Immigration Deal Remains Elusive As Lawmakers Scramble To Avert Another Shutdown

If Congress doesn’t pass another continuing resolution – what would be its fifth since September – by midnight Thursday, the federal government will shut down for the second time in the span of a month.

And as CNN points out, there are two pressing priorities that must be worked out if lawmakers want to eventually open the door to a more-permanent spending agreement.

Lawmakers are up against two key deadlines that were put in place as part of the negotiations to reopen the government last month, creating a short window to show substantial signs of progress on a deal to protect undocumented immigrants who came to this country as children and their families. Immigration negotiators say they’ve taken steps in the right direction, but no deal to address the contentious issue has thus far emerged.

The first deadline is Thursday, when government funding runs out. The second is to reach a long-stalled deal on immigration before Senate Majority Leader Mitch McConnell opens a promised freewheeling floor debate to try to settle the contentious issue.

Lawmakers from both parties insist there won’t be another shutdown: But then again, they said that last month, before a three-day shutdown that ultimately left Democratic leaders looking impotent in the eyes of progressives who want them to show more of a backbone on immigration.

At the behest of their base, Democrats are insisting that Congress pass an immigration bill before they agree to a budget caps deal, which is needed to write a massive omnibus-spending bill for the rest of the fiscal year, as the Hill explains.

Senate

In a maneuver that’s becoming a hallmark of legislative procedure during the Trump era, House Republicans are planning to hold yet another “wing it” vote, this time on a bill to keep the lights on until March 22. But if the past is any guide, we imagine the vote will be canceled at the last minute once it becomes clear that the bill has no chance of passing. The Senate hasn’t planned a vote, and it’s unclear if GOP leaders would be able to muster enough support in the House.

Bloomberg reported Monday morning that House Republicans are planning to meet tonight at 7 pm to discuss their plan to avert the shutdown.

Even if it were to pass in the lower chamber, 60 votes will be needed in the Senate, meaning at least nine Democrats must vote yes. It’s too soon to know if they will back the House’s six-week proposal – in part, because it blows past a March 5 deadline when the Deferred Action for Childhood Arrivals program expires.

This time around, there appears to be a degree of comity in the negotiations, as both Republican and Democratic leaders have said the negotiations have made strong progress and that they don’t expect another shutdown.

Democrats apparently expect Mitch McConnell to uphold his promises about bringing an immigration bill for a vote and, as the GOP Senate leader so eloquently put it, “there’s no education in the second kick of a mule,” McConnell said about the short-lived shutdown.”

Already, Republicans are signaling that they might be willing to agree on an immigration deal without including funding for 700 miles of border wall, as the White House has insisted.

According to CNN, John Thune, a member of Senate Republican leadership, told reporters last week that he favors narrowing the immigration debate from President Donald Trump’s suggested “four pillars” to two: legal status for DACA recipients and border security.
The framework suggested by the White House would provide 1.8 million undocumented immigrants a pathway to citizenship in exchange for $25 billion for border security, in addition to the eradication of the diversity lottery and changes to curtail chain migration.

Senators John McCain and Christopher Coons have taken things one step further, announcing that they will introduce a bill Monday that omits funding for a southern border wall while providing a path to citizenship for more “Dreamers” than President Trump has agreed to, and calls for a study to determine whether additional border security measures are needed.

The announcement swiftly provoked a reaction from President Donald Trump, who tweeted that there will be no DACA without “STRONG border security and the desperately needed WALL”.

If no immigration deal is reached this week, McConnell is expected to call for an open-ended floor debate to begin some time next week. The threat of an open debate is essentially another incentive to get a deal done quickly. An open debate would probably be extremely chaotic, resulting in marathon discussions until an agreement is hammered out.

Adding another layer of complications to the already fraught negotiations between Republicans and Democrats, conservative Freedom Caucus Republicans in the House are demanding spending hikes for the military and have already declared a deal without funding for the wall to be a non-starter.

In addition to the defense spending issue, lawmakers are also facing pressure to approve more disaster relief for areas affected by hurricanes and wildfires. And Democrats and some moderate Republicans are also calling for a deal to restore some of the federal cost-sharing for Obamacare that Trump scrapped last fall.

After months of negotiations, it appears lawmakers aren’t substantially closer to striking an immigration deal – let alone solving these other priorities. That’s certainly a lot of ground to cover in three days. And while lawmakers have tried their hardest to reassure markets, one detail that’s been lost amid the shuffle is that lawmakers will also need to raise the US borrowing limit again to continue funding the government – a detail that has not been lost on the $2 trillion market for short-term Treasury bills.

Critically, with Treasury expected to exhaust its borrowing authority as early as the first half of March, a four-week bill sale on Tuesday will serve as the latest gauge of investor anxiety.

Indeed, the bill curve spread is already blowing out, as we pointed out earlier.

spread

 

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This tiny corner of Rhode Island shows us the future of Social Security

The United States Court of Appeals for the First Circuit gave us an interesting glimpse of the future last week when it ruled on an obscure case involving government pension obligations.

Ever since the mid-1990s, police officers and fire fighters in the town of Cranston, Rhode Island had been promised state pension benefits upon retirement.

But, facing critical budget shortfalls over the last several years that the Rhode Island government called “fiscal peril,” the state legislature voted to unilaterally reduce public employees’ pension benefits.

Even more, these cuts were retroactive, i.e. they didn’t just apply to new employees.

The changes were applied across the board; workers who had spent their entire careers being promised certain retirement benefits ended up having their pensions cut as well.

Even the court acknowledged that these changes “substantially reduced the value of public employee pensions provided by the Rhode Island system.”

So, naturally, a number of municipal employee unions sued.

And the case of Cranston’s police and fire fighter unions made it all the way to federal court.

The unions’ argument was that the government of Rhode Island was contractually bound to pay benefits– these benefits had been enshrined in long-standing state legislation, and they should be enforced just like any other contract.

The state government disagreed.

In their view, the legislature should be able to change laws, even retroactively, whenever it suits them.

Last week the First Circuit Court issued a final ruling and sided with the state of Rhode Island: the government has no obligation to honor its promises.

News like this will never make major headlines.

But here at Sovereign Man our team pays very close attention to these obscure court cases because they often set very dangerous precedents.

This one certainly does. Because Social Security is in even WORSE condition that the State of Rhode Island’s perilous pension system.

We talk about this a lot in our regular conversations.

According to the Board of Trustees for Social Security (which includes the US Treasury Secretary, the US Secretary for Health & Human Services, and the US Secretary of Labor), the Social Security trust funds “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”

Once again– that’s the Treasury Secretary of the United States saying that Social Security will run out of money in 16 years.

You’d think this would be shouted from the rooftops, especially given how long it takes to save for retirement.

Yet instead the news is ignored or flat-out rejected by people who simply want to believe either that it’s not a problem, or that the government has some magical solution.

The First Circuit just showed us what the solution is: cutting benefits.

And now the government has legal precedent to do so.

They can retroactively slash whatever benefit they want in their sole discretion regardless of what legislation exists, or what promises have been made in the past.

Let’s be smart about this: the clock is ticking. Sixteen years may seem like a lifetime away, but with respect to retirement, it’s nothing.

Securing a comfortable retirement takes decades of careful planning, and a lot of folks are going to have to catch up.

Fortunately there are a lot of options available, but you’re going to have to take deliberate action.

For example, you could set up a more robust structure to help you put away even more money for retirement and invest in safer, more lucrative assets that are outside the mainstream.

A number of our readers, for example, are safely earning double-digit returns in secured, asset-backed lending deals with their properly structured IRA and 401(k) vehicles.

Here are a couple of options to consider.

This problem is completely solvable. But you’re going to have to solve it for yourself. You can’t rely on the government to fix it.

The First Circuit Court affirmed last week without a doubt that government promises aren’t worth the paper they’re printed on.

Source

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Evercore ISI: “The Selloff Is Almost Over”

Amid a flurry of comments on what the market will do from here, with some analysts predicting a continuation of the selloff, especially if bond yields continue their upward ways, one especially bullish comment stands out.

According to Evercore ISI’s technical analyst, Rich Ross, the equity selloff that hammered the S&P 500 3.9% over last week, its biggest drop since January 2016, is almost done as volume spike signaled “climax” selling.

According to Bloomberg, Ross said that the index is likely to be 1 to 1.5 percent away from reaching its nadir, he said.

Specifically, the Evercore technician eyes the 93% NYSE downside volume observed on Friday, the highest since September 2016, and not notes that it is “consistent with climax.”

Meanwhile, he writes that the backdrop across currencies, commodities, and global equities remains “sound, bullish and intact”, although he failed to mention yields which, of course, is what caused the selloff in the first place.

Finally, Ross notes the VIX’s “doji” pattern which sets up for a “potentially exhaustive downside reversal.”

And speaking of the VIX as a bullish signal, Oppenheimer’s technical analyst Ari Wald agrees with Ross, and writes that last week’s 50% rise in the VIX is a “buyable spike”, which he defines as a reading that is 50% higher than its 3- month low, which helps normalize for different volatility environments

He adds that spikes in the VIX typically occur around short-term market lows and have found it’s a more compelling signal when trend is positive. This can be seen in the chart below.

For now the S&P remains in no man’s land, unchanged after starting the day deep in the red, helped by renewed tech strength as the Nasdaq surges to day highs.

 

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SocGen: “Asset Markets Have An Inescapable Problem”

Highlighting something we discussed over the weekend, namely the rising, and now positive correlation between bonds and stocks…

… SocGen’s Andrew Lapthorne writes overnight that as equity market investors digest some unfamiliar volatility, what will be concerning asset allocators is the now positive correlation between bonds and equities as bond yields rise. “Or put simply, it is becoming very hard to avoid losing money.”

As an example, Lapthorne points out that as equity markets fell last week (MSCI World -3.4%) due to rising bond yields, pretty much every other asset lost money as well.

This harks back to the 2008 period when the New York Times – among many others – wrote about the failure of diversification leading to much head scratching and ultimately helped spawn the alternative risk-premia industry. Given the shorter duration and relatively limited downside risk of bonds relative to equities, if the sell-off persists we expect increasing pressure to take money out of equities and rotate into bonds”, Lapthrone adds.

This observation leads Lapthrone to note that “asset markets have an inescapable problem, i.e., historically low level nominal yields on a global balanced portfolio and depressed real yields at a time of low inflation.”

To get higher real yields from here, either inflation needs to head even lower (risking deflation), or yields rise due to falling prices. Neither outcome is very positive.

And another thing worth noting: normalcy appears to be slowly returning to the market, with losses for companies boasting the worst balance sheets double those with the best:

In down markets, balance sheet risk is always the most  important factor, and this bout of equity market weakness is proving no exception. Our equal-weighted index of US companies with the worst balance sheets was down 6% last week vs a 3% drop for those with the best.

And visually:

So is this the end of the bull market, especially for the most heavily levered companies? For now the answer is unclear:

“We never know if a sell-off is part of a longer-term trend as this can only be judged ex-post, but we don’t think managing an orderly decline in asset prices and the associated rise in volatility at a time of record valuations and high corporate leverage is going to be a ’healthy exercise’.”

Then again, judging by the sharp rebound in risk this morning which was kicked roughly when the White House said that it is getting “concerned” about the selloff, we may have to shelve predictions about the end of the bull market for another day yet again…

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The Philadelphia Eagles Won the Super Bowl, but They’ll Lose on Tax Day

The Philadelphia Eagles won the Super Bowl when they defeated the New England Patriots last night. But it’s the tax man who really always wins.

Because the game was played in Minneapolis, the $112,000 bonuses paid to each player on the winning team (and the $56,000 bonuses paid to the losers), will be taxable in Minnesota, which has some of the highest personal income tax rates in the country. Each member of the Eagles will end up paying about $7,200 of their Super Bowl bonus to the state of Minnesota. That comes on top of an estimated $23,500 federal tax hit for each of the winning player’s shares.

And that’s just the start. Minnesota also imposes a so-called “jock tax” on athletes that visit the state for practices and games. Income earned during the days leading up to Sunday’s big game will be taxed at the state’s top marginal rate of 9.85 percent. Only California has a higher jock tax, and even states with no personal income taxes—like Texas and Florida, both frequent Super Bowl hosts—still hit up professional athletes, coaches, and team staff with special taxes.

Robert Raiola, chief of the sports and entertainment group at PKF O’Connor Davies, a New York–based accounting firm that specializes in working with athletes, tells Philly.com that most players on the two teams would have spent about a week in Minnesota during the lead-up to the Super Bowl. That works out to about 3 percent of their total working time for the year, and their tax bills will vary depending on how much they earned during the season. Raiola told Time that Patriots quarterback Tom Brady, who earned about $15 million in salary this year, could end up owing Minnesota roughly $43,000.

While stars like Brady can make tens of millions of dollars annually in salary alone (and yet more in paid endorsements), the average NFL player makes $1.9 million—considerably less than the average in America’s other major sports. Still, that works out to more than $3,300 in state taxes owed simply for spending a week in Minnesota. And of course those players still owe taxes in Massachusetts and Pennsylvania, along with every other state where they played a road game during the season. Tennessee is the only state without a jock tax.

You may find it difficult to feel bad about the tax hurdles that come with being paid a lot of money to play a game for a living. Even so, jock taxes are fundamentally unfair, targeting income earned from a handful of high-profile professions.

“The problem I have is [visiting athletes] are not receiving benefits that other people in that state receive who are paying the tax. It’s unfair that the athletes get singled out,” Illinois tax specialist Mark Goldstick told Stateline in 2014. “If an attorney makes a million-dollar deal in that state, they are not made to pay the tax, they are not pursued. But the fact that an athlete was in the state is in the box score.”

Chris Stephens, a law clerk with the D.C.-based Tax Foundation, writes that states like to tax visiting pro athletes because they are perceived to be easy targets for taxation. Their schedules are published in advance, some have very high incomes, and as non-residents, they cannot vote to voice their displeasure with the tax.

While some teams in low-tax states can use their location to attract highly sought after free agents, players and team staff have no choice about where they play road games. And no one is going to turn down an opportunity to play in the Super Bowl because of the potential for a multi-thousand-dollar tax hit. But all those special tax bills might help explain why more than three quarters of professional football players find themselves in financial difficulties within a few years after retirement.

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US Services Economy Spikes To 13 Year High (Or Slumps To 9-Month Low)

Last week saw mixed messages on Manufacturing (ISM down, PMI up), and Services was even more so (ISM surged, PMI down).

  • Markit PMI Manufacturing – 3 year high
  • Markit PMI Services – 9-month low
  • ISM Manufacturing – fading from multi-year high
  • ISM Services – highest since Aug 2005

Take your pick – 13-year high or 9-month low?

 

Overall the Composite US PMI dropped to its lowest since May 2017, down 3 months straight signaling an unimpressive 2-to-2.5% GDP growth

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“A slowdown in the service sector comes as a disappointment, though was partially offset by faster manufacturing growth during the month. Combined, the two PMI surveys point to the economy expanding at a reasonably solid, albeit not exciting, 2-2.5% annualised rate at the start of the first quarter.

“Beneath the headline numbers, the survey findings are more encouraging, and suggest the pace of economic growth could accelerate in coming months. Most importantly, growth of new orders jumped higher in both sectors in January, registering the largest upturn in new work since last August and one of the biggest gains seen over the past three years.

Back orders also showed the biggest rise for almost three years as firms struggled to cope with rising demand.

“This upturn in client demand was a key factor behind another month of strong hiring, but also encouraged firms to hike prices. Selling price inflation accelerated in both manufacturing and services as pricing power continued to return.

And ISM soared to 13-year highs. topping all forecasts. Under the covers, ISM was incredible:

  • Employment gauge rose to 61.6, the strongest in records to July 1997, from 56.3
  • Measure of new orders surged to a seven-year high of 62.7 last month from 54.5

The month-over-month advance in orders was the second-biggest in data going back to mid-1997 and suggests businesses are responding to the passage of tax-cut legislation and boosting capital spending. What’s more, a gauge of export orders edged up to a three-month high as global economic growth picks up.

Confused? That’s the goal!

 

 

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White House: “We Are Concerned About The Market Selloff”

Having proudly owned every uptick in the stock market since his election, Donald Trump has been rather silent for the past week when it comes to commenting on the S&P’s recent reversal.

Commenting on just that, moments ago CNBC’s Eamon Jeavers reported that the White House said Monday it is worried about the U.S. stock market sell-off.

“We’re always concerned when the market loses any value, but we’re also confident in the economy’s fundamentals,” an official told CNBC.

So far on Monday, the Dow Jones industrial average briefly dropped as much as 300 before rebounding off the lows and trading -200; the S&P 500 traded about 0.6% lower, extending last week’s plunge.

As CNBC notes, President Trump has touted the strong stock market performance since his election win and has yet to deal with a significant market pullback. The Dow is up more than 30 percent since the election.

It is unclear if Trump will – and what S&P level – Trump instruct Jay Powell to start jawboning “QE4 or more”.

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Wells Fargo Plunges 9%, Biggest Drop Since August 2015 “ETFlash Crash”

Following Friday’s stunning announcement by the Fed penalizing Wells Fargo, and effectively quasi-nationalizing America’s largest mortgage lender (or maybe not largest any more), ordering it to “stop growing” until its gets its criminal house in order, on Monday Wells stock is reeling, tumbling as much as 9%, its biggest intraday drop since the August 2015 ETFlash Crash.

Not helping Wells was a batter of downgrades as analysts from Citi, JPMorgan, Morgan Stanley and RBC cut their ratings, using language like “Fed doesn’t pull any punches,” Fed “pounces,” and noting Wells Fargo “will have to be defensive” as summarized by Bloomberg.

Not everyone was gloomy, however: the Fed’s enforcement effort may create “political capital” it can use to justify regulatory relief for big banks and that Congress can use to enact legislation easing regulations, Cowen’s Jaret Seiberg writes in a note.

According to Siebert, the Fed’s enforcement action is positive for new Fed Chairman Jerome Powell, as he can start his tenure touting the action instead of answering questions about why the Fed hasn’t done anything about the fake account controversy. “Creating the perception that regulators are willing to take harsh actions against mega banks for misdeeds is critical in building and maintaining political support for bank deregulation,” Seiberg wrote.

Meanwhile, Nomura’s Bill Carcache concurs in a note that the Fed’s order “offers a healthy progress sign,” as the “unprecedented penalty may allow political pressure to ease.” He also writes that the “financial impact is manageable.”

He’s among the analysts keeping a buy rating on the bank, for now, however, he has an uphill climb to convince traders to stop selling.

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Jay Powell Sworn In As Fed Chair, Issues Statement

With Jay Powell was sworn in as the new Fed chairman,  now that Janet Yellen has moved on to greener pastures over at the blogging department at Brookings, the former banker issued a video statement on the Fed’s website in which he reiterated that the Fed will support continued growth and price stability: “Today, unemployment is low, the economy is growing, and inflation is low,” Powell said, adding that “Through our decisions on monetary policy, we will support continued economic growth, a healthy job market, and price stability.”

In an apparent comment at the recent market turbulence, Powell said that “my colleagues and I will remain vigilant, and we are prepared to respond to evolving risks” and assured Americans that “our financial system is now far stronger and more resilient than it was before the financial crisis that began about a decade ago. We intend to keep it that way.”

The video of Powell’s statement can be found here, and the transcript is below:

CHAIRMAN POWELL: Hello. This is Jay Powell.

A short time ago, I took the oath of office to become Chairman of the Federal Reserve. I am humbled and honored by this opportunity to serve the American people. And as I begin my term, I want to stress my commitment to explaining what we’re doing and why we are doing it.

Congress has assigned the Federal Reserve several important jobs. We are tasked with achieving stable prices and maximum employment. We also supervise financial institutions, including our largest banks. We play a key role in ensuring the stability of our financial system, and the integrity of our payment system.

Today, unemployment is low, the economy is growing, and inflation is low. Through our decisions on monetary policy, we will support continued economic growth, a healthy job market, and price stability.

I am also pleased to report that our financial system is now far stronger and more resilient than it was before the financial crisis that began about a decade ago. We intend to keep it that way.

My colleagues and I will remain vigilant, and we are prepared to respond to evolving risks. We will also work hard to make sure that our regulation and supervision are efficient as well as effective.

At the Federal Reserve, we know that our decisions matter for American households and businesses. Our long-standing, non-partisan tradition is to make decisions objectively, based only on the best available evidence.

My colleagues and I at the Federal Reserve will put everything we have into serving you and our country with objectivity, independence, and integrity.

Thank you.

 

 

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