Category: zerohedge

While Schiff Talks “Jail Time” For Trump, Rep. King Says Not Enough Evidence To Impeach

California Rep. Adam Schiff (D) said on Sunday that President Trump could “face the real prospect of jail time” after federal prosecutors said in a legal filing that Trump directed his former attorney, Michael Cohen, to make illegal payments during his 2016 presidential campaign. 

Speaking on CBS’s “Face The Nation,” Schiff said: “There’s a very real prospect that on the day Donald Trump leaves office, the Justice Department may indict him. That he may be the first president in quite some time to face the real prospect of jail time.”

In terms of impeachment, Schiff said that he will wait to see the “full picture” before concluding whether recent developments meet the standard for an impeachable offense.

Last week federal prosecutors, referring to Trump as “Individual-1” who “had become the President of the United States,” that Cohen “acted in coordination with and at the direction of” Trump when he made two payments to silence women who claimed to have had affairs with Trump in 2006. 

Despite his cooperation with the Mueller probe, prosecutors recommended that Cohen – who flipped on Trump – should receive “substantial prison time,” for being a terrible witness among other things. 

Schiff, who will become Chairman of the House Intelligence Committee in January, also said he hopes to bring Cohen back for more testimony.

Not enough evidence to impeach

While Schiff seems convinced Trump could see the inside of a prison cell after he leaves office, Sen. Angus King (I-ME) – a member of the Senate Intelligence Committee, told NBC’s “Meet The Press” that despite the Friday court filings by Mueller’s team, there is not yet enough evidence to warrant launching the impeachment process. 

King, an independent who caucuses with the Democrats, said the investigation has yet to deliver the evidence that would prove collusion between Trump and the Russians. He said starting an impeachment inquiry without it would just send the message to Trump’s base that the Mueller investigation is politically motivated. –PressHerald

“We don’t want to create a precedent where the Congress of one party unseats a president of another party. We become a kind of parliamentary system,” King told host Chuck Todd. 

The Maine Senator also told Todd that the special counsel’s sentencing guidelines on former National Security Adviser Michael Flynn are the most significant developments of last week, and should be “most troubling to the White House.”

Flynn, as opposed to Cohen, was given a recommendation from the special counsel of no jail time for his “substantial” assistance to the Mueller investigation. 

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Elon Musk’s Divorce Lawyer Is No Longer Tesla’s General Counsel

The executive turnstile at Tesla continues to operate at full force gale, with the most recent changing of the guard happening at the company’s general counsel position. Todd Maron, Tesla’s (now former) general counsel and also Elon Musk’s divorce lawyer will be leaving the company after five years on the job according to a statement given to the Wall Street Journal.

He’s going to apparently stay on until January and help transition the role to Dane Butswinkas, a seasoned trial lawyer who has “decades of experience defending corporate interests”. His bio states that he is “recommended by his peers and clients alike for his ‘absolute trial-ready preparedness.’”

We’re sure that this switch at the General Counsel position has absolutely nothing to do with an ongoing Department of Justice investigation into the company reportedly directed at whether or not Elon Musk misled investors with regards to Model 3 production timelines.

Butswinkas is currently chairman of law firm Williams & Connolly and he will report directly to Elon Musk. When asked about the transition, Tesla did a great job of pivoting from the fact that its general counsel was leaving and instead made some vague and nebulous statement about its interstellar philosophic goals.

“Tesla’s mission is bigger than Tesla – one that is critical to the future of our planet. It’s hard to identify a mission more timely, more essential, or more worth fighting for,” the company told the Wall Street Journal.

When asked for a comment from the departing counsel, Mr. Maron wrote:

 “Being part of Tesla for the last five years has been the highlight of my career. Tesla has been like family to me, and I am extremely grateful to Elon, the board, the executive team, and everyone at Tesla for allowing me to play a part in this incredible company.”

The company didn’t give a firm answer as to why Maron was leaving, but it did note that the transition had began in July of this past year. One of the interesting things about Mr. Maron’s departure is the fact that he has not only been Elon Musk‘s personal lawyer, but also his confidant, for years. On the other hand, the incoming attorney had already been hired as to help assist with Musk’s August tweets that landed him as the target of a Securities and Exchange Commission lawsuit.

We’re sure that Tesla bringing on a seasoned trial attorney is nothing to pay attention to at all, but likely just another step in helping fight the pesky and nefarious short-sellers that have conspired to further the interests of the oil and gas lobby and destroy the company. Vaya con dios, Mr. Maron. 

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One JPMorgan Strategist Finds The Buyback Party Is Over, Hopes Not To Be Lumped In With The “Fake News”

It was a little over a year ago, when Trump’s then chief economic advisor, former Goldman COO Gary Cohn had an epiphany in which he realized that Trump’s entire overarching economic policy of encouraging tax repatriation so companies would invest in the US, spend on R&D and hire more workers, had been a disaster.

During an event for the Wall Street Journal’s CEO Council in November 2017, an editor at The Wall Street Journal asked the room: “If the tax reform bill goes through, do you plan to increase investment — your company’s investment, capital investment?” He asked for a show of hands.

Alas, as the camera revealed, virtually nobody raised their hand.

Responding to this “unexpected” lack of enthusiasm to invest in growth, Cohn had one question: “Why aren’t the other hands up?”

Cohn’s confusion was understandable: this one simple experiment revealed that Cohn’s entire economic policy was a disaster, and that instead of using repatriated cash to invest, most US corporations would use the newly-unlocked funds to double down on stock buybacks. And while the former Goldman president tried to cover up his disappointment with laughter, the cognitive dissonance between the stated intention behind tax reform, and what it would ultimately achieve, or rather not achieve, was painfully obvious to everyone.

Fast forward one year, when what was only speculated had been confirmed, and not only were total corporate buybacks in 2018 set for an unprecedented record high, surpassing $1 trillion for the first time…

… but, in a slap to the Trump administration’s implicit request, buybacks would surpass CapEx spending for the second quarter in a row.

 

And now, confirming all of the above, in his latest Flows and Liquidity newsletter, JPMorgan’s Nikolaos Panigirtzoglou finds that while US companies brought back hundreds of billions in profits from overseas to take advantage from last year’s tax break, most of it went to share buybacks, with far less spent on debt repayment, while capital spending was a distant third.

However, in a more troubling sign for equity bulls, JPM also found that the amount of cash repatriated, and thus fund the “buyer of last resort” i.e., corporate stock repurchases, has been declining dramatically,

To calculate the amount of cash that was repatriated, the JPM strategist looked at “foreign earnings retained abroad”, disclosed in Table F.103 in US Flow of Funds for the “Nonfinancial Corporate Business”, relative to its 2017 average. This repatriation proxy declined to only $60bn in Q3 vs. $115bn in Q2 and $225bn in Q1.

This implies that just like the trade boost for much of 2018 which was the result of frontrunning higher US-China tariffs, the US repatriation flow was also effectively frontloaded in Q1 and had been almost halved in Q2 and halved again in Q3. Assuming another halving in Q4, would practically mean that the current repatriation episode would be largely completed by the
end of the year with the cumulative amount having repatriated by the US nonfinancial sector reaching around $430bn, or 20% of JPMorgan’s estimated $2.1tr stock of offshore cash.

This deceleration pattern implied by the US Flow of Funds data is also consistent with the company reports from the reporting season. In particular, JPM notes that analysts can get a good idea of the amount of repatriated cash that has been actually deployed via looking at the earnings reports of US companies and in particular via observing the reduction in overall cash holdings. When the offshore cash is repatriated but not deployed, then overall cash holdings should be unchanged as the only change that has happened is that a portion of cash has switched location from offshore to onshore. But when the repatriated cash is deployed, in order for the company to buy back shares or to fund other activities, then the overall amount of reported cash holdings should decline.

And sure enough, confirming the Flow of Funds approximation, JPMorgan looked at the overall cash holdings for the universe of the 15 US companies with the highest cash holdings: the reduction in reported cash holdings during Q3 was only $6bn, compared to $47bn in Q2 and $80bn in Q1 (Figure 2). So here too there is a rapidly decelerating trajectory similar to the pattern from the US Flow of  Funds repatriation proxy.

Now that we know that US corporations repatriated far less cash in Q3 then they did in Q1 and Q2, let’s go back to the use of funds.

As noted above, JPMorgan estimates that around half or $190bn of the above $400bn has been used for increased US share buybacks. In particular, the reported “net decrease in the capital stock”, a proxy for share buybacks, increased to just below $200bn per quarter in Q1-Q3 this year vs. $134bn per quarter in 2017 for S&P500 index companies. So a net incremental change of $64bn per quarter or $190bn in total during Q1-Q3.

The second most popular use of funds was repaying debt, as another $90bn was likely used for corporate bond withdrawal, judging by the decline in domestic net issuance of US corporate bonds during the first quarters of the year.

This means that a mere $75 billion appears to have been used for capex, a far lower number than the Trump administration initially paraded to obtain broad support for its tax repatriation holiday strategy. The remaining $45bn of the $400bn Q1-Q3 repatriation flow was likely deployed in Q4 mostly as share buybacks.

Finally, a third confirmation for slowing buybacks – something we first discussed one month ago – comes from public information on announced US buybacks, which also show a decelerating pattern. The monthly trajectory for announced buybacks for S&P500 index companies is shown in the chart below.

Following an accelerating pattern during the first seven months of the year and a peak in July, the flow of announced buybacks had been very small for three months in a row between August and October, coinciding with the time rates pushed sharply higher and market turbulence first emerged. And while November was somewhat stronger than October, but far from the exuberant pace of the first seven months of the year.

In other words the picture we get from Figure 3 is that the repatriation-induced exuberance in share buyback announcements is behind us.

This is a problem because while another JPM strategist, Marko Kolanovic believes that stocks are set to surge some 18% over the next 12 months, rising to 3,100 by the end of 2019, Panigirtzoglou is not so sure, and as he writes, “if the above trends continue, the extra boost that US repatriation provided to US equity and bond markets via share buybacks and corporate bond redemptions would likely dissipate next year.”

And speaking of the Kolanovic (bullish) vs Panigirtzoglou (bearish) worldview schism, one which was on full display on Friday, when JPM’s chief quant and derivatives strategist blamed “specialized websites that mass produce a mix of real and fake news” for screwing up his optimistic forecast, which is somewhat paradoxical when considering that another member of JPM’s own team week after week published far less bullish takes than the official “house view”, here is how Panigirtzoglou defends himself against any potential future allegations by Kolanovic that he is merely spreading “fake and bad” news:

As a note to our readers, the above analysis does not represent JPM’s official views/forecasts about US share buybacks. These JPM official forecasts are more positive and are outlined in the reports by our US equity strategists (Dubravko Lakos-Bujas and team). Instead, the objective of our analysis is to highlight risks around the house view.

In other words, the objective is to explain why “those other guys” are always wrong…

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Markets Are “On The Cusp” Again

Authored by Sven Henrich via NorthmanTrader.com,

For the third month in a row markets are on the cusp of breaking their bull market trends. And once again they need a magic rescue into month end to avoid such a break.

What if you have a license to rally and stocks sell anyways? Not a good sign. Last week I concluded:

“Outlook: Last week’s massive rally and indicated further strength have so far supported the Bear Trap scenario. We’ll be reaching short term overbought readings into early December just ahead of traditional short term weaker seasonality. There likely will be some fade/retest trade opportunities. Indeed bulls need to avert a sell the news scenario. A renewed drop below 2700 would constitute a major warning sign for bulls. A drop below the October/November lows would fully open up the lower risk zone again”.

I think it’s fair to say bulls fumbled badly. Short term weak seasonality indeed made its presence felt in a historic way as stocks dropped nearly $1 trillion dollars in market value in just 4 days and $SPX dropped below 2700. But October lows have not been taken out either. Yet.

The bad news hits kept on coming. Hardly anybody believes Theresa May can pull off a miracle and get the Brexit deal passed next week and European stocks soured amidst further weakening economic data. US markets kept getting hit by unforced errors by the US administration’s continued bumbling efforts to explain what’s what in regards to China and the arrest of Huawei’s CFO seemed to contribute to a sudden futures plunge as future markets reopened following the George Bush funeral. To boot President Trump appears under increasing siege being implicated in multiple potential felonies in Friday’s SDNY and Mueller filings increasing event risk and the departure of his Chief of Staff announced over weekend adds to uncertainty on the political front. Bottomline: All gains from the previous week were again given back and traders find themselves in a wide and aggressive chop range:

What this chart shows: A battle field for control and neither side has still proven their case. It’s a nightmare for investor confidence, but it’s a dream for short term traders. You don’t need to catch every move, but if you can short some of the rips or ride some of the rips you’re doing well. These type of moves used to take months to unfold, now they’re happening in a matter of hours and days. Volatility is back.

Notable about this chart, the massive back and forth ranges aside:

1. All gaps since late October have gotten filled. Be it up gaps or down gaps algos are filling them all.

2. There is a potential positive divergence in play

3. This large range could now be considered a consolidation range and it may have implications of significance.

An eventual breakout upside the could imply a targeted move of equal size in either direction. 2815-2603 = 212 handles. On the downside this implies a potential move to 2391 on $SPX, on the upside it implies a potential move toward 3027. Gee, thanks Sven so we can go either up or down? Yup, that’s currently the situation. But there is more nuance to all of this.

$SPX remains inside the larger range:

But $SPX has dropped below 2700 again and as I outlined this is major warning sign for bulls as now again, for the 3rd month in a row, markets are in desperate need for another magic save into month end to prevent a break of the bull market trend:

Be it the global market:

Or key US indices:

The timing is once again critical. Long gone is the yield scare as slowing growth data and technicals have once again dropped the 10 year yield away from its long term trend line as it has time and time again for decades:

…as $TLT has once again held its long term trend line as well:

The Fed has been desperate to keep sending dovish signals and the President himself,apparently obsessed with stock market levels, has been trying his dearest to sweet talk markets with tweets. With no avail on either count. Markets are ignoring the Fed and they choose to focus on the negative on China coming from Navarro who apparently plays the evil twin to Kudlow who is the go to guy for jawboning markets higher.

Markets are not buying it and every spike has been sold.

I’ve been highlighting the lower risk zone that could come into play if markets break the October lows and, given the range consolidation, I’ve expanded the risk zone lower:

Given that ominous $VIX pattern the risk range could certainly come into play quickly. If we break the October lows. And make no mistake: That weekly candle is awful looking.

The weekly 100MA, February lows, April lows, the .50 fib, the 2460 gap, the .618 fib and 2400 zone could all be target zones on a panic flush and a $VIX breakout implying a 9% risk zone to the downside.

So is the Bear Trap #2 case I raised this week dead? It sure looks like it at the moment. But not so fast.

Several considerations that may still work in favor of bulls here for year end. For one, the powers that be have made their preference clear: They want markets higher. The Fed has gotten the message but hasn’t found the formula. Trump clearly wants higher prices but he keeps sending Navarro in front of the cameras. He may have to decide quickly which one he wants as he clearly can’t have both. Markets want confidence and they don’t have any at the moment.

Can Theresa May deliver a surprise next week? It seems highly unlikely, but if she does or delivers something that markets like in form of a compromise offer Europe may decide to rally. Next week also ends the poor seasonality window for stocks and closely watched central bank meetings by the ECB and the FOMC will become front and center.

As bad as December has been so far the weakness fits inside the seasonal script. December OPEX week tends to be bullish, the Fed is also meeting that week and then it’s supposed traditional Santa rally time.

I’ve outlined the 2000 scenario before and I’ll highlight it again as the current chop situation is so incredibly similar:

Back then a quick dip to new lows was bought aggressively for a larger rally into January. But be clear: In that year markets topped and larger rallies proved further selling opportunities as the recession then began to unfold. Recession risk has been rising and the signs of a slowdown are abundant at this stage.

So don’t be surprised if new lows are ultimately bought aggressively for a final hurrah perhaps.

Remember bear markets, (if this is morphing into one) don’t move in one direction. They move violently in both directions and their rallies can be the most aggressive.

If we do break October lows there are actually a few charts that suggest imminent support below inside the lower risk range.

Take $NYSE as an example, a rather fascinating chart in its current configuration:

Note the positive RSI and MACD divergences are overtly similar to the 2015 and 2016 lows showing potential for double bottoms. Back then markets were of course showered by massive central bank interventions and abundant fresh new liquidity. We don’t have evidence to new liquidity entering markets at this stage buybacks aside. Indeed $FB announced a $9B buyback increase just on Friday evening and Credit Suisse is expected to announce one next week.

$NYSE has been an awful chart in 2018, never made new highs, broke major support and has now formed an interesting pattern with lows holding at a trend line going back to 2014. At the same time it has formed a support trend line in 2018 which is a bit lower and could provide support on new lows versus October. A key chart to watch from my perch.

We have a similar setup in $NDX:

This pink trend line dates all the way back to 2007. Remember monthly trend lines are not confirmed broken until month end, hence a quick dip below the 2009 trend line then finding support at the 2007 trend line setting up for a big bounce could avert the breakdown before month end. Break that 2009 trend line by month end, then all bets are off of course.

Speaking of $NDX: It remains inside its wedge:

That wedge also has room lower before the pattern is invalidated. Last week’s rally above was a failed breakout at this stage.

Friday’s new lows for December came on a positive divergence:

Hence $NYSE is not alone with a positive divergence. Indeed they are visible everywhere:

The brutalized banking sector:

Small caps:

Even in internals we see positive divergences:

None of this means lows are in, but as aggressive as last week’s sell-off was it produced some odd readings on Friday.

$NY High Lows actually improved:

Still sitting at 15 it remains at a historical low prior to a year end close:

Even 2007 and 2015 produced rallies to higher readings before year end.

We see a similar positive divergence in $US high/lows as they closed higher on Friday despite the weakness in markets:

These signs may mean nothing or they mean everything. It’s too early to tell, but should a surprise rally emerge know there were signs that supported a rally.

And bulls may have another chart to give hope and that is the structure of the $DIA, the $DJIA ETF, it looks very similar to the structure we saw earlier in the year:

Bottomline: These markets are in big trouble again. Defending the 2009 trend lines for a 3rd month in a row seems an unlikely feat. Triple bottoms are rare and clearly we see liquidation in markets and very rash price discovery.

Working perhaps in favor for bears here is that we still don’t see any real panic fear spike in the $VIX as the $SPX range looks increasingly like a bear flag:

So if you’re looking for a traditional fear bottom none is apparent yet. To not see one would be a bear trap as many are expecting it now. And a fear spike would likely break the bull market trends unless the support lines I outlined above can hold.

As it stands long term charts continue to strongly resemble the 2007 market topping structure:

$WLSH:

$BKX vs $SPX:

Outlook: This coming week will likely be the defining moment for buyers and sellers. Sellers still haven’t been able to make new lows, but monthly trend lines are again at risk of breaking. Sellers need to break them this week and sustain a break below outlined support levels or risk getting run over by positive seasonality to come. Remember all headlines have turned negative for bulls, but still bears haven’t been able to capitalize other than chop inside the range. Buyers may need just one positive trigger to switch sentiment on a dime, but the proof would only come with a confirmed bottom which will require a weekly close back above the weekly 50MA which currently sits at 2742 $ES.

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U.S. Pullout Of Yemen War Would Send “A Wrong Message”: State Department

The White House and State Department have reaffirmed the US commitment to its lead military role in executing the Saudi coalition war on Yemen. This despite mounting civilian deaths numbering tens of thousands, devastating famine and food shortage, a cholera epidemic — all factors behind what the U.N. has dubbed “the world’s worst humanitarian crisis.” 

In comments on Sunday a top State Department official quoted by Reuters said a US pullout from the Saudi coalition would send “a wrong message“. But we would ask: what then is the message here?…

Victim of Yemen’s famine due to the Saudi coalition blockade and bombing campaign. via The New York Times

The official framed the conflict fundamentally in terms of countering Iran and bolstering the regional standing of key ally Saudi Arabia in a civil war that’s been raging in neighboring Yemen since 2015. 

The official, Timothy Lenderking, deputy assistant secretary for Arabian Gulf affairs, told a security forum in the United Arab Emirates, per Reuters:

“There are pressures in our system… to either withdraw from the conflict or discontinue our support of the coalition, which we are strongly opposed to on the administration side.”

“We do believe that the support for the coalition is necessary. It sends a wrong message if we discontinue our support,” he added.

Like all administrations going back to 2001, the White House has relied on the 9/11-era Authorization For Use of Military Force (AUMF) to give legal justification for its actions in the Arabian peninsula. 

But in Yemen the target not primarily al-Qaeda, ISIS, or Sunni Islamist militants, but Iran — which the Trump administration has repeatedly accused of supplying Yemen’s Shia Houthis with its ballistic missile arsenal.

Like Putin is to NATO expansion, Iran is the hidden bogeyman that’s formed the basis of Pentagon “justification” for perpetually remaining in the costly war despite Congress never having authorized it, and despite the unpopularity of the war among an increasingly aware American public. 

In late November, the Senate passed a resolution to debate whether the president has the authority to support the Saudi coalition in Yemen. Though last month the US announced it would halt the refueling of Saudi-UAE coalition jets, it still remains deeply involved in orchestrating military operations. 

But ironically, none of the growing scrutiny of the war has come to pass based on any concern that it’s American bombs wiping out Yemeni children, but based on one Saudi journalist and Washington Post columnist’s death. 

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OPEC’s Deep Cuts & The Rise Of The Petroyuan

Authored by Tom Luongo,

OPEC Cuts Deep To Save Cartel

With oil prices in free fall and the dawning realization that Great Reflation trade of 2017 is over, OPEC needed to do something drastic to remind everyone how important they are.

Moreover, with Qatar quitting the cartel last week it was then doubly necessary for OPEC to make the markets stand up and remember them.

So, after a few days of wrangling, a 1.2 million barrel per day cut was announced by OPEC, larger than the market was expecting. 

The Trump administration is fuming today over this result.  

Predictably, oil prices jumped on the news.  All is right with their world, yes?

Well, yes and no.  The Saudis need $80 per barrel oil.  Russia doesn’t get its hair mussed below around $50 and even then it simply scales back government spending in line with oil prices — auto-budgeting based on oil tariffs.

The free-floating ruble insulates Russia domestically from a sharp drop in oil prices far better than Saudi Arabia since the Riyal is pegged to the U.S. dollar.

But for Saudi Arabia, the stakes are far higher.  And its chief rival, Iran, understands this very well.  The reason the OPEC meeting was so touch and go was Iran exerting its leverage over the Saudis in response to U.S. sanctions. 

Because while Russia agreed to a 200,000 barrel cut, which is nothing to them in the grand scheme of things, Iran was exempted from making any cuts.

Iran, Libya and Venezuela will be effectively exempt from the cuts, though the text of the deal will say they received “special considerations,” Iraqi oil minister Thamir Ghadhban said.

Saudi Loss Leader

Saudi leadership is weakening.  Qatar left to pursue its own ambitions without OPEC getting in the way.  That’s a nice way of saying they want to do business with Iran developing the shared North Pars gas field.

Iran used the Saudis’ need for much higher prices to extract this major concession so that it can produce what it can sell.  Iran will, by definition, maintain market share, possibly taking some from the Saudis because a tighter supply environment means customers will flaunt U.S. sanctions to get what they need.

This is how Iran wins another round in the battle to defy U.S.’s sanctions.   Let market forces pressure Trump to give up the sanctions or find more ways around them.

Trump wants Iran’s economy destroyed and is willing to tear up every international standard of behavior to get his way.  The gloves came off with the arrest of Hauwei CFO Wanzhou Meng over violating sanctions on Iran. 

As David Stockman points out in a recent Contra Corner article:

But this isn’t just an “oops!” The loathsome neo-cons twins—Pompeo and Bolton–sitting on Trump’s right side at the Buenos Aires dinner apparently didn’t tell him that she was actually being nabbed at the very moment they were slicing their steak.

After all, the Chinese have a thing about saving face, and this stunt literally ripped Emperor Xi’s right off his forehead.

Yet the real oops is not this one hideously stupid episode. It’s the whole sweeping, global-spanning sanctions regime that Imperial Washington has put in place over the last several decades.

Trump was apparently kept in the dark on this operation because as President he’s not on a need-to-know basis anymore.  This arrest is the kind of sabotage that should have resulted in his firing his entire cabinet but not Orange Jesus, he’s just rolling with it while he complains about Mueller and CNN.

So watching OPEC try to cut their way to prosperity in the face of a deflating world economy — ask Deutsche Bank how well that’s working out for them -is fascinating because, like Trump’s tariffs and sanctions, it is the action of a group whose power is past its sell-by date.

Iran Mates in Four Moves

Look, sanctions don’t work.  People will figure out ways to hide their trades from U.S. regulatory agents faster than the U.S. can respond to them.  The authoritarian mind simply cannot fathom anything other than punishment for defiance.

They simply think that if someone is still telling you ‘No’ then they haven’t beaten you hard enough.  It’s how they’re handling North Korea and now how they’re handling everyone doing business with Iran.  

But, look at OPEC today.  It rolled over on deep production cuts, the main group taking it on the chin and allowing Iran to skate.  What’s the point of Iran being in OPEC if it doesn’t have to abide by any rules of the cartel?

OPEC needed to do this and it signals that things are going to get much worse in 2019 than better.  They wouldn’t have cut so deeply if they were bullish on global growth in 2019.

But, it also means that countries like China, now smarting from Bolton/Pompeo’s humiliation, will likely not reduce their tenders for Iranian oil.  Neither will India.

The waivers granted to them and six other countries will run out in five months.  That is more than enough time for companies and banks to put together back-channels (especially having nearly another full year to prepare) to pay Iran for its oil and leave the U.S. hanging on sanctions.

And all Trump and Bolton can do is fume.  All they can do is act more erratically and unlawfully.  It may win them battles in the short term but it will lose them the war in the long term.

Because all this is doing is increasing the viability of Shanghai’s petroyuan contract as an alternative platform for oil trading. Because its not like China will help the U.S. find sanctions cheaters. When only dollar-based futures contracts were around the U.S. could contain this better.  

But, now, with Shanghai it’s completely different.  And OPEC’s survival in a deflating world of shifting geopolitical power depends on responding in their own best interest.

And after Trump’s latest snub, a thoroughly frustrated Vladimir Putin will happily go along with this to help the Saudis out of a jam but allow Iran the means to survive.

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These Are The Three Things Goldman’s Clients Are Most Worried About

After two weeks of violent market whipsaws, which saw the S&P rally by 5% two weeks ago, then drop by the same amount last week with the VIX surging to 23, Goldman’s chief equity strategist David Kostin writes that the bank’s clients remain nervous with concerns rising over three key market themes: i) US-China trade relations, ii) the pace of Fed tightening, and iii) concerns about recession.

To be sure, there is reason to be worried – as Bank of America summarized over the weekend, following the second 10% correction of the S&P in 2018, “the capitulation has begun”, and while “everyone is bearish, nobody is short.” This has led to a jump in market swings – a traditional late-cycle indicator – with the S&P 500 having no less than 56 daily moves of more than 1% this year, versus only 8 last year and a calendar-year median of 49 since 2010. Additionally, as Driehaus Capital notes, the S&P has also had more 2% and 3% daily moves than any year since 2011 as traders scramble to jump on directional momentum, only to find none exists.

Adding to the confusion is that while a recession – according to most – remains unlikely in the short to medium-term, the US economy is clearly slowing down as the latest print of the Citigroup US Econ surprise index demonstrates.

Additionally, while November payroll growth was softer than expected, other economic data remained firm: the ISM manufacturing index rebounded to 59, with particularly strong New Orders (62), and the ISM non-manufacturing index was higher than expected, and as the chart below implies, the S&P 500 appears to have priced in a more drastic slowdown in economic growth than what manufacturing surveys expect.

So what is Goldman advising its confused clients to do now?

According to Kostin, with an increasingly uncertain economic background, coupled with renewed concerns about the US-China trade war and the Fed’s balance sheet, in 2019 Goldman expects “a continued environment of low risk-adjusted US equity returns.”  As the bank outlined in its 2019 outlook, it forecasts a combination of modest absolute returns to the S&P 500 and elevated risk.

Our baseline forecast is for US economic growth of 2.5% and earnings growth of 6% to drive the S&P 500 to 3000 by year-end 2019. If realized S&P 500 volatility matches the 30-year average, the risk-adjusted return in 2019 for the S&P 500 would equal 0.5, well below the long-term average of 1.1.

However despite its upbeat year-end price target, and echoing other banks’ increasingly cautious stance, Goldman also lays out an upside and downside case, which would see the S&P rise either as high as 3,400 or drop as low as 2,500.

Kostin also notes that “numerous risks threaten the bull market” and for the first time in a decade, cash represents a competitive asset class to equities as the current forward market pricing suggests a 3-month T-Bill rate of 2.75% at the end of 2019.

The good news, for traders if not so much investors, is that tactically the S&P 500 appears to have priced a more substantial slowdown in growth than Goldman expects. The S&P 500’s -0.1% trailing 12-month return has historically corresponded with an ISM manufacturing index level of roughly 50, well below the most recent reading of 59.

Similarly, the performance of the bank’s Cyclicals vs. Defensives baskets implies that the S&P 500 is currently pricing US economic growth substantially below its US Current Activity Indicator of 2.8%.

And while Goldman economists forecast a deceleration in economic activity from 2.9% in 2018 to 2.5% in 2019, recent equity market performance implies a more dramatic slowdown than our baseline, which leads to the following bullish near-term reco from Kostin.

Accordingly, we believe there is short-term upside to the S&P 500.

Which brings us to the bank’s top trade recos, the first of which is for investors to own “quality” in 2019 given elevated risk, with Kostin explaining that as economic and earnings growth decelerate and financial conditions tighten, “investors should be increasingly focused on companies best-positioned to withstand late-cycle pressures.”

The bank notes that stocks in its High Quality basket (ticker: GSTHQUAL) should outperform in this environment due to their combination of strong balance sheets, stable sales and EBIT growth, and low drawdown experience. It also recommends investors own stocks with strong balance sheets (GSTHSBAL) and recently upgraded the low-beta Utilities sector to overweight, reflecting similar versions of “quality.”

What about the recent debate whether it is time to rotate out of growth and into value? Here Kostin is more ambivalent, noting that “volatility this year has widened P/E multiple dispersion and improved the case for Value, but the economic environment still favors Growth.” Additionally, while decelerating economic growth would usually suggest further Growth stock outperformance, on the other hand, widening valuation dispersion, concentrated investor positioning, and recent weakness in EPS revisions complicate the picture. As a result, Goldman seems to edge in favor of Value over Growth, at least until recent market gyrations subside.

Valuation dispersion has historically been a strong predictor of future Value performance. When the distribution of stock valuation multiples is narrow, returns are differentiated by growth and other fundamental qualities rather than differences in multiples. Multiple dispersion has widened during recent volatility and points towards a more favorable environment for Value stocks next year.

For investors who wish to combine the best of both Value and Growth words, Goldman recommends its newly-rebalanced High Sharpe Ratio basket which “offers tactical investors one screen for value stocks with a “quality” overlay. The sector-neutral basket (GSTHSHRP) consists of an equal-weighted portfolio of 50 S&P 500 stocks with the highest prospective risk-adjusted returns.”

The median constituent in this basket which is being rebalanced to include 35 new constituents, “is expected to post 2x the return as the median S&P 500 stock with only modestly higher volatility, resulting in 2x the prospective risk-adjusted return (1.1 vs. 0.5).”

By construction, the High Sharpe Ratio basket carries laggard and value tilts, as stocks screening into GSTHSHRP have often experienced substantial price declines. However, resilient analyst price targets reflect ongoing confidence in the companies’ fundamentals.

That said, it would be better for investors not to have bought into this reco at the start of the year as the median stock in the basket has a YTD return of -19% (vs. -1% for S&P 500 median) and trades at 13x forward earnings (vs. 16x for S&P 500 median). Stocks with the highest prospective Sharpe Ratios: NFX, NWSA, NKTR, SLB, HAL, FLR, PWR, and KORS.

So how does Goldman justify this recent underperformance, and why does it believe the basket will be a winner going forward?

The High Sharpe Ratio basket has underperformed the S&P 500 YTD but has a long-term track record of outperformance. The basket has lagged the S&P 500 by 10 pp in 2018. GSTHSHRP’s risk-adjusted YTD return also ranks in just the 2nd percentile relative to large-cap core mutual funds. However, since 1999, the strategy has outperformed the S&P 500 in 68% of semi-annual periods and generated an average 6-month excess return of 310 bp (roughly 620 bp annually). GSTHSHRP’s average semi-annual information ratio of 0.3 ranks in the 88th percentile of large-cap core mutual funds since 1999. The basket performs best during regimes of above-average volatility, generating an average excess return of 320 bp in periods with realized volatility greater than 15 vs. 130 bp of outperformance when realized S&P 500 volatility measures less than 15.

Finally, Kostin has one specific seasonal observation, noting that laggards have historically continued to underperform in December but rebound in January, and according to the Goldman strategist one possible explanation for this seasonal pattern is the tax loss selling of laggards at year-end.

Although the effect is generally found to be stronger in smaller cap stocks, we also find signs of seasonality in our momentum factor using S&P 500 companies. Since 1980, January has typically been one of the worst months for our momentum factor, as laggards reverse and outperform.

Of course, with markets increasingly on edge as a result of the ongoing perfect storm of trade, hawkish central bank and economic headwinds, tax-loss selling will likely be the last thing on anyone’s mind should last week’s selloff accelerate in the last three weeks of the year as the realization that buying the dip no longer works (as Morgan Stanley infamously demonstrated in October), dawns on even the most optimistic market participants, especially if stock buybacks begin to exit stage left as companies become increasingly reluctant to issue debt at a time when debt issuance costs are rising rapidly while the loan market is on the verge of freezing.

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Large-Scale USAF War Drill Over Nevada Simulated Forcible Entry Maneuver: War Preparations  

Dozens of US Air Force warplanes have hit the skies en masse under cover of night over the American Southwest for the Joint Forcible Entry Exercise (JFEX), December 08, reported The Drive. 

The large-scale air mobility exercise, simulated forcible entry capabilities by the USAF of enemy territory with dozens of transport planes, fighter jets, and electronic warfare aircraft.

The first report of a massive military mobilization came from a social media account called @AChandlerCody, who allegedly shows video of 26 Lockheed C-130 Hercules preparing for takeoff at an undisclosed location at 8:47 pm. 

About 38 minutes later, CivMilAir reported 17 C-130s over Texas headed for a region near the Area 51 Airbase in Lincoln County, Nevada. 

According to one Twitter user, there could have been as many as 38 warplanes participating in the JFEX.

Another Twitter user showed the C-130s flying over Canyon de Chelly National Monument, a vast park in northeastern Arizona, around 11:13 pm. 

Twitter account @AircraftSpots spotted multiple “C-17As with THUG callsigns are en route to March ARB from the Nevada desert as part of JFEX.”

“At this same time last year, social media was flooded with videos of lights filling up the night sky as strings of C-17s and C-130s crossed the U.S. on their way primarily to the Nellis Test and Training Range (NTTR) in desolate Southern Nevada. This unique large force employment exercise (LFE) is among the most complex drills the USAF executes and it combines assets of all types, including fighters, surveillance aircraft, electronic warfare platforms, and throngs of ground troops and equipment that are dropped into or dropped off in simulated enemy territory,” said The Drive. 

Here is what JFEX looked like a few years ago during a daytime exercise:

“The C-17s are working out of Keno Airstrip in the NTTR. As you can see, it is one impressive display of airpower. Also, keep in mind that there are so many other moving parts you don’t see in the video.” 

The Drive also points out that the Nellis Test and Training Range was very active during the JFEX. There were surveillance aircraft, from RQ-4 Global Hawks to RC-135 Rivet Joints, orbiting around the range complex around 11:22 pm.

“JFEX has become far more relevant in recent years as the U.S. has started to come to terms with the reality that winning an expeditionary fight against a peer state competitor is an increasingly dubious challenge. Anti-access and area-denial strategies have left the services scrambling to adapt to having to fight an enemy over long distances and breaking open new avenues into their increasingly expansive and fortified domain. Being able to use the Pentagon’s potent but limited airlift capacity to rapidly open up new bases of operation and vectors of attack even at very austere and remote locales in becoming a key tenet of future combat operations. This is exactly what JFEX is all about, punching into contested territory over long distances by surprise and setting up a foothold for expanded operations,” said The Drive. 

With massive war preparations underway, who is the USAF planning to invade next?

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Lessons From 50 Years Of Venezuelan Inflation

Authored by José Niño via The Mises Institute,

Count Venezuela among the victims of hyperinflation.

Economist Steve Hanke has done a meticulous job over the years raising awareness on troubled world currencies, with Venezuela’s Bolivar receiving the bulk of his focus. Hanke’s recent findings place inflation rates at 60,324 percent — rendering the Bolivar practically worthless.

The Bolívar’s collapse is rather tragic, considering the Bolívar was actually one of Latin Americas’ strongest currencies during Venezuela’s peak from the 1950s to 1970s.

Venezuela’s flirtation with socialism is well-documented and is a story of death by one thousand cuts. In the same vein, Venezuela’s current hyperinflationary debacle is also a process decades in the making.

The 1970s: The Consolidation of Venezuelan Central Banking

Ironically, Venezuela was a laggard when it came to the establishment of a central bank. The Venezuelan central bank was founded on the eve of World War II. Nevertheless, Venezuela maintained a gold-backed money throughout most of the 20th century.

Things started to change in the 1970s when the United States went off the gold standard and Venezuelanationalized its oil industry. Carlos Andrés Pérez, the president who presided over Venezuela’s oil nationalization, was a dyed in the wool interventionist who believed that rational state-planning could take Venezuela to new heights.

In addition to oil nationalization, the Venezuelan government politicized its central bank when Pérez’s government bought the central bank’s privately owned stake and placed the Pérez government’s cabinet members on the central bank’s board.

With deficits rising and debt accumulating from the 1970s spending binge, this move proved to be politically smart. Now the Venezuelan government had its way in convincing the supposedly independent central bank to pursue easy money policies.

The Beginning of Inflation in the 1980s

The government expansion of the 1970s wasn’t without its consequences. By the time the 1980s arrived, Venezuela was sinking in debt. Like countless other governments in the 20th century, Venezuela resorted to easy money policies to continue its profligate spending programs.

Venezuela’s easy money escapade soon came back to bite it in the rear. In 1983, the Venezuelan government conducted an unprecedented devaluation of its currency to try to wiggle itself out of its self-inflicted fiscal quagmire.

Colloquially known as Black Friday, the 1983 devaluation was a watershed moment in Venezuelan history. Soon double-digit inflation became the new normal in Venezuela. The last year that Venezuela had inflation in the single digits was in 1983.

Inflation De-Railed Market Reforms in the 1990s

Carlos Andrés Pérez made another presidential appearance in the late 1980s promising to bring back the spending party of the 1970s. But economic realities soon hit him in the face. The Venezuela before him was over-regulated, debt-burned, and uncompetitive at the international level.

Pérez turned to the IMF’s guidance for market reforms and shepherded through several sensible measures such as privatizations, political decentralization in local elections, subsidy cuts, and tariff reductions. Unfortunately, Pérez could not tame inflation throughout his second term.

In 1989, when Venezuela went through the infamous Caracazo, a government crackdown leaving hundreds of people dead, inflation stood at 84 percent. From 1989 to 1993, inflation averaged about 46 percent. Unsurprisingly, people were skeptical of the efficacy of Pérez’s otherwise decent reforms when inflation was constantly eating away at their savings.

Economist Hugo Faria contrasted the Venezuelan reform experience with Argentina and Peru’s relatively successful liberalization transitions in the 1990s:

To secure the people’s approval of new economic policies, it is important that reforms induce rapid, sustained growth. The reelections of Alberto Fujimori in Peru, Carlos Menem in Argentina, and Fernando Cardozo in Brazil were driven by rapid economic growth and reduced rates of inflation.

The key to the latter countries’ successes was their focus on taming inflation first and then pursuing policies that reduced the costs of doing business and spurred strong domestic growth. With a stable economy that enjoys prolonged economic growth, the broader public would be more likely to accept other market reforms like trade liberalization.

Alas, the inflation monster did not go away and was one of the factors that led to Pérez’s undoing. Political tension continued to mount, with two unsuccessful coups launched in 1992. The tipping point came in 1993, when Democratic Action (AD), Pérez’s party, impeached him for embezzlement. By then, any semblance of market liberalization was out of the question.

Subsequent Venezuelan administrations had to deal with Pérez’s inability to tame inflation. Under the presidency of Rafael Caldera, Venezuela’s last democratically-elected president, the average inflation rate from 1994 to 1996 was 74 percent, with a peak of 100 percent in 1996.

Naturally, a freshly pardoned Hugo Chávez was able to exploit Venezuela’s economic instability during the 90s and cruise to victory in the 1998 presidential elections by running as an anti-establishment political candidate.

The Chávez Regime’s Complete Disrespect for Basic Economics

In a cruel twist of fate, Chávez would not only continue the same anti-growth policies of the previous political order but amplify them at catastrophic rates. Massive spending, economic controls, easy money, and constant expropriations had shattered Venezuela’s productive capacities.

In 2014, when Venezuelan protests gained worldwide coverage, inflation was hovering over 60 percent.

By 2017, Venezuela was deep in a hyperinflationary territory. According to a report from Reuters, the Venezuelan central bank was increasing the money supply by double digits toward the end of 2017.

Naturally, such increases in the money supply have brought inflation into the aforementioned hyperinflationary rate of 60,324 percent.

Inflation is No Natural Phenomena

In a century of technocratic statism, central banking has become like furniture in the living room, a baseline that people are accustomed to, until its disastrous effects surface. And by then it’s usually too late.

The destructiveness of central banking cannot be viewed as a natural occurrence. It is indeed the manifestation of universalist ideologies that worship at the altar of centralization. Intellectuals can rationalize the Venezuelan crisis away, but the nature of inflation’s causes can never be ignored. Ludwig von Mises set the record straight in his work Economic Policy:

The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.

Let’s hope government economists get the memo and stop treating the economy like their personal voodoo doll that must be poked and pinned at every turn.

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Jared Kushner Advised MbS On How To “Weather The Storm” After Khashoggi Death: Report

It’s a scandal that won’t elicit near the level of media coverage that any Russia-related story would. An explosive New York Times report over the weekend reveals that President Trump’s adviser and son-in-law Jared Kushner sought to advise Saudi Crown Prince Mohammed bin Salman on the embattled prince’s political survival in the wake of the Jamal Khashoggi’s murder. 

Image via Reuters

The two had warm relations before the murder, however, contacts continued well after the Oct. 2nd murder inside the Istanbul consulate. One Saudi source reported to the Times that Kushner offered “advice about how to weather the storm, urging him to resolve his conflicts around the region and avoid further embarrassments.”

According to the report the two exchanged first name basis chummy texts and calls while circumventing formal White House procedures which guide contacts with foreign leaders. The White House pushed back against this allegation, with a spokesman telling the Times, “Jared has always meticulously followed protocols and guidelines regarding the relationship with [the crown prince] and all of the other foreign officials with whom he interacts.”

Kushner reportedly became a one-man pro-MbS lobbying campaign inside the White House, according to the report:

As the killing set off a firestorm around the world and American intelligence agencies concluded that it was ordered by Prince Mohammed, Mr. Kushner became the prince’s most important defender inside the White House, people familiar with its internal deliberations say.

Mr. Kushner’s support for Prince Mohammed in the moment of crisis is a striking demonstration of a singular bond that has helped draw President Trump into an embrace of Saudi Arabia as one of his most important international allies.

However, it’s clear that Trump appeared an enthusiastic supporter of MbS from the beginning, and has since remained steadfast in standing by the crown prince even as demands grow to create more distance with Riyadh.

The “untouchable” decades-long oil for weapons relationship has always existed at a deeply institutional level, and few should have had any doubt that it would survive something like the Khashoggi scandal, with or without Kushner’s MbS ties. 

The NYT report suggests Kusher’s closeness with MbS has helped shape White House policy on everything from the Yemen war, to international terrorism, to the Israel-Palestine conflict.

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