’ve got people hooked to the screen,” said Epstein.
While much of the political and public scrutiny of digital platforms has been focused on the behavior of bad actors like Cambridge Analytica, Esptein called these scandals a distraction, saying, “Don’t worry about Cambridge Analytica. That’s just a content provider.” Instead, he said, the power of digital platforms to manipulate users lies in the filtering and ordering of information: “It’s no longer the content that matters. It’s just the filtering and ordering.” Those functions, he noted, are largely dominated by two companies: Google and, to a lesser extent, Facebook.
SEME, said Epstein, is but one of five psychological effects of using search engines he and his colleagues are studying, all of which are completely invisible to users. “These are some of the largest effects ever discovered in the behavioral sciences,” he claimed, “but since they use ephemeral stimuli, they leave no trace. In other words, they leave no trace for authorities to track.”
Another effect Epstein discussed is the search suggestion effect (SSE). Google, Epstein’s most recent paper argues, has the power to manipulate opinions from the very first character that people type into the search bar. Google, he claimed, is also “exercising that power.”
“We have determined, through our research, that the search suggestion effect can turn a 50/50 split among undecided [voters] into a 90/10 split just by manipulating search suggestions.”
One simple way to do this, he said, is to suppress negative suggestions. In 2016, Epstein and his coauthors noticed a peculiar pattern when typing the words “Hillary Clinton is” into Google, Yahoo, and Bing. In the latter, the autocomplete suggested searches like “Hillary Clinton is evil,” “Hillary Clinton is a liar,” and “Hillary Clinton is dying of cancer.” Google, however, suggested far more flattering phrases, such “Hillary Clinton is winning.” Google has argued that the differences can be explained by its policy of removing offensive and hateful suggestions, but Epstein argues that this is but one example of the massive opinion-shifting capabilities of digital platforms. Google, he argues, has likely been determining the outcomes of a quarter of the world’s elections in recent years through these tools.
“The search engine is the most powerful source of mind control ever invented in the history of humanity,” he said. “The fact that it’s mainly controlled by one company in almost every country in the world, except Russia and China, just astonishes me.”
Epstein declined to speculate whether these biases are the result of deliberate manipulation on the part of platform companies. “They could just be from neglect,” he said. However, he noted, “if you buy into this notion, which Google sells through its PR people, that a lot of these funny things that happen are organic, [that] it’s all driven by users, that’s complete and utter nonsense. I’ve been a programmer since I was 13 and I can tell you, you could build an algorithm that sends people to Alex Jones’s videos or away from Alex Jones’s videos. You can easily alter whatever your algorithm is doing to send people anywhere you want to send them. The bottom line is, there’s nothing really organic. Google has complete control over what they put in front of people’s eyes.”
A “Nielsen-type network” network of global monitoring, suggested Epstein, might provide a partial solution. Together with “prominent business people and academics on three continents,” he said, he has been working on developing such a system that would track the “ephemeral stimuli” used by digital platforms. By using such a system, he said, “we will make these companies accountable to the public. We will be able to report irregularities to authorities, to law enforcement, to regulators, antitrust investigators, as these various manipulations are occurring. We think long-term that is the solution to the problems we’re facing with these big tech companies.”
Is Antitrust the Solution?
In the past two years, a growing movement of scholars, policy wonks and politicians has argued that many of the challenges associated with digital platforms are related to market concentration and has favored increased antitrust enforcement, possibly even breaking platforms up, as a way to address their growing power. But is antitrust the best way to address things like addiction-enhancing business models? Kevin Murphy, a Chicago Booth economics professor, doesn’t think so.
“First off, most of what we’re talking about has nothing to do with concentration. These problems would exist absent concentration. Secondly, a focus on concentration as the bottom line of antitrust is misguided as well. The idea that we have some new world that doesn’t look like things we’ve seen before, I don’t know, I don’t see it,” said Murphy.
“Would this be an easier problem to solve if we had 100 firms out there all trying to influence people using these same methods? It might be a much more difficult regulatory process in that world. It might be difficult to measure, difficult to regulate. It’s not clear how this is related to the concentration issue per se,” he added.
Similar arguments about the ability of technology to manipulate elections, Murphy opined, were also made in the early days of television, and concerns over market power were heard during the early days of the Internet. “I remember the days where Yahoo was thought to have an insurmountable first-mover advantage in search, or [when] AOL had an insurmountable first-mover advantage in access to people’s eyeballs, or [Windows] Media Player was going to dominate digital music. The idea that we’re any good at predicting how these markets are going to move or any good at shaping how they’re going to move seems to me to be odd. It also seems like a poor use of antitrust.”
There is also the question of just what sort of impact digital platforms have on the economy as a whole. Contrary to their prominence in the political debate, noted Chad Syverson, also an economics professor at Chicago Booth, the rise of digital platforms coincided with a decade of historically low productivity growth. Tech firms often like to portray themselves as bucking this trend, but evidence of this has so far been slim. It is possible, said Syverson, “the brain space dedicated to these companies, right now at least, exceeds the economic space that they fill up. The entire information sector, which is all of telecom, all of broadcasting, publishing, online and off, and some other sectors, that’s less than five percent of GDP.”
For years, tech execs have fended off possible antitrust actions by claiming that their dominance is not a competition issue, utilizing Alphabet CEO and Google co-founder Larry Page’s argument that “competition is only one click away.” The problem that faces antitrust enforcers, argued Thompson, is that it’s “kind of true.”
“You can go to Bing. You can go to DuckDuckGo, which doesn’t track your information. You can go to other e-commerce sites. You can go to other social networks,” said Thompson. “The issue is that customers don’t want to. It’s not that they can’t. It’s that no one wants to go anywhere else.” The services that platforms offer are vastly superior to what came before them, and network effects mean they can offer an overall better user experience than any fledgling competitor. According to Thompson, this is the paradox antitrust enforcers have to contend with: “The bigger you are, the better you are, at least from a consumer perspective.”
Concentration Really Does Matter
Responding to Murphy, Yale University economics professor Fiona Scott Morton argued that while there have been similar concerns over technology’s ability to influence and manipulate in the past, the difference is the precision with which digital platforms can target users at the individual level.
Concentration, she said, is a relevant issue because of the massive influence currently held by a small number of actors. “If there were 30 search engines and everybody was evenly distributed across those 30 search engines and each one had a bias, we would not think that anyone of them was perhaps tipping an election. That’s the sense in which the concentration really does matter to the problems that we’re talking about.”
Responding to Syverson, Morton said that “it is a little misleading” to say platforms are only a small part of GDP. The influence of their technologies on the rest of the economy, she noted, exceeds their actual share of GDP.
While there are potential costs associated with regulating digital platforms, these are not necessarily larger than the benefits that would come from regulating them, Morton asserted. “Of course, we’re going to make a mistake, but we balance the mistakes of regulation. My photos aren’t shared quite as well as they might have been. The search term doesn’t come up quite as fast as it otherwise would because we’ve regulated the company away from innovating in that space. Then there’s the cost of not regulating, which is our democracy doesn’t work anymore, and we have to balance those two things. As a society, we’re having a national conversation about how that latter thing is a lot bigger than we thought it was before.”
Many of these challenges, Morton noted, are not strictly related to competition. When it comes to antitrust, she said, “there’s a little bit of a shortage of really tight theories of harm,” which is why, she said, antitrust cases against digital platforms have not moved forward. “There’s also a question of political will to bring those cases,” she acknowledged, but “even with political will, you have to have a really good explanation of how competition is being harmed.”
At the conclusion of the panel, Foulis asked the panelists whether platforms companies will be more or less powerful in 10 years. The panelists were divided. “In 10 years, I think the surveillance business model will have been made illegal,” said Epstein, whereas Morton argued that platforms will ultimately become more powerful. “I’m afraid that I believe that people with profit are really good at hanging onto their profit,” she said.
Thompson also believes platforms will be more powerful. However, he said, “I do think people like Tristan are the biggest threat to these companies. The reason is because their power accrues not from controlling railways or telephone wires. Their power accrues from people continually making affirmative choices to use their platforms. That’s what gives them monopsony power, The way I think ultimately that power will be undone is through the political process.”
Things are not trending well for the Democrats, despite what you may read/seen on mainstream media.
The generic congressional ballot has continued to tighten, according to a new CNN poll conducted by SSRS, with the Democrats’ edge over Republicans within the poll’s margin of sampling error for the first time this cycle.
About six months out from Election Day, 47% of registered voters say they back the Democratic candidate in their district, 44% back the Republican.
The Democrats’ advantage in the generic ballot plunged from 16 points in February to six points in March to just three points now.
Potential voters’ focus on the Russia investigation is tumbling from 45% seeing it as important in February to 40% now.
All of which may explain why the top Democrat on the Senate Select Committee on Intelligence appears to be backing away from the “Russia Collusion” narrative slowly and quietly…
As The Daily Caller reports, Virginia Sen. Mark Warner said in an interview with The New Yorker’s David Remnick, when asked whether he believes that Trump associates conspired with the Kremlin to influence the 2016 presidential election…
that contacts between Trump campaign associates and Russians could be “a set of coincidences” rather than collusion.
“I’m reserving my final judgement until we’ve seen all the witnesses we need to see, and we’ve gotten all the facts. So I’m going to hold off,”
“This may all be simply a set of coincidences or it may be … it was not the sophistication to realize what was happening,” said Warner.
The White House and members of the Trump campaign have vehemently denied coordinating with the Russian government, but several members of the campaign had contacts with Russians in the run-up to the election.
“I’m anxious for this to come to a conclusion,” Warner said of the investigation, adding that he is “hopeful” that the committee will be able to release sections of its final report every 30 to 45 days.
As a reminder, The House Permanent Select Committee on Intelligence has already released a report on its own Russia investigation. The report said that investigators found no evidence of collusion.
