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Just when investors thought President Trump might be easing up on his protectionist push following the uproar caused by his decision to slap tariffs on steel and aluminum imports, Politico is reporting that Trump’s next trade salvo will be explicitly directed at China.

According to Politico, Trump last week told Cabinet secretaries and top advisers during a White House meeting that he wants to hit China with steep tariffs and other restrictions as retaliation for Chinese policies blatantly designed to siphon valuable intellectual property from US companies. The measures would be a follow up to an order issued by Trump over the summer, when he ordered the Commerce Department to launch an investigation into Chinese IP theft, using an obscure law that was frequently employed by the Reagan administration.

* * *

As we explained back in August, with total bilateral trade of more than half a trillion dollars a year, the list of potential losers from Trump’s protectionist policies is notably lengthy:

• U.S. companies such as Apple Inc., which assemble their products in China for sale in the U.S., and those tapping demand in China’s expanding consumer market.

• U.S. agricultural and transport-equipment firms, which meet China’s demand for soy beans and aircraft.

• Manufacturing firms from the U.S. that import intermediate products from China as an input into their production process.

• Retailers including Wal-Mart Stores Inc. and the U.S. consumers that benefit from low-price imported consumer electronics, clothes and furniture.

• Other trade partners caught in the crossfire of poorly-targeted tariffs. On steel, for example, U.S. direct imports from China account for less than 3% of the total — below Vietnam.

* * *

During the as-yet-unreported meeting, US Trade Representative Robert Lighthizer reportedly presented Trump with a package of tariffs that would target the equivalent of $30 billion a year in Chinese imports. In response, Trump urged Lighthizer to aim for an even bigger number, and warned everybody present that they should prepare for an announcement during the coming weeks.

That sent senior officials at the White House, Treasury Department, State Department, Justice Department, the Office of the U.S. Trade Representative and other key agencies scrambling this week to finalize the proposal. While the details were still in flux, aides said the administration is considering tariffs on more than 100 Chinese products ranging from electronics and telecommunications equipment to furniture and toys.

Shortly after Trump authorized the tariffs, trade experts speculated that the steel and aluminum tariffs might not elicit a response from China – despite senior Chinese officials’ stern threats of retaliation – because China’s industrial sector doesn’t directly send that much steel to the US (instead, it funnels its wares into other countries, where they help drive global metals prices lower).

However, we noted at the time that China could be considerably more enraged if the administration slaps tariffs on finished Chinese goods, like, for example, toys.

And if the Politico report is accurate, it appears that Trump is poised to do just that:

“Steel tariffs are one thing. Taking on the entire Chinese industrial policy apparatus that is designed to suck technology out of the world is another,” said one outside adviser to the administration who has been briefed on the planning and was not authorized to speak on the record.

An investigation conducted in 2011 by the International Trade Commission found that China’s intellectual property theft had cost US producers nearly $26 billion in losses in 2009 on copyrighted material alone. Another study from the US software industry in 2011 put software theft losses as high as $60 billion.

Furthermore, Visa restrictions being mulled over by Trump could stem the influx of Chinese undergraduate and graduate students pouring into US universities…

The visa restrictions could hit Chinese students going to school in the United States, especially graduate students in science and technology programs, as well as other Chinese nationals working in sensitive jobs like at national laboratories. But some administration officials have raised objections to the visa restrictions and it’s unclear whether they’ll be included in the final package.

Even before the Politico report – which added to investors’ worries about Trump taking a harder line on trade – the Nasdaq led the market lower as investors worried that Trump’s decision to replace Secretary of State Rex Tillerson with CIA Director Mike Pompeo could signal that he’s taking a harder line on trade and national security – the reason he cited for quashing Broadcom’s pursuit of Qualcomm… and additional Section 301 concerns.

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After a year of delivering President Trump’s daily intelligence briefing, CIA Director Mike Pompeo is finally getting his shot  at the big chair.

Assuming Pompeo’s nomination sails through the Senate (in January 2017, he was easily confirmed as CIA director in a 66-32 vote), he cold officially take over for Tillerson as soon as the first or second week in April. Back then, Pompeo faced resistence from a small but vocal contingent of Senate Democrats, and – of course – Rand Paul.

Rumors that Pompeo would replace Tillerson at the State Department have been circulating since at least October, when we published a post entitled “Will CIA Director Mike Pompeo Replace Rex Tillerson As Secretary Of State?”

As investors attempt to suss out what, exactly, Pompeo’s nomination means for markets, Citi published a note breaking down his positions on several key issues while providing a brief biography of one of the most powerful men in Washington.

Until he was selected to serve as Trump’s CIA director, Pompeo represented Kansas’ 4th district in the House, having been voted in as part of the Tea Party wave of 2010. He was then reelected in 2012, 2014 and 2016.

Before that, Pompeo graduated first in his class from West Point Military Academy, and later received a JD from Harvard.

Moving on to his views on Russia, Pompeo differs from Tillerson in two important ways. The first, according to Citi, probably made him extremely attractive to Trump: Pompeo doesn’t believe that Russia tried to interfere in the 2016 election.

“Americans should rest assured that we have a very good understanding of the Russian program and how to make sure that Americans continue to be kept safe from threats from Vladimir Putin,” Pompeo said.

Pompeo is also considerably more hawkish in his foreign policy views than Tillerson: He wants progress with North Korea, but is keeping his “eyes wide open.”

On Sunday, Pompeo made the following comment during an appearance on Fox News:

“Never before have we had the North Koreans in a position where their economy was at such risk, here their leadership was under such pressure. Make no mistake: while these negotiations are going on, there will be no concessions made.”

Pompeo also harbors the view, shared by several senior Pentagon officials, that China is a greater long-term threat to the US than Russia:

“The Chinese have a much bigger footprint upon which to execute that mission than the Russians do.. We can watch very focused efforts to steal American information, to infiltrate the United States with spies – with people who are going to work on behalf of the Chinese government against America. We see it in our schools. We see it in our hospitals and medicals systems. We see it throughout corporate America. It’s also true in other parts of the world… including Europe and the UK.”

Finally, Pompeo is a proponent of broad-based surveillance (which is what drew the opposition from Rand Paul).

“Congress should pass a law re-establishing collection of all metadata, and combining it with publicly available financial and lifestyle information into a comprehensive, searchable database. Legal and bureaucratic impediments to surveillance should be removed. That includes Presidential Policy Directive-28, which bestows privacy rights on foreigners and imposes burdensome requirements to justify data collection.”

President Trump is expected to announce a handful of other personnel changes by the end of the week – with rumors circulating that National Security Advisor H.R. McMaster could be next.

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Authored by Virginia Fidler via GoldTelegraph.com,

A study released by GoBankingRates reveals that older people planning their retirement have cause for concern. Forty-two percent of Americans are facing their golden years with less than $10,000 in savings. A lack of savings and planning has reduced what should be an enjoyable time in seniors’ lives to a period of stress and worries for many.

Out-of-pocket expenses for health care is spiraling. The Bureau of Labor Statistics indicates that Americans 65 years of age and older may spend up to $46,000 annually on healthcare. This is not good news for those with only $10,000 on which to fall back on.

For adults over 50, this should be a call to act now, while there is still time. Only one-third of adults in that age group have savings greater than $10,000. Retirement planning needs to become a priority, as there is little time to waste. Pensions are becoming rarer, and Social Security is becoming less secure than it used to be. Many health needs of seniors are not covered by Medicare. Some experts believe the Social Security system will be depleted by 2030. Adults over the age of 50 need to consider making contributions into 401(k) accounts or similar retirement plans.

Social Security was never intended to be the sole income of retiring seniors. It was meant to supplement approximately only 40% of post-retirement spending. Social security was supposed to enhance seniors’ lives, not support it entirely. However, according to Investopedia.com, 43 percent of unmarried seniors rely on Social Security to cover 90 percent of their basic needs. Almost a quarter of married couples depend on Social Security to meet most of their expenses.

Some seniors struggling with poverty are able to receive supplemental income (“SPM”), such as food stamps for a bit of additional help. The need is especially high for seniors who are women, African Americans, and Hispanics, and those with ongoing health issues.

6,400,000 million American seniors are living at poverty level, struggling to meet fundamental needs such as rent and food. This number is likely to increase as more boomers become eligible for Social Security and the system becomes less able to support them.

What does this mean for the Millennial generation? The current Social Security system will be unsustainable at some point. It cannot continue at the current level. It probably won’t be abolished, as that would cause chaos for seniors. However, Millennials are aware that changes are coming. They know that benefits will likely be reduced by the time they grow older.

The good news is, Millennials are aware of the problem. Members of the boomer generation who assumed Social Security would take care of their needs are learning a hard lesson.

 

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When Rex Tillerson was appointed Secretary of State in late 2016, there were howls of indignation from the “resistance” accusing Trump of adding yet another pro-Russian to his closest circle: after all, why else would Tillerson have been awarded the 2013 Russian Order of Friendship award, if not to further promote the Russian agenda, or so the thinking went. The WaPo even penned “What is the Russian Order of Friendship, and why does Rex Tillerson have one?“

So it may be awkward to explain to the public why (and how) Tillerson himself is about to become the latest honorary member of the “resistance.”

Meanwhile, a just as relevant question is how Russia feels regarding the appointment of Tillerson’s replacement: former CIA chief Mike Pompeo. According to the Moscow Times, Russian senators have expressed cautious optimism over Donald Trump’s announcement of Mike Pompeo as the new U.S. Secretary of State.

“Russia will cooperate with those who are appointed to this or another post in the Trump administration,” the state-run RIA Novosti news agency cited senior Federation Council senator Yevgeny Serebrennikov as saying Tuesday.

Throwing some shade at failed attempts at detente between Putin and Trump, Serebrennikov addded that “we pursued and are pursuing a course to reduce tensions in relations between our countries, but our partners do not see this aspiration.”

The Federation Council’s International Affairs Committee deputy chairman Vladimir Dzhabarov said that Pompeo “may have the chance to become a man who will stop our relations from dropping rock-bottom,” the RBC business portal reported.

Meanwhile, Russian Foreign Ministry spokeswoman Maria Zakharova reacted to the news with an ironic “have they started blaming Russia for Washington’s staff reshuffles yet?” question in remarks to Interfax.

Elsewhere, across the Atlantic (and Pacific), Senator Chuck Schumer tweeted that he hoped “that Mr. Pompeo will turn over a new leaf and will start toughening up our policies towards Russia and Putin.”

Because if there is one thing the military-industrial complex US economy desperately needs, is even more conflict with Russia…

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Authored by John Rubino via DollarCollapse.com,

A branch of journalism that might be called, “don’t worry, be happy, because this time is different” tends to pop up at the peak of cycles when imbalances that caused past crashes start to reemerge. Eager to keep the gravy train going, business publications send reporters out to interview industry experts (who are making fortunes from the ongoing expansion) on why this batch of imbalances is actually no problem at all. And sure enough they find all kinds of plausible-sounding rationalizations.

In the 1990s dot-com bubble, for instance, stratospheric P/E ratios didn’t matter because for New Age tech companies earnings were “optional.” In the 2000s housing bubble record mortgage debt didn’t matter because home prices would always rise faster than the associated borrowing, keeping homeowners above water and banks ever-solvent. Subsequent events proved this to be nothing more than insiders trying to keep the deals flowing.

Now, with pretty much every major indicator signaling a peak for the latest cycle, “don’t worry, be happy” is once again a popular journalistic beat. Here’s an excerpt from yesterday’s Wall Street Journal on why investors fine with record corporate debt:

U.S. corporate debt has climbed to levels that have coincided with recent recessions. Many analysts and investors are unconcerned.

Even before this week’s blockbuster $40 billion bond sale by CVS Health, corporate debt stood at 45% of GDP, a level it last reached in 2008 as the economy was entering a recession, according to Moody’s Investors Service.

Some companies with weaker credit quality are finding it easier to access the bond market, and others are skimping on covenants protecting investors. Yet analysts say the differences between the current period and 2008 and 2001—when corporate debt rose to similar levels as the U.S. tipped toward contraction—are more important than any similarities.

Today, signs of economic growth persist, supported by corporate tax cuts and a simulative budget deal, as well as borrowing costs that remain relatively low by historical standards. That means companies can continue to borrow without creating significant economic risks, according to analysts.

Moody’s predicts the economy will grow 2.7% this year and expects the default rate on corporate bonds to drop to 2.2% by year-end from 3.2% in January.

Today’s credit conditions are also stronger than in the past because of larger capital buffers held by U.S. banks as part of more stringent regulatory standards, Moody’s analysts said.

Banks’ bondholdings have shrunk drastically since the financial crisis, in part because of Dodd-Frank banking reforms but also because investors are more willing to buy the securities they underwrite. This signals an improved capacity within the economy to handle the present level of corporate borrowing.

Banks formerly held significant amounts of bonds either as unsold inventory from or with their proprietary trading units. In January 2008, the bond dealers in the Federal Reserve’s network of primary dealers who underwrite the U.S. Treasury debt held as much as $279 billion of corporate debt on their balance sheets compared with $24 billion as of last month.

Corporations are in a better position to function with higher debt burdens than in the past, some analysts said.

“The difference this time is really in the debt affordability,” said Anne van Praagh, head of credit strategy & research at Moody’s Investors Service.

The yield on the 10-year Treasury note, which serves as a benchmark lending rate for companies, has climbed this year, recently hitting a multiyear high of 2.943%, compared with an average rate of 4.63% in 2007. And with credit spreads—the difference in yield between corporate bonds and Treasury debt—hovering near multiyear lows, investor demand continues to hold down borrowing costs for most companies.

One of the fun ways to read this kind of journalism is to count the sentences likely to come back to haunt the reporter and/or his source a few years hence. The above article has a ton of them, but here are three that stand out:

“Banks’ bondholdings have shrunk drastically since the financial crisis, in part because of Dodd-Frank banking reforms but also because investors are more willing to buy the securities they underwrite. This signals an improved capacity within the economy to handle the present level of corporate borrowing.”

If there are record amounts of corporate bonds in circulation and banks don’t own them, who does? Bond ETFs and pension funds, neither of which will react well to the next downturn. ETFs will see outflows which require them to sell existing positions, thus pushing prices down even further. Pension funds will fall into a black hole of underfunding if their current investments lose value when they’re supposed to rise by a steady 7% per year. Both ETFs and pension funds are every bit as fragile and systemically dangerous as big banks were prior to the Great Recession.

“The yield on the 10-year Treasury note, which serves as a benchmark lending rate for companies, has climbed this year, recently hitting a multiyear high of 2.943%, compared with an average rate of 4.63% in 2007. And with credit spreads—the difference in yield between corporate bonds and Treasury debt—hovering near multiyear lows, investor demand continues to hold down borrowing costs for most companies.”

To note that interest rates recently hit a multi-year high but brush that off because they’re still lower than past peaks is the kind of snapshot thinking that ignores trends. And in finance it’s really all about trends. If the 10-year Treasury rate keeps rising, corporate borrowing costs will have to follow – and will eventually spike when higher interest rates destabilize the economy. Put another way, it’s not the nominal interest rate that matters, it’s the resulting interest cost. And with the world approximately twice as indebted as it was a decade ago, a lower interest rate can still generate a debilitating level of interest expense.

“Today, signs of economic growth persist, supported by corporate tax cuts and a simulative budget deal, as well as borrowing costs that remain relatively low by historical standards. That means companies can continue to borrow without creating significant economic risks, according to analysts. Moody’s predicts the economy will grow 2.7% this year and expects the default rate on corporate bonds to drop to 2.2% by year-end from 3.2% in January.”

Growth is always robust and prospects bright – according to forecasters who get paid by companies and/or governments that benefit from positive perceptions – just before something blows up and stops the expansion. In 2006, everyone from Ben Bernanke to Goldman Sachs thought 2008 was going to be a great year.

So insouciant bondholders are just following the standard late-cycle script.

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Amid an avalanche of rumors and facts about exactly how Rex Tillerson was fired – and why – the ousted Secretary of State is holding a press conference to explain his side of things…

Having been very diplomatic until now, we wonder whether Rex will rage?

Live Feed (due to begin at 2pmET)…

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Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Outcome versus Process Strategies

It is that time of year when the markets play second fiddle to debates about which twelve seed could be this year’s Cinderella in the NCAA basketball tournament. For college basketball fans, this particular time of year has been dubbed March Madness. The widespread popularity of the NCAA tournament is not just about the games, the schools, and the players, but just as importantly, it is about the brackets. Brackets refer to the office pools based upon correctly predicting the 67 tournament games. Having the most points in a pool garners office bragging rights and, in many cases, your colleague’s cash.

Interestingly the art, science, and guessing involved in filling out a tournament bracket provides insight into how investors select assets and structure portfolios. Before explaining, answer the following question:

When filling out a tournament bracket do you:

A) Start by picking the expected national champion and then go back and fill out the individual games and rounds to meet that expectation?

B) Analyze each opening round matchup, picking winners and advance round by round until you reach the championship game?

If you chose answer A, you fill out your pool based on a fixed notion for which team is the best in the country. In doing so, you disregard the potential path, no matter how hard, that team must take to become champions.

If you went with the second answer, B, you compare each potential matchup, analyze each team’s respective records, strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography might affect performance. While we may have exaggerated the amount of research you conduct a bit, such a methodical game by game evaluation is repeated over and over again until a conclusion is reached about which team can win six consecutive games and become the national champion.

Outcome Based Strategies

Outcome-based investment strategies start with an expected result, typically based on recent trends or historical averages. Investors following this strategy presume that such trends or averages, be they economic, earnings, prices or a host of other factors, will continue to occur as they have in the past. How many times have you heard Wall Street “gurus” preach that stocks historically return 7%, and therefore a well-diversified portfolio should expect the same thing this year? Rarely do they mention corporate and economic fundamentals or valuations. Many investors blindly take the bait and fail to question the assumptions that drive the investment selection process.

Pension funds have investment return assumptions which, if not realized, have negative consequences for their respective plans. Given this seemingly singular aim of the fund manager, most pension funds tend to buy assets whose expected returns in aggregate will achieve their return assumption. Accordingly, pension funds tend to be managed with outcome-based strategies.

For example, consider a pension fund manager with an 8% return target that largely allocates between stocks and bonds.

Given the current yields in the table above, and therefore expectations for returns on sovereign bonds of approximately 1%, the manager must instead invest in riskier fixed income products and equities to achieve the 8% return objective. Frequently, a pension fund manager has a mandate requiring that the fund hold a certain minimum amount of sovereign bonds.  The quandary then is, how much riskier “stuff” do they have to own in order to offset that return drag? In this instance, the manager is not allocating assets based on a value or risk/reward proposition but on a return goal.

To illustrate, the $308 billion California Public Employees Retirement System (CalPERS), the nation’s largest pension fund, has begun to shift more dramatically towards outcome-based management. In 2015, CalPERS announced that they would fire many of their active managers following repeatedly poor performance. Despite this adjustment, they still badly missed their 7.5% return target in 2015 and 2016. Desperate to right the ship, CalPERS maintains a plan to increase the amount of passive managers and index funds it uses to achieve its objectives.

In speaking about recent equity allocation changes, a CalPERS spokeswoman said “The goal is to eventually get the allocation to the right mix of assets, so that the portfolio will likely deliver a 10-year return of 6.2%.”

That sounds like an intelligent, well-informed comment but it is similar to saying “I want to be in Poughkeepsie in April 2027 because the forecast is sunny and 72 degrees.” The precision of the 10-year return objective down to the tenth of a percent is the dead giveaway that the folks at CalPERS might not know what they’re doing.

Outcome-based strategies sound good in theory and they are easy to implement, but the vast amount of pension funds that are grossly underfunded tells us that investment policies based on this process struggle over the long term. “The past is no guarantee of future results” is a typical investment disclaimer. However, it is this same outcome-based methodology and logic that many investors rely upon to allocate their assets.

Process Based Strategies

Process-based investment strategies, on the other hand, have methods that establish expectations for the factors that drive asset prices in the future. Such analysis normally includes economic forecasts, technical analysis or a bottom-up assessment of an asset’s ability to generate cash flow. Process-based investors do not just assume that yesterday’s winners will be tomorrow’s winners, nor do they diversify just for the sake of diversification. These investors have a method that helps them forecast the assets that are likely to provide the best risk/reward prospects and they deploy capital opportunistically.

Well managed absolute return and value funds, at times, hold significant amounts of cash. This is not because they are enamored with cash yields per se, but because they have done significant research and cannot find assets that offer value in their opinion. These managers are not compelled to buy an asset because it “promises” a historical return. The low yield on cash clearly creates a “drag” on short-term returns, but when an opportunity develops, the cash on hand can be quickly deployed into cheap investments with a wider margin of safety and better probabilities of market-beating returns. This approach of subordinating the short-term demands of impatience to the long-term benefits of waiting for the fat pitch dramatically lowers the risk of a sizable loss.

A or B?

Most NCAA basketball pool participants fill out tournament brackets starting with the opening round games and progress towards the championship match. Sure, they have biases and opinions that favor teams throughout the bracket, but at the end of the day, they have done some analysis to consider each potential matchup.  So, why do many investors use a less rigorous process in investing than they do in filling out their NCAA tournament brackets?

Starting at the final game and selecting a national champion is similar to identifying a return goal of 10%, for example, and buying assets that are forecast to achieve that return. How that goal is achieved is subordinated to the pleasant but speculative idea that one will achieve it. In such an outcome-based approach, decision-making is predicated on an expected result.

Considering each matchup in the NCAA tournament to ultimately determine the winner applies a process-oriented approach. Each of the 67 selections is based on the evaluation of comparative strengths and weaknesses of teams. The expected outcome is a result of the analysis of factors required to achieve the outcome.

Summary

It is very likely that many people filling out brackets this year will pick Villanova. They are a favorite not only because they are the #1 overall seed, but also because they won the tournament last year. Picking Villanova to win it all may or may not be a wise choice, but picking Villanova without consideration for the other teams they might play on the path to the championship neglects thoughtful analysis.

The following table (courtesy invest-assist.blogspot.com and Koch Capital) is a great reminder that building a portfolio based on yesterday’s performance is a surefire way to end up with sub-optimal returns.

Winning a basketball pool has its benefits while the costs, if any, are minimal. Managing wealth, however, can provide great rewards but is fraught with severe consequences. Accordingly, wealth management deserves considerably more thoughtfulness than filling out a bracket. Over the long run, those that follow a well-thought out, time-tested, process-oriented approach will raise the odds of success in compounding wealth by limiting damaging losses during major market set-backs and by being afforded opportunities when others fearfully sell.

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On the heels of UK PM May’s red hot rhetoric and ultimatum yesterday and Germany’s pressure this morning, Russia has cranked up their response to ’11’ on the Spinal Tap amplifier of global armageddon. 

Having made clear this morning that:

“We have certainly heard the ultimatum voiced in London,” Russia’s top diplomat Sergey Lavrov said.

“The spokesperson for the Foreign Ministry has commented on our attitude to this,” he added referring to Maria Zakharova branding of May’s appearance in Parliament as a “circus.”

Russia faces warning from Germany too, as Reuters reports Merkel and May spoke this morning about the nerve agent attack. Merkel condemned the attack and stated that she was “taking very seriously the British government’s view that Russia might be responsible.” Merkel then said Russia “needs to give prompt answers to the British’ justified questions.”

But then, Interfax reports Russian Foreign Ministry Spokeswoman Maria Zakharova turne dup the heat dramatically, warning (or threatening):

“One does not give 24 hours notice to a nuclear power.”

Adding that the “Skripal poisoning was not an incident but a colossal international provocation.“

Slamming the British for “not using a single international legal mechanism to probe the Skripal case.”

Additionally, Zakharova stated that British Prime Minister Theresa May apparently has no actual facts concerning the poisoning of former Russian military intelligence Colonel Sergey Skripal and his daughter Yulia.

“No one knows anything, including Theresa May, who has no actual fact in her hands,” Zakharova told the 60 Minutes program on the Rossiya-1 television channel.

Finally, following reports that Britain’s media regulator Ofcom said Russian broadcaster RT could lose its UK licence if Theresa May’s government determines that Moscow was behind the poisoning of a former Russian double agent in England this month, Russia’s foreign ministry threatened retaliation:

“…not a single British media outlet with work in Russia if London shuts RT.”

This escalation is far from over.

 

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