Making Money Isn’t Supposed To Be Easy

Authored by Simon Black via SovereignMan.com,

I remember having a conversation with a woman during the peak of the housing bubble, probably 2005…

She was a psychologist based in Florida. And she was explaining to me how she was flipping condos that hadn’t even been built yet.

Back in the boom times, buyers would line up at condo sales offices and have to decide within minutes if they wanted to put down a deposit. The demand for these undeveloped units was so large, developers would raise prices, sometimes multiple times a day, to whip buyers into a frenzy.

The woman I was talking to would put down a deposit before the developer had broken ground. Then when the building just started construction, she’d sell the contract and make money.

She was literally cackling to me on the phone… “It’s just so easy,” she said before laughing.

This was a long time ago. And I didn’t have anywhere near the deal experience or financial know how that I have now.

Still, even then, I remember thinking that making money isn’t supposed to be that easy.

There’s supposed to be risk, hard work and effort involved with making money. And simply flipping contracts on yet-to-be-developed condos for huge profits didn’t make sense to me.

This woman was just one of the legions of people that were able to make quick profits in real estate because, at the time, there was an enormous amount of debt flowing into that sector.

Banks would issue mortgages to unqualified borrowers (often without a job or an income), the issuer would quickly sell that mortgage to a large bank, the bank would chop the mortgage into a mortgage-backed security, get the US government to stamp a guarantee and sell it to investors around the world.

Mortgage-backed securities and their many derivatives were the hottest investment in the world, with almost unlimited demand.

Eventually, of course, reality caught up with us. People realized that when you loan $1 million to an unemployed, former bus driver with a bad credit history… it’s probably not the best investment.

All of the condo flippers, and other leveraged players in the real estate space, got wiped out.

They say history doesn’t repeat itself, but it often rhymes.

And almost exactly 10 years since Lehman Brothers collapsed, we’re back where we started, with a twist…

Years of easy credit and low interest rates are blowing another bubble… But instead of lending money to unemployed, ex-bus drivers, investors are lending absurd amounts of money to companies with ZERO chance of paying those debts.

We discussed this in yesterday’s Notes about billionaire investor Howard Marks and his concerns about the economy today.

As of June, U.S. non-financial firms are sitting on a record $6.3 trillion in debt.

AT&T alone has an astounding $180 billion of debt, making it the most indebted non-government controlled and non-financial firm in history… and more indebted than many governments around the world.

And the quality of corporate debt is getting worse and worse.

More than 40% of US corporate bonds are rated BBB – just one notch above non-investment grade, or “junk” – an all-time record. The riskiest, “junk” borrowers, have a record $8 of debt for every $1 of cash on their books.

A full 14% of companies in the S&P 500 don’t even make enough money to cover the interest on their debt.

Within the corporate debt market, there’s also the fast-growing, $1 trillion “leveraged loan” market. That’s just a fancy name for loans made to companies that already carry lots of debt, making them even riskier.

And 77% of leveraged loans are what’s called “covenant lite,” meaning lenders are waiving their right to certain protections when lending to these incredibly risky companies.

You’d think with all of this bad debt floating around, investors would at least require a healthy interest rate for making these loans. Not the case… the extra yield lenders demand to make these riskier loans is near its lowest in history.

Remember, this behavior is taking place in a rising interest rate environment.

As a general principle, as the amount of debt increases, you should also see defaults increase. But today, while the level of corporate debt is exploding to record highs, defaults are plummeting toward record lows. And this widening divergence can’t continue forever.

Eventually those defaults will come, at a time when debt as a percentage of GDP has never been higher. And you’ll see a significant percentage of GDP that just disappears.

When you look back throughout economic history, almost every crisis happens because there’s too much debt… the Great Financial Crisis, the Savings & Loan crisis, the Asian crisis.

It’s the same ingredients every single time… we see lots of debt, followed by complicated financial instruments to encourage more debt. Eventually, market participants take it too far and something cracks.

Today we’ve got all the same ingredients. Can we honestly expect it to turn out any different?

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Dow Hits Record High, Small Caps Crushed, BTPs Battered, & Bullion Bid

Big Caps for the first two minutes… and then Small Caps…

 

China remains closed for Golden Week but offshore yuan was extremely active overnight, flash-crashing below key support and back…

 

And the China ETF was slammed down over 2% today…

 

Another odd day in Italian stocks – yesterday they were panic bid and slumped to unch, today panic sold and bid to unch..

 

But BTPs were blasted higher in yield to 4-year highs…

 

In the US, The Dow surged to a new record high today… but Small Caps collapsed. Powell spooked stocks very briefly at around 1245ET…rebounded, then faded… The Dow went out near HoD, Russell near LoD… (on the day, the S&P was unchanged, Dow up and the rest red)…

 

Another major divergence between big (Dow) and small (Russell 2000) stocks as the former soars relative to the latter and erases any relative performance YTD…

This is the biggest outperformance of Dow over Small Caps since Oct 2011.

Both are now up just over 8% on the year… (Trannies are worse. Nasdaq best)

This is the biggest Small Cap slump since July, and it broke below its 50- and 100-DMA…

 

Small Caps and Mid Caps have both rolled over hard, with only Big Caps holding on…

FANG Stocks are all lower today…

 

And while tech and financials were weak, the former’s relative outperformance has stalled…

 

And while all this uncertainty is swirling, the spread (risk) of US HY Corporates is at its tightest since July 2007…

 

Despite gain on the Dow, UST Bonds were also bid, with yields 1-3bps lower on the day… leaving them all lower on the week…

 

10T yields fell 3.5bps, but remain above 3.00%… (though this is the lowest yield close since 9/17 when yields were below 3.00%)

 

and the yield curve flattened…back below Fed rate hike levels…

 

The Dollar ended the day higher but sold off overnight gains into the European close before bouncing in the afternoon…

The Rand and Rupiah nudged lower on the day as Argentina’s Peso and Brazil’s Real both surged…

 

Cryptos drifted lower on the day with Ether and Ripple holding gains on the week…

 

WTI limped lower ahead of tonight’s API report, PMs and copper were higher on the day…

 

Silver briefly broke above its 50DMA and Gold broke above $1200… but notice that the moment Europe closed, the PMs were monkeyhammered lower…

 

Finally, we thought this might be interesting for some – it now costs the average worker 1164 hours work to buy The Dow (versus the average 225 hours that it costs from 1960to 1995…

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US Households Are Loaded Up On Stocks

Via Dana Lyons’ Tumblr,

Outside of the 2000 dotcom bubble, U.S. households have never had more of their assets invested in the stock market.

The U.S. stock market, i.e., the S&P 500, soared back to new all-time highs again today – always a welcomed development for investors. And it is especially welcomed now considering the fact that investors are loaded up with stocks at the moment. That information comes courtesy of one of our favorite investment related statistics.

From the Federal Reserve’s Z.1 release, we find that U.S. Households had a reported 34.3% of their financial assets invested in the equity market as of the 2nd quarter. Outside of a slightly higher reading in the 4th quarter of 2017, that is the highest level of stock investment in the 70-plus year history of the series, other than the 1999-2000 bubble top.

What is the upshot of this series – and its current reading? As we have discussed many times, this statistic is not necessarily an effective timing tool. It is what we call a “background” indicator in that it provides an instructive representation of the longer-term potential — and risk — of the stock market.

One thing we know about the investing public (and most investor groups for that matter) is that they are notoriously poor at timing markets. For example, they generally adopt their largest allocations at market tops. Thus, based on the current, historic level of household investment, we would determine the stock market to be carrying substantial risk – in the longer-term.

Again, this is not a great timing tool. It can, and has, remained elevated for years on end prior to any household investor comeuppance. However, just as households learned the hard way in 2000 (and 2015 and 2007 and 1972 and 1968 and 1966), don’t expect them to walk away from these extreme equity investment levels unscathed.

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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NYTimes Accuses Trump Of Making Hundreds Of Millions From Tax Dodges And “Outright Fraud”

In a massive, front page story, the NYT has accused President Trump of participating in “questionable” and “dubious” tax strategies “including instances of outright fraud” that greatly increased the fortune he received from his parents and allowed him to accrue millions of dollars in additional wealth from his father’s real estate empire “much of it through tax dodges in the 1990s.”

The NYT reported that Trump and his siblings set up a “sham” corporation to help disguise otherwise taxable income that came from gifts from their parents. The president also allegedly helped his father take improper tax deductions that amounted to millions of dollars, with the Internal Revenue Service reportedly providing little pushback against the Trumps’ reported tactics.

According to the Times’ investigation, “based on a vast trove of confidential tax returns and financial records” Trump received the equivalent today of at least $413 million from his father’s real estate empire, starting when he was a toddler and continuing to this day. And, in what will attract the most attention, the newspaper wrote that Trump’s behavior amounted to fraud in some cases.

The NYT reports that records indicate that Trump helped his father take improper tax deductions; he is also said to have helped formulate strategy to undervalue his parents’ real estate holdings

The Times interviewed former employees and advisers to Trump’s father and reviewed more than 100,000 pages of documents related to the Trump family business, including bank statements, financial audits and invoices.

Charles Harder, an attorney for the president, said in a statement to The New York Times that allegations of tax evasion are “100 percent false,” adding that Trump “had virtually no involvement” with the tax strategies used by his family, and instead delegated those tasks to others. Harder also implied that the newspaper could face a defamation lawsuit if it suggested Trump participated in a fraudulent tax scheme.

“The New York Times’s allegations of fraud and tax evasion are 100 percent false, and highly defamatory,” Mr. Harder said. “There was no fraud or tax evasion by anyone. The facts upon which The Times bases its false allegations are extremely inaccurate.”

The Times says that its findings “raise new questions about Mr. Trump’s refusal to release his income tax returns, breaking with decades of practice by past presidents.”

According to tax experts, it is unlikely that Mr. Trump would be vulnerable to criminal prosecution for helping his parents evade taxes, because the acts happened too long ago and are past the statute of limitations. There is no time limit, however, on civil fines for tax fraud.

Robert Trump, the president’s brother, issued a statement on behalf of the Trump family and said that all appropriate gift and estate taxes were paid after his parents passed away.

Developing.

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NBC “A Co-Conspirator In The Destruction Of Kavanaugh” According To Lindsey Graham

Senator Lindsey Graham, who made headlines last week after excoriating Democrats over their “unethical sham” investigation of Brett Kavanaugh, now says that NBC is a “co-conspirator” in the “destruction” of the Supreme Court nominee. 

In an interview with Fox News host Sean Hannity, Graham said: “NBC, they’ve been a co-conspirator in the destruction of Kavanaugh from my point of view,” he said. “… do you think NBC would’ve done that if this had been a Democratic male nominee? All I can say is that there the journalistic integrity has been destroyed over this case.” 

Graham, who sits on the Senate Judiciary Committee, lambasted his Democratic colleagues for sitting on allegations of sexual assault levied against Kavanaugh by Stanford researcher Christine Blasey Ford. 

“If you wanted an FBI investigation you could have come to us. What you want to do is destroy this guy’s life, hold this seat open, and hope you win in 2020. You’ve said that, not me,” Graham seethed across the room. “This is the most unethical sham since I’ve been in politics and if you really wanted to know the truth, you certainly wouldn’t have done what you did to this guy.”

“Boy y’all want power, God I hope you never get it. I hope the American people can see through this sham, that you knew about it and you held it, you had no intention of protecting Dr. Ford, none!” he added. “I hate to say it because these have been my friends, but if you were looking for a fair process, you came to the wrong town at the wrong time.”

“I’m really upset that they knew about this in August and never told anybody,” Graham continued outside the hearing room following Ford’s Thursday testimony. “I’m really upset that [Feinstein] believed this was a credible allegation, [and] that you wouldn’t do Mr. Judge Kavanaugh the service of saying, ‘I’ve got this, what’s your side of the story.’” 

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“We’re Our Own Worst Enemy” – Midstream Constraints Threatens Permian Shale Boom

The US now pumps a record 11 million barrels a day in oil, surpassing both Saudi Arabia and Russia, and becoming the world’s largest oil producer. Behind this historic achievement is America’s most productive region, the Permian Basin in west Texas and New Mexico, where approximately one-third of the nation’s daily supply is extracted from the ground via hydraulic fracking.

However, the shale revolution has overwhelmed the region’s infrastructure with massive supply – driving up costs, depressing regional oil prices and slowing the pace of growth, according to Reuters.

The Trump administration has been cheering the country’s oil output rising to record levels, but some severe logistical constraints have developed – leaving many producers unable to turn a profit and encouraged some to drill elsewhere.

Consider the Permian Basin, the country’s largest oil field, which has increased production from 1.5 million barrels per day (bpd) to 3.43 million bpd, in the last three years. The influx of new supply has strained pipeline capacity for Permian Basin producers and is not expected to exceed overall oil production until late in 2019 or early 2020. Several new pipelines are expected to be operational in the next several years, but in the meantime, producers are resorting to rail and trucks in higher frequency.

Shortages of human labor, water, and even fuel used in fracking are skyrocketing the cost of production.

At the same time, Permian producers are being paid $17 a barrel below West Texas Intermediate (WTI). Sellers have to offer the discount to compensate for the higher transport costs, said Reuters.

We’re our own worst enemy,” said Ross Craft, chief executive of Approach Resources, a West Texas oil producer which last year averaged about 11,600 barrels per day. “We can drill, bring these wells on so quickly that we basically outpace the market. It is going to take a little bit of time,” for the infrastructure to catch up to producers.

Since mid-2016, the number of drilling rigs in the Permian rapidly increased, but the momentum is now slowing, in part because of the deep discount of Permian oil versus WTI.

With the shale revolution in danger, the number of uncompleted wells in the Permian jumped by 80% to 3,630 in August compared with a year earlier, according to US Energy Department data. Outside of the shale bubble, uncompleted wells are only up 10% from the same period a year ago.

ConocoPhillips and Carrizo Oil & Gas are reducing their operations in the Permian. Each has moved a Permian rig to another oilfield, and Conoco idled a second, Reuters said. Noble Energy also scaled back rigs in the region and said it is transferring resources to Colorado.

John Hopkins, a managing partner at Global Drilling Partners, said they were ready to drill at least seven wells with a Permian operator this summer, but those plans fell apart due to the lack of pipeline capacity.

“There will be a shift out of West Texas temporarily until they can solve their midstream problems,” he said. Companies are looking to boost their drilling in other fields in Texas, Colorado and Oklahoma, he said.

The deep price discount on Permian oil has damaged the equity price of some shale producers such as Parsley Energy, which operates rigs only in the Permian. Parsley delivered an eight fold-rise in profits in the second quarter versus a year earlier and boosted output by 57% over the same period. But investor still dumped the equity because of concerns that plans to increase production by another 5% by spending 17% more will deliver diminishing returns.

Wood Mackenzie, a global energy consultancy group, published a report that estimates Permian oil production in 2019 will be 200,000 bpd lower than it could be because of infrastructure constraints. Permian output will be 3.9 million bpd in 2019, Wood Mackenzie estimates, but if proper infrastructure was in place, production could have soared well above 4.1 million bpd.

“We’ve had a more significant increase in costs this year than we would have assumed,” Timothy Dove, chief executive of Pioneer Natural Resources, one of the largest Permian oil producers, said in August.

Some producers are being forced to use truck and railcar as pipeline capacity has reached its upper limits. In return, oil by truck to Gulf Coast refinery and export hubs costs $15 to $25 a barrel, compared to $8 to $12 a barrel by rail and less than $4 a barrel by pipeline, according to Reuters’ market sources.

“Truck traffic is unlike anything we’ve ever seen,” said James Walter, co-CEO of Colgate Energy, a Midland-Texas based oil producer, who adds his company has contracts to transport all of its crude and gas production via pipelines.

Reuters noted that rail capacity will not increase because oil producers are not signing long-term contracts to lease cars. They would prefer to wait for the new pipelines to be built. Meanwhile, rail companies are reluctant to purchase new oil railcars without long-term contracts.

“We do think it’s a short-term situation,” Union Pacific Executive Vice President Beth Whited said in July. “So we will not invest to support that.”

Meanwhile, Jean Laherrere at Forecast For U.S. Oil & Gas Production shows the Permian oil production peaking sometime in 2019.

And so with logistical hurdles surpassing oil price as the key extraction bottleneck, one wonders if we have finally hit peak shale?

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Republicans Bet On Stocks After Trump’s Win, While Democrats Bought Bonds, Study Shows

While President Trump’s upset electoral victory two years was a boon for Republicans who supported the president’s “American First” agenda, it sent many Democrats into paroxysms of outrage. And while Democrats have filtered every major policy achievement of the Trump age through a lens of cynicism, Republicans chose a more optimistic tack.

And as it turns out, Republican voters have benefited from that outlook, not just emotionally, but financially as well.

To wit, a paper published by researchers at the MIT Sloan School of Business summarized by Bloomberg revealed that Republicans upped their exposure to US stocks after Trump’s victory, while Democrats poured their money into bonds. This has led to a cavernous gap in returns, as Republicans have reaped the rewards of the Trump economic and market boom, while Democrats have been largely left behind.

According to the paper, following the 2016 election, Democratic voters reported feeling much more pessimistic about the state of the economy, while Republicans reported feeling more optimistic. This divergence in worldviews, according to the study’s authors, supports the rational-expectations theory of asset pricing, i.e. that trading activity arises as different groups of investors embrace divergent theories of how publicly available information will impact markets.

Prior to the election, differences in Republicans’ and Democrats’ portfolios were relatively minor. But after the vote, some of the changes in investing strategy could be attributed to hedging needs that arose as Republican voters tended to be employed in industries that would be positively impacted by Trump’s presidency, while Democratic voters tended to live in industries that might be negatively impacted. But after controlling for these factors, the researchers were able to show that differences in investment strategies after the election arose from biases inherent to the different groups, such as their outlook for the global economy.

Compared with Democrats, Republican investors actively increase the share of equity and market beta of their portfolios. Meanwhile Democrats increased their exposure to bonds and other “safe” investments.

Since the vote, the S&P 500 has returned more than 40%, while the PIMCO Total Return Fund, by comparison, has returned a paltry 1.6%.

Stocks

But please, tell us again about how Trump’s victory would drive American to an inevitable economic meltdown.

Read the paper below:

 

Belief Disagreement and Portfolio Choice by Zerohedge on Scribd

 

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September U.S. Auto Sales Plunge, Most OEMs Miss Pessimistic Estimates

In line with the preview published here last week, auto sales numbers for September are in and, as expected, it has been an extremely ugly month for car makers. Results from Ford, Honda, Nissan, Toyota and Fiat all tell the story of an industry that had a terrible month, with few silver linings. Three of these names posted double digit percentage declines in YOY sales and three of them missed analyst estimates.

Here are the lowlights from across the industry:

  • Ford posted an 11% drop, missing analyst estimates of 9.1%. The F-Series pickup line ended a 16-month streak of sales gains. Mustang sales were down 1.3%. 
  • Nissan posted a 12.2% drop in September. Nissan and Infiniti brand car sales fell by 36%, including a 28% drop for the Altima sedan as the company prepared to start selling an all-new version this week.
  • Toyota sales were down 10.4%, far below estimates of 6.7% for the month. Combined sales for Toyota and Lexus brand cars fell 25.3%. 
  • Fiat posted the only true “beat”, as sales rose 15% versus analyst estimates of 8%. However, the Chrysler brand fell 7% to 14,683 vehicles and the Fiat brand fell 46% to 1,185 vehicles. The deficit was made up on Jeep sales, which were up 14%, as well as sales of Ram pickups and minivans.
  • Volkswagen of America car sales were down 4.8%
  • GM third quarter total sales were down 11%. The company stopped reporting monthly numbers earlier this year, with many suspecting that weakness in the production pipeline is responsible; they were right. 

Ford also posted an astounding drop in car sales, which fell 25.7% as a segment. 

As we had previously predicted, the lack of incentive outlays seemed to be the primary driver for the poor numbers

The impact of shrinking incentives was best observed in many of the “mainstay” sedan models among U.S. households, as many are switching to trucks and SUVs:

  • Honda Civic sales were lower by 30% 
  • Honda Accord sales were lower by 15% 
  • Toyota Camry sales were lower by 20%
  • Toyota Corolla sales were lower by 36%

Most manufacturers found their strongest points with trucks and SUVs. Nissan, for example, saw combined truck sales rise 6.6%. This included gains of 71% for the Frontier mid-size pickup and a 57% gain for the Titan. The Rogue SUV was down 11%. Fiat outsold Ford, 199,819 to 196,496 in cars, SUVs and light trucks. 

For Toyota, Highlander and 4Runner SUV sales rose, cauterizing Toyota’s light truck sales decrease at just 0.3%.

Vehicle ASP seems to be the “silver lining” that many optimists are trying to pull from this otherwise terrible month. Kelley Blue Book reported that the industry average price paid at dealerships was $35,742, a gain of 2%, while the average Ford buyer paid $36,040, up $1,500 from last year. According to Cox Auto, the average new vehicle price rose $687, or 2%, from September last year.

That however may be at the expense of still easy loans: the average new car loan jumped $724 year-over-year to $30,958 in Q2 2018, while used vehicle loan amounts increased $520 to reach $19,708, both records.

Many OEMs blamed the poor YOY numbers on last year’s Hurricane Harvey, which spurred more buying in its aftermath to make for tougher comps and this year’s Hurricane Florence, which is being blamed for a lack of buyers. 

Ford’s Mark LaNeve called September a “tale of two hurricanes” on this morning’s conference call. “Hurricane Florence was a big factor this month.”

Others chose to leave the past in the rearview mirror and focus on the future: Kurt McNeil, GM U.S. vice president for sales, was looking forward to Q4: “Our brands are very well-positioned for the fourth quarter when our next wave of new products start shipping in high volume.”

However, experts at AutoTrader still see headwinds for the industry as a result of rate hikes. 

Michelle Krebs, senior analyst with researcher AutoTrader, said: “It’s a very hard comparison with last year. But we do see headwinds building, with higher interest rates being the major one. We anticipated the last part of the year would be challenging and now we’re seeing that. Wages aren’t rising fast enough to keep up with inflation and that is keeping some people out of the market.”

Just days ago, we outlined that September was shaping up to be a brutal month for auto sales. At the time, estimates released by Edmunds were expecting a new vehicle sales collapse both on a monthly basis and year-over-year basis. Edmunds predicted that 1,392,434 new cars and trucks would be sold in the U.S. in September, which equals a estimated seasonally adjusted annual rate (SAAR) of 17 million.

At the time, Jeremy Acevedo, Edmunds’ manager of industry analysis, stated: “Vehicle replacement demand following Hurricane Harvey bolstered auto sales last September, and Hurricane Florence has had a very limited impact on auto sales this month, which are the primary reasons why we’re seeing this year-over-year decline. With that said, a SAAR of 17 million is certainly not an unhealthy number — September is still shaping up to be a robust month for sales.”

On the other hand, with rates ticking up again since then and making auto loans and leases that much more expensive with the average new car payment hitting a record $525 per month…

… it is debatable whether the picture will get any more “robust” in October, or the rest of the year for that matter. 

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Trump’s Top Econ Advisor Accuses Goldman Of Slanting Research To Help Democrats

Over the weekend we reported that as increasingly more banks evaluate the worst case scenario in the ongoing US-China trade war, we highlighted that Goldman Sachs, which assigns a 60% probability the US will impose tariffs on most or all of the additional $267 billion of imports from China that are not covered by the tariffs announced to date, issued a warning that whereas so far S&P profits and margins have been able to avoid a direct hit, this may change soon:

“Tariffs threaten corporate earnings through higher costs and lower margins. Conservatively assuming no substitution or pass-through of expenses, we estimate a 25% tariff on all imports from China could lower our 2019 S&P 500 EPS estimate by roughly 7% (from $170 to $159), resulting in no EPS growth next year.”

And while Goldman did not predict a severe impact to either the market or stocks, the bank’s chief equity strategist David Kostin repeated an analysis he made three weeks ago, warning that if trade tensions spread significantly and a 10% tariff were implemented on all US imports – the highest rate since 1940s – the bank’s EPS estimate could fall by 15% to $145 in the “severe case”, resulting in a bear market for equities; a less draconian scenario of imposing 25% tariffs on all Chinese imports would wipe out all corporate profit growth in 2019.

As it turns out, Goldman’s analysis made its way all the way to the White House, and on Tuesday Kevin Hassett, the chair of President Donald Trump’s Council of Economic Advisers, took heavy aim at the Goldman Sachs research team, which he claimed was overtly political and negative toward Trump’s policies.

Asked during an interview on CNN about the conclusion of the analysis by the Goldman equity strategists – which as noted above showed that Trump’s potential tariffs could wipe out corporate profit growth in 2019 and offset all the stimulative benefits of other policies, Hassett compared the analysts to the Democratic Party.

“I haven’t read that report, but the Goldman Sachs economic team almost at times look like they are the Democratic opposition,” Hassett said, which is ironic as it was former Goldman COO, Gary Cohn, who led Trump’s economic team for over a year.

Hassett dismissed those concerns, and pointed to Goldman Sachs’ previous analysis that the GOP tax cut bill would do little to boost economic growth, which was “really, really wrong and timed in a partisan way” and served as evidence the bank’s latest analysis was flawed.

“Their analysis of the tax cuts was really, really wrong,” Hassett said. “And timed in a partisan way. So maybe they are trying to make a partisan point before the elections.”

Lastg year, ahead of the passage of the GOP tax law, Goldman economists estimated that the tax law would boost US GDP growth modestly, by only 0.3% in 2018 and 2019.

Hassett’s comments came as the Trump administration has taken aggressive steps to defend the decision to start a trade war with China. On Monday, the president hit back at critics of the tariffs during a press conference announcing the new US-Mexico-Canada trade deal: “By the way, without tariffs, we wouldn’t be talking about a deal,” Trump said. “Just for those babies out there that talk about tariffs.”

Watch the exchange below.

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US Gross National Debt Soars $1.27 Trillion In Fiscal 2018, Hits $21.5 Trillion

Authored by Wolf Richter via WolfStreet.com,

But wait — these are the Boom Times!

The US gross national debt jumped by $84 billion on September 28, the last business day of fiscal year 2018, the Treasury Department reported Monday afternoon. During the entire fiscal year 2018, the gross national debt ballooned by $1.271 trillion to a breath-taking height of $21.52 trillion.

Just six months ago, on March 16, it had pierced the $21-trillion mark. At the end of September 2017, it was still $20.2 trillion. The flat spots in the chart below, followed by the vertical spikes, are the results of the debt-ceiling grandstanding in Congress:

These trillions are whizzing by so fast they’re hard to see. What was that, we asked? Where did that go?

Over the fiscal year, the gross national debt increased by 6.3% and now amounts to 105.4% of current-dollar GDP.

But this isn’t the Great Recession when tax revenues collapsed because millions of people lost their jobs and because companies lost money or went bankrupt as their sales collapsed and credit froze up; and when government expenditures soared because support payments such as unemployment compensation and food stamps soared, and because there was some stimulus spending too.

But no – these are the good times. Over the last 12-month period through Q2, the economy, as measured by nominal GDP grew 5.4%. “Nominal” GDP rather than inflation-adjusted (“real”) GDP because the debt isn’t adjusted for inflation either, and we want an apples-to-apples comparison.

The increases in the gross national debt have been a fiasco for many years. Even after the Great Recession was declared over and done with, the gross national debt increased on average by $954 billion per fiscal year from 2011 through 2017.

And the regular debt-ceiling fights in Congress, rather than accomplishing something noticeable in terms of fiscal rectitude, are just political charades that leave some flat spots in the chart above followed by some dizzying spikes right afterwards.

But now we have even more profligacy: Increased spending combined with tax cuts. As a result, the surge in the debt in fiscal 2018 of $1.27 trillion was 33% more than the already mind-blowing average surge in the debt over the past seven fiscal years ($954 billion).

For the first 11 months of fiscal 2018, through August, total tax receipts inched up by only $19 billion, or by 1%, according to the CBO, though the economy, as measured by nominal GDP, grew at an annual rate of about 5.4% (none of the figures are adjusted for inflation).

This 1% increase in revenues was distributed as is to be expected:

  • Individual income and payroll tax receipts rose by $105 billion, or by 4%.

  • Corporate income tax receipts fell by $71 billion, or by 30%, due to the new corporate tax law.

  • Revenues from other sources fell by $16 billion or by 6%. This includes declines in the remittances from the Federal Reserve, which sends most of its profits to the Treasury Department, but now pays banks more on their excess reserves, and thus remits less to the Treasury Dept.

Outlays surged by $240 billion, or by 7%, over the first 11 months of fiscal 2018, compared to the same period in the prior year.

The CBO estimates that the “deficit” will be $895 billion in fiscal 2018. These annual “deficits,” based on government accounting, are almost always substantially smaller than the increase in the gross national debt. But it’s the debt that finally accounts for all the money the government spends minus the money it receives: The difference has to be borrowed, and that difference in fiscal 2018 between what it paid out what it received in revenues was $1.27 trillion.

The US is “on an unsustainable fiscal path, there’s no hiding from it,” explained Fed chairman Jerome Powell during the press conference.  Read…  The Fed’s Not Backing Off: Powell’s Standouts & Zingers at the Press Conference  

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