What Goldman Expects Will Happen In A “Severe” Trade War

In recent months, a cottage industry has emerged on Wall Street trying to quantify the impact from escalating trade war with China, with reports coming out fast and furious with predictions, some dire, others innocuous trying to capture what a worst case scenario would look like, and today was no exception.

In a report from Goldman’s David Kostin, the equity strategist departs from the traditional angle of looking at the hit to the overall economy and GDP, and takes a slightly different angle in evaluating trade war impact, which he analyzes in terms of foreign revenue exposur of US companies – and to infer how the bank’s three tariff scenarios would impact S&P earnings.

According to Goldman calculations, S&P 500 companies in aggregate derived 30% of revenues from international sources, compared with 29% in 2016. At a sector level, Information Technology and Materials have the highest international exposure, representing 60% and 49% of total sector sales, respectively. On the other hand, the most domestic-facing sectors were Telecom Services and Utilities, which both generated 96% of revenues in the US.

When analyzing the impact of trade war on US corporations via the revenue channel, Kostin notes that the relative performance of the most domestic- and foreign-facing stocks is driven by a combination of three factors:

  • First, ongoing trade tensions pose the most risk to companies with high exposure to trade between the affected countries, notably China and the US. As a whole, tariffs will weigh on S&P 500 earnings in two ways: lower export revenues and lower margins resulting from higher input costs. The risk of lower export revenues to be minor: only two percent of S&P 500 sales are from China. The impact of a 10% tariff on Chinese imports would be more substantial, lowering our 2019 S&P 500 EPS estimate by three percent. While we estimate the impact to be limited on the index level, companies with a large portion of sales to China are more exposed.
  • Second, relative GDP growth is another important driver of the performance of our geographic baskets. As US GDP growth rises relative to global, domestic-facing stocks outperform stocks with the highest international sales exposure. Higher global ex-US GDP growth often implies better growth prospects for companies with significant exposure to non-US regions, which in turn drives equity performance.
  • Third, foreign exchange rates are also a key factor of our baskets, with a strong dollar benefiting domestic-facing stocks relative to firms with a high proportion of non-US sales. A strong US dollar represents a potential headwind to firms with the highest foreign sales exposure, as their goods and services become more expensive relative to goods and services within the foreign country

Predictably, Kostin notes that stocks exposed to trade between the US and China have underperformed, although he observes that “the market appears less concerned about trade tensions with Europe.”

In particular, US and Chinese stocks most affected by the cross-border conflict have trailed their respective market indices by 6 pp and 8 pp since trade discussions became more involved in March. However, a basket of European stocks with the highest US sales exposure outperformed the STOXX 600 (8% vs. 3%) over the same period.

Going back to the above point how tariffs, both implemented and proposed, will impact S&P 500 earnings, Kostin lays out two ways: (1) lower export revenues and (2) lower margins due to higher input costs.

We estimate the impact of the first to be minimal, using GS Economics’ demand-side estimates for a multilateral trade war in which every country imposes a 5% tariff on every other country. Using the resulting decrease of 20 bp and 10 bp for US and World GDP would reduce our 2019 S&P 500 EPS forecast by 1% to $169.

While none of that is surprising, Goldman finds that even a worst case scenario – a 10% tariff on all imports from China – which Kostin calls a serious escalation from current talks, would result in a potential 3% revision to our top-down 2019 S&P 500 EPS estimate of $170.

we laid out a scenario analysis assessing the potential impact of escalating tariff rates on S&P 500 EPS. Using our estimate that S&P 500 firms import 30% of COGS (double the 15% for all US industry), and assuming (a) no supplier substitution, (b) no pass-through of costs, (c) no change in economic activity, and (d) no benefit to domestic producers, a 10% tariff on all imports from China would lower our 2019 EPS estimate by 3% to $165.

And, extending the “severe” scenario’s 10% tariff to all US imports would see Goldman cut its EPS estimate by 15% to $145.

Trade war escalation (or de-escalation) notwithstanding, looking ahead Kostin writes that the bank’s economists expect three new dynamics to emerge in the relationship between trade negotiations and currencies. In mid-July, President Trump commented that a strong US dollar puts the US at a disadvantage internationally. As a result,

  1. the correlation between trade tensions and FX will change, meaning an increase in trade friction may no longer lead to USD gains;
  2. other reserve currencies (e.g., EUR, JPY) should find support; and
  3. the CNY will be more stable, as further depreciation of the currency could be viewed by the US as retaliation against the tariffs.

So far, however, none of these have materialized and the offshore Yuan today tumbled to a fresh one year low as Beijing clearly is encouraging devaluation of the currency. One reason for this may be the disproportionately adverse response for Chinese stocks that have US exposure, compared to Japanese or European stocks, which leaves China with just non-traditional responses to Trump’s tariffs.

While there is more in the full report, perhaps the most interesting part is Goldman’s trade recommendations on how to trade the trade war, specifically depending whether it escalates further, or if a truce finally emerges:

1. If trade tensions escalate, favor stocks with high domestic revenues

If trade tensions continue to rise and new tariffs are proposed and implemented, stocks with the highest domestic sales exposure should outperform. A stronger US dollar and above-trend US economic growth would support this basket, which carries a similar P/E to the S&P 500 (17.1x vs. 17.6x). However, analysts expect a prospective Sharpe ratio of just 0.4, below the S&P 500 median of 0.5.

2. If trade tensions ease, firms with Greater China exposure should outperform

We highlight stocks with over 10% revenue or asset exposure to Greater China. These firms are heavily concentrated in Info Tech, specifically Semiconductors and Semiconductor Equipment. Investors are pricing the US-China dispute, but appear less concerned about an escalation of trade tensions between the US and Europe.

We also highlight S&P 500 stocks with over ten percent sales exposure to Greater China that are at risk from continued escalation of the trade war. Top-line growth for these firms will likely come under pressure if China imposes retaliatory tariffs. Such tariffs would drive up the price paid by consumers in Greater China. It appears that Taiwan will not be directly subject to the Section 301 tariffs. However, firms with high exposure to Taiwan may still be affected by tariffs through the supply chain. Even excluding Taiwan, all of the stocks in Exhibit 12 have over 10% revenue exposure to Greater China

Finally, Goldman also highlight S&P 500 firms with more than 10% asset exposure to China despite limited revenue exposure because these firms may need to make costly alterations to their supply chains. In fact, the management teams of Amphenol (APH), Whirlpool (WHR), and others expressed in their 2Q 2018 earnings calls the need to adapt, via localization or efficiency gains. Twenty-two S&P 500 firms report at least 10% of reported assets in Greater China.

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Governor Calls For Calm After New Ebola Outbreak Confirmed In Eastern Congo

One day after a Denver man was promptly quarantined after returning to the US from eastern Congo, where he was working with sick people, and became suddenly ill Sunday (he was subsequently cleared), a new Ebola virus outbreak has been confirmed in eastern Democratic Republic of Congo, Governor Julien Paluku said on Wednesday, just one week after the country declared an end to a separate outbreak that killed 33 people in the northwest.

According to Reuters, the latest outbreak was found in the province of North Kivu, near the Congo’s border with Uganda.

Ebola virus confirmed in North Kivu,” Paluku wrote on Twitter. “I call for calm and prudence.”

While authorities did not say how many cases had been detected, Congo’s health ministry said on Monday that it had found 25 cases of fever near the town of Beni and that samples had been sent to the capital Kinshasa for testing. Congolese and international health officials deployed an experimental vaccine during the last outbreak, which helped contain its spread after it reached a large river port city..

This is the central African country’s 10th outbreak of Ebola since 1976, when the virus was discovered near the eponymous river in the north.

In responding to this year’s outbreak in Congo, the world seemed to be better prepared – especially in comparison with the previous outbreak in West Africa. “One of the many painful lessons from the devastating West African Ebola epidemic of 2014 was that the world expected much more from the World Health Organization than it was then able to deliver,” WHO spokesman Tarik Jašarević said.

During that outbreak, 28,616 cases of Ebola virus disease and 11,310 deaths were reported in Guinea, Liberia and Sierra Leone. An additional 36 cases and 15 deaths occurred when the outbreak spread outside those three countries, according to the CDC.

“Since then, we have dedicated ourselves to ensuring that the world is better prepared, not only for Ebola but for the many high threat pathogens, including pandemic influenza, that can cross the species barrier, from animals to humans, at any moment,” Jašarević said.

As of now, WHO and other global health organizations are ensuring the end of the Ebola response in Congo and maintaining an increased vigilance to identify lessons learned and good practices in responding to such outbreaks moving forward, Jašarević said.

“Already, we can say we have contributed to improving surveillance systems, and for next time, will have in place protocols for vaccines and therapeutics,” he said. “Another legacy is capacity building, such as training vaccinators who will now not only be able to respond domestically but can also help neighboring countries, too.”

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Finally… A Major Victory For Common Sense

Authored by Simon Black via SovereignMan.com,

In a major victory for common sense, a group of cosmetologists defeated an insanely stupid regulation passed down by the state of Louisiana.

Louisiana, just like the other 49 states in the Land of the Free, governs licensing requirements for dozens… hundreds of professions… ranging from athletic trainers to tour guides to barbers and cosmetologists.

And most of the time the licensing requirements are just plain idiotic.

In Louisiana, for example, the State Board of Cosmetology had formerly required an unbelievable 750 hours of training (which costs thousands of dollars) simply to be able to thread eyebrows.

(If you’re like me and totally unfamiliar with eyebrow threading, check out this video. You’ll probably agree that 750 hours of training is totally ridiculous.)

And so, in conjunction with the Institute for Justice, several Louisiana-based cosmetologists filed a lawsuit against the Board.

The Board backed down… passing a new regulation exempting eyebrow threaders from such pointless licensing requirements.

One down. 2,214 to go.

That’s right. According to the Institute of Justice’s study License to Work, there are over two thousand licensing requirements across the Land of the Free… and that’s just for low income jobs like manicurists or floor sanders. We’re not even talking about doctors and dentists here.

Another study from the Brookings Institute shows that nearly 30% of US workers require some sort of state license. That’s up from just 5% in the 1950s.

Many of the licenses truly defy any logic whatsoever.

The State of Michigan, for example, sees fit to require 467 days of education and training to receive a barber’s license, but only 26 days to be a licensed Emergency Medical Technician.

The State of California requires aspiring tree trimmers to have 1,460 days of education and training. But pre-school teachers only require 365 days.

The District of Columbia requires 2,190 days of education and training to be an Interior Designer, but ZERO days to be a school bus driver.

The State of Iowa requires 1,460 days for athletic trainers, but just 370 for dental assistants.

What exactly are these people trying to tell us about their priorities? Trees and furniture are more important than children? Hair is more important than health? Abs are more important than teeth?

It’s all quite bizarre.

But there is one occupation I noticed that is conspicuously absent from this list.

And it’s a big one.

Not a single state in the union has a licensing requirement for this profession.

And that’s an incredible irony given that this occupation gets to tell the rest of the occupations how much training they require.

Did you figure it out?

It’s politicians.

Just think about it: Barbers and manicurists require hundreds of hours of training.

But the people who have the power to pass idiotic legislation, waste taxpayer funds, declare war, tell us what we can/cannot put in our own bodies, and regulate every aspect of our lives, don’t even have to be literate.

(And judging by some of the laws they pass, that may very well be the case.)

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WTI Holds Below $68 After Surprise Crude Inventory Build

WTI has extended its losses since last night’s surprise API-reported crude inventory build., and DOE confirmed with a surprise 3.8mm bbl inventory build and while WTI tried to rally (smaller build than API), the jump stalled at $68.00…

 

API

  • Crude +5.59mm  (-3mm exp)

  • Cushing -930k (-500k exp)

  • Gasoline -791k

  • Distillates +2.89mm

DOE

  • Crude  +3.803mm (-3mm exp, -850k whisper)

  • Cushing -1.338mm (-500k exp)

  • Gasoline -2.536mm (-2mm exp)

  • Distillates  -101k (+500k exp)

So another surprise build – not a seasonal norm – but smaller than API-reported…

 

US crude production dipped on the week…

NOTE: As Erik Townsend pointed out, EIA changed the rules June 1st – now they round to the nearest 100k bbl. So the week-to-week production data is now next to worthless. The reason it LOOKED LIKE a ‘surge’ of 100k bbl last week is because that was from prior weeks (reported as zero). Each time is crosses the half-way point, they bump the official number up 100k.

WTI traded below $68 ahead of the DOE data, and kneejerked up to 68 the figure on the print…

“Oil bulls have been left battered and bruised,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. in London.

“The rebalancing paused abruptly last week” as inventories likely increased, while “downside risks for the global economy and therefore oil demand growth prospects remained alive and well.”

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‘Anonymous’ Greece Takes Down Government Website Over Athens Fire Disaster Response

Cyber group Anonymous Greece have brought down the website of Greek government over the dozens of victims in the Athens wildfires. Access to the website “government.gr” was denied for a period of time and showed “Forbidden.”

As KeepTalkingGreece.com reports, in a post on their Facebook page, Anonymous Greece sent their own message to the disaster. Expressing condolences for the victims, the group blamed the government for the unfair death of  more than 90 people. “Responsibility lies on the government that remained idle at the time of disaster and did not inform the citizens letting them burn alive,” the group argued.

“It is obvious that nobody would have died had the state reacted in time. People didn’t know the fire was approaching and we came to the point to mourn more than 90 dead families and children,” the message read.

The group claimed that “that was the goal” of the government.

The group also criticized the attitude of the Church and especially Bishop Ieremias who claimed three days after the tragedy that the people who died in the fires “with their death they cleaned their sins.”

“Dear Church, instead of offering help to the fire-stricken people you started accusing the citizens. ‘They were burned because of their sins’. What sins did the twin angels have?” the group notes with reference to the 9-year-old twin girls who died in the fires.

“Close to God is someone who offers to his fellow man and helps as much as possible for a better world. Who loves and offers support. You are just  pawns of the state, “the group concluded its message.

The message was uploaded on Sunday evening, the government website was down on Monday afternoon. The group page on Facebook has been closed down, notes newsit.

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US Manufacturing PMI Slumps To Weakest In 2018 As Prices Surge, Orders Tumble

After China’s Manufacturing PMI tumbled to 8mo lows overnight (joining Japan in its demise to 13mo lows), US Manufacturing PMI for July has not been weaker since Dec 2017.

Markit’s Manufacturing PMI signals stagflation with output prices at their highest since June 2011, production slide, and supplier delivery times fall to a record low.

And after decoupling from reality in the last two months, ISM Manufacturing tumbled back to ‘hard data’ at 58.1 (dramatically below expectations)…

ISM’s survey suggests prices paid and new orders dropped in July…

ISM New Orders at their weakest since May 2017…

All ISM respondents can talk about is tariffs…

“Global demand is still strong. Working on contingency plans for the Chinese tariffs. We will probably onshore most of that material. Labor availability is becoming an issue.” (Computer & Electronic Products)

“As a result of new tariffs on materials to/from China, we are taking measures to move impacted materials ahead of effective dates, which in some cases is resulting in holding higher inventories.” (Chemical Products)

“Reviewing the business case for importing manufactured parts from China, as new tariffs will lead to increased costs that we will pass along to our domestic customers.” (Transportation Equipment)

“The steel tariffs are a concern to us. We have already seen steel prices increase due to the threat of the tariffs and are seeing kickback from our customers due to the higher prices. We are concerned that the end customer will go to off shore to purchase the finished product.” (Fabricated Metal Products) 

Tariffs are [resulting in] customs inspection-time increases on imported raw materials from China. Logistics seems to be improving, but we are seeing a [continuing] tight chemical bulk tanker market.” (Plastics & Rubber Products)  

“Our customer demand is high, but supply of aluminum is tight. Also, tariffs are negatively affecting our bottom line, as we are unable to pass increases to all of our customers. Plus, we are seeing increases in our construction costs because of the steel price increases. Labor market is extremely tight for professional personnel, plant technicians and support associates.” (Primary Metals)  

“The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders. China has all but stopped taking orders, causing inventories to build up in the U.S. Domestic business is steady. However, it is too small to carry the load that export markets have retreated from. As a result, we will be meeting as a corporation next week to recast our second-half sales and revenue projections.” (Wood Products)

Chris Williamson, Chief Business Economist at IHS Markit said:

“The US manufacturing sector continued to expand in July, but shows increasing signs of struggling against headwinds of supply shortages, rising prices and deteriorating exports.

“The latest survey showed output rising at a rate roughly equivalent to an annualised 1% pace of expansion, which is the weakest since late last year. While a weakening of new export orders for a second successive month suggested foreign demand has waned compared to earlier in the year, the slowdown can be also in part attributed to increased difficulties in sourcing sufficient quantities of inputs. Suppliers’ delivery delays were more widespread than at any time in the survey’s history. With producers often scrambling to buy enough raw materials, suppliers enjoyed greater pricing power. Not surprisingly, with tariffs also kicking in, cost pressures spiked higher again.

“Some relief for manufacturers came from strong domestic demand, which meant firms were increasingly able to pass higher costs on to customers. Average prices charged for goods consequently rose at the steepest rate for seven years, which is likely to feed through to higher consumer prices in coming months.”

Does that sound like a sustainable 4% economy?

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Are The Market Generals Leading Us To War?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Market Wizards, a best-selling investment book written by Jack Schwager, is a must-read for investors looking to improve their performance. Each chapter of the book provides a biography and an interview of a highly successful trader/investor. Originally published in 1989, the book is full of valuable lessons from some of the best in the business, including Paul Tudor Jones, Jim Rogers, Marty Schwartz, and Ed Seykota.

Of timely interest is a quote from William O’Neil:

Another way to determine the direction of the general market is to focus on how the leading stocks are performing. If the stocks that have been leading the bull market start to break down, that is a major sign the market has topped.”

The “leading” stocks that O’Neil mentions are commonly referred to as the “Generals.”

On the heels of recent weakness in some of today’s Generals, we examine whether these stocks are sending us a signal to seek shelter or if their lower prices are temporary and a rallying call for the troops.

FAANG Stocks

The Generals leading the market higher over the last couple of years go by the acronym of FAANG. FAANG is composed of Facebook (FB), Amazon (AMZN), Apple (APPL), Netflix (NFLX), and Google (GOOGL). To understand the outsized effect they have on the S&P 500 consider the following:

  • Per Bloomberg data, the five FAANG stocks currently account for 13.5% of the weighting of the S&P 500.

  • The combined market cap of the FAANG’s is equal to that of the smallest 252 S&P 500 constituents.

  • On average, each FAANG stock has over 13 times the effect on the S&P 500 index than the average stock in the index.

The popularity of the FAANG stocks has risen substantially over the last few years as witnessed by a futures contract and multiple ETFs that track the performance of these five stocks’. Further, the Bank of Montreal now offers 3x leveraged ETF’s (FNGU and FNGD) that triple the performance of the five stocks.

The following paragraphs provide a summary of the most recent earnings announcements and the stock price activity for each FAANG stock. This analysis will help us appreciate what is driving these stock prices over the last two weeks and by default driving the markets.

Facebook – Facebook fell over 20% on July 26, 2018, erasing almost $120 billion in market capitalization. The decline was the largest one-day loss of market value in one stock in the history of the U.S. equity markets.Interestingly, the two runners-up are Intel (INTC) and Microsoft (MSFT), both occurring in the year 2000. At the time, they were five-star Generals that ultimately led their troops over a cliff.

Largely responsible for the drop was Facebook’s second-quarter earnings announcement which reported weaker than expected revenue and daily active users as well as corporate guidance lowering those metrics in the third and fourth quarters. The stock was also downgraded by a few Wall Street analysts.

While the decline was severe, FB is still flat this year and up over 50% since January 2017.

Netflix – Netflix has fallen 7% since a lackluster earnings report on July 23, 2018. While earnings beat estimates, they only added 670,000 U.S. subscribers in the second quarter, missing projections of 1,200,000. This was the first time in five years they fell short of their user projections. Given that Netflix is trading at valuations that portend significant user growth, any signs that they are approaching product saturation should be especially concerning.

Despite the loss, Netflix is still up nearly 200% since January 2017 and over 85% this year.

Amazon – Amazon released its quarterly earnings on July 26, 2018. The stock closed the following day up about half a percent but since then has given back over 2%. While the market initially seemed to focus on a massive beat in earnings versus projections, investors seemed to gravitate to the company’s missed revenue expectations and guidance lower for the next quarter. Given that a large chunk of the bottom line EPS rise was attributable to a sub-3% tax rate, it is likely concerns over forward guidance are justified.

For the year to date, Amazon is up almost 60%, trading near its all-time high and showing few signs of weakness.

Google – Like Amazon, Google smashed earnings expectations, and the stock rose nearly 5% on the day following the announcement. Unlike Amazon, their sales also beat expectations, and they did not lower forward earnings guidance. Google is up 20% year to date and is perched near its all-time highs. Google appears to be the strongest of the Generals.

Apple – Apple’s second quarter earnings per share and sales surpassed Wall Street’s expectations and they raised revenue guidance for earnings for next quarter. The only wrinkle was iPhone sales, which account for more than half of their revenue, came up slightly short of expectations. As of writing this the stock is up 2.50% and within a few cents of its all-time high.

The following table summarizes the FAANG’s stock performance since July 1, 2018.

Summary

Some of the Generals are flashing signs of weakness. That said, two weeks and one-quarter of earnings do not make a trend. Despite large price losses for two of the Generals, the S&P 500 took these drops and earnings announcements in stride. For the week of July 23-27, in which all but one of the FAANGs released earnings, the S&P 500 was up 0.61%.

Currently, we are focused on the price action of FB and NFLX. Given the “buy the dip” reflexivity that has pervaded the market and these stocks in particular, their price action in the weeks ahead will be telling. If they remain at current levels or drift lower, we would regard this as a signal that all is not well. On the other hand, if the FAANG stocks that are struggling start to recoup losses and resume their role leading the market higher again, we will have to wait on the wisdom of William O’Neill.

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Trump Urges AG Sessions To “Stop Dirty Democrats’ Rigged Witch Hunt Right Now”

President Trump was later then normal to take to his Twitter account this morning, but nevertheless provided a triumvirate of tweets that doubled down on his views of the Russia probe and what should be done about it.

Trump began with a two-fer tweet, quoting Alan Dershowitz:

FBI Agent Peter Strzok (on the Mueller team) should have recused himself on day one. He was out to STOP THE ELECTION OF DONALD TRUMP. He needed an insurance policy. Those are illegal, improper goals, trying to influence the Election. He should never, ever been allowed to remain in the FBI while he himself was being investigated. This is a real issue. It won’t go into a Mueller Report because Mueller is going to protect these guys. Mueller has an interest in creating the illusion of objectivity around his investigation.

And then Trump took aim at his own AG, demanding the probe be shut down “right now”…

And cue the hysterical calls of “obstruction” from the liberal media and Chuck and Nancy.

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Ron Paul: Government-Funded ‘Free’ Healthcare Is “Preposterous & Deadly”

Day after day, the newly minted hordes of ‘Democratic Socialists’ proclaim “free stuff” for all as their platform to grabbing the greater fool’s marginal vote.

And finally, after Ocasio-Cortez’ embarrassing display of ignorance, Mike Shedlock notes, cost estimates for “free stuff” are pouring in. The sticker price for “Medicare for All” is shocking.

“Medicare for All” sounds great. And every unthinking socialist wants it. But here’s the deal: ‘Medicare for All’ Would Cost $32.6 Trillion Over 10 Years.

Sen. Bernie Sanders’ “Medicare for all” plan would boost government health spending by $32.6 trillion over 10 years, requiring historic tax hikes, says a study released Monday by a university-based libertarian policy center.

That’s trillion with a “T.”

The latest plan from the Vermont independent would deliver significant savings on administration and drug costs, but increased demand for care would drive up spending, according to the analysis by the Mercatus Center at George Mason University in Virginia. Doubling federal individual and corporate income tax receipts would not cover the full cost, the study said.

The Mercatus analysis estimated the 10-year cost of “Medicare for all” from 2022 to 2031, after an initial phase-in. Its findings are similar to those of several independent studies of Sanders’ 2016 plan. Those studies found increases in federal spending over 10 years that ranged from $24.7 trillion to $34.7 trillion.

Ron Paul raged on his Facebook page$32 Trillion! … that’s how much “FREE” costs.

Government intrusion (often welcomed by crony corporations) has ruined the healthcare industry in America.

The idea that government needs to go all the way with “FREE” care is preposterous, and deadly.

The solution is in the opposite direction.

Get government OUT of healthcare, and return it to the free marketplace.

*  *  *

Mish exclaims, I am not at all surprised by the estimated cost but I do have a question: How do we afford $3.4 trillion a year for 10 years of “free” stuff?

And Medicare is just a start. There are proposals for free college tuition and free universal pre-kindergarten among other things.

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10Y Treasury Yield Tops 3.00% After Treasury News

As we noted here, the Treasury announced it would raise the amount of long-term debt it sells to $78 billion this quarter, up from $73 billion last quarter, while launching a new two-month bill. 

The surprise is that whereas consensus had expected 5-year auctions to increase by $1 billion in the quarter, the Treasury will now increase the auction amount by $1bn every month in the quarter, for a total of $3 billion, which in turn will put extra pressure on the belly of the curve.   

And that extra supply has prompted weakness across the Treasury curve, pushing 10Y Yields back above 3.00% for the first time since The Fed hiked rates in June…

And the yield curve is steepening…

All of this ahead of The Fed this afternoon.

 

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