Breadth Breakdown Bodes Badly For Budding Bulls

While the S&P 500 held support at January low (1,812) yesterday (and October 2014's Bullard bounce lows), BMO's Russ Visch warns "it may not hold in the days ahead" due to weak market breadth.

 

Given the ongoing collapse in market breadth (now breaking well below January's lows), BMO's Visch adds…

…the probabilities still favour a breakdown in the days ahead given the continued deterioration underneath the surface in broad measures of equity participation. For example, both NYSE Advance-Decline lines (traditional and common-stock-only) have broken below their January lows.

 

The same is true for other indexes such as the Russell 2000 and Wilshire 5000 indexes.

 

Daily breadth and momentum oscillators also continue to deteriorate so the path of least resistance still appears to be to the downside here.

 

As we have noted in recent reports, the next major support level for the S&P 500 on a close below 1812 is the February 2014 low at 1737.


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Why Yellen’s Testimony Was Not Dovish Enough: Bank CEOs Told Her The ‘Economy Is Stronger Than Markets Imply’

Every quarter members of the Fed meet with 12 representatives of the U.S. banking industry who comprise the Federal Advisory Council.  This is what the Fed says about this specific council:

The Federal Advisory Council (FAC), which is composed of twelve representatives of the banking industry, consults with and advises the Board on all matters within the Board’s jurisdiction. The council ordinarily meets four times a year, the minimum number of meetings required by the Federal Reserve Act. These meetings are always held in Washington, D.C., customarily on the first Friday of February, May, September, and December, although occasionally the meetings are set for different times to suit the convenience of either the council or the Board. Each year, each Reserve Bank chooses one person to represent its District on the FAC, and members customarily serve three one-year terms. The members elect their own officers.

Here are the 12 current “bank representative” members:

  • Richard E. Holbrook, First District
  • James P. Gorman, Second District
  • Scott V. Fainor, Third District
  • Paul G. Greig, Fourth District
  • Kelly S. King, Fifth District
  • O.B. Grayson Hall, Jr., Sixth District
  • Frederick H. Waddell, Seventh District
  • Ronald J. Kruszewski, Eight District
  • Patrick J. Donovan, Ninth District
  • Jonathan M. Kemper, Tenth District
  • Ralph W. Babb, Jr., Eleventh District
  • John G. Stumpf, Twelfth District
  • Herb Taylor, Secretary

We bring this up because according to the just released records from the most recent, February 3, meeting one which came one week ahead of Yellen’s congressional tesimony which on both days sent markets into a tailspin because Yellen “was not dovish enough” according to sellside commentary, she was told “the economy is stronger than the recent negative market sentiment would imply.”

Specifically, this is what the Council was tasked with responding at the latest meeting:

What is the Council’s view of the current condition of, and the outlook for, loan markets and financial markets generally? Has the Council observed any notable developments since its last meeting for loans in such categories as (a) small and medium-size enterprises, (b) commercial real estate, (c) construction, (d) corporations, (e) agriculture, (f) consumers, and (g) homes? In particular, what is the likely impact of the recently issued Statement on Prudent Risk Management for Commercial Real Estate Lending on banks’ lending practices?  Do Council members see economic developments in their regions that may not be apparent from the reported data or that may be early indications of trends that may not yet have become apparent in aggregated data?

And here was their main response:

The Council believes the economy is stronger than the recent negative market sentiment would imply.

Some of the other things the bank CEOs said:

  • Lenders are generally still highly competitive on rates, and looser structures are becoming more common, particularly on buyout financing.
  • The demand for loans is anticipated to increase moderately through 2016, consistent with a moderately expanding U.S. economy. Soft commodity pricing may reduce some demand for working capital credit.
  • More stress in the energy sector and in the manufacturing sector are to be expected going forward. To date, oil and natural gas prices remain weak and show little prospect of significant increase in the near term. Ongoing low oil and natural gas prices, combined with decreasing protection from price hedges, along with tightening credit standards, will extend the current high-stress environment for many petroleum-related companies into 2016. High-level economic indicators for the manufacturing sector are also cooling down, as recent consecutive contractionary readings in the ISM manufacturing index were the lowest since the last recession. Several regional purchasing-manager surveys have also indicated contraction over the past year.
  • The financial markets will be greatly influenced by the decisions of the FOMC on monetary policy, with discussion centering on the speed of the rate-increase cycle.
  • Commercial real estate and construction demand is steady, with strong competition for quality credits.
  • The consumer credit market remains strong, with stable-to-improved mortgage activity and increased demand from new homeowners, supported by household formation. Auto loan volumes are robust due to record auto sales and a supportive consumer sentiment.
  • The strong dollar continues to weigh on commodity prices and manufacturing activity

Of the above, the bolded statment is key, which may well have solidified Yellen’s rather upbeat view that the economy is strong enough to not only be able to sustain the rate hike cycle, but to neither rush in adjusting the “dot plot” lower if not horizontal for the next two years (as the market implies), but to actually proceed with another rate hike during the March meeting especially if the Atlanta Fed’s Q1 upward revised forecast of Q1 GDP which just rose to 2.7%, is accurate.

The above also poses the question: who is it that decides the fate of the Fed’s rate hikes – the Fed, or the 12 bankers on its advisory council.

The full meeting record can be found here.


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Complete and Utter Scam: Oil Prices

Phil’s article below was from yesterday morning, before today’s big spike in oil prices (2-12-16). He follows up on Oil Fears Spook Investors (Again), from Monday.

Why is oil currently up almost 12%? “US crude surges as much as 12% on output-cut hopes.” Hopes. 

Screen Shot 2016-02-12 at 9.14.20 AM

(Screenshot: Yahoo’s chart)

Markets Collapse as Sweden goes Negative & Oil Spills Over

From Thursday’s article by Phil at Phil’s Stock World

Really, Sweden?  

Well, it’s just an excuse to sell off on a 30-year auction day (happens almost every one) because it panics people into T-Bills at ridiculously low rates and makes it look like the Fed is doing its job and people really do want to lend the Government money for 30 years at 2.5% rather than do something productive with the money.  Why?  Because if people don’t want to by 30-year Treasury Notes at 2.5% then one would have to question our Government’s $19,000,000,000,000 debt load which, at 2.5%, costs $475Bn in interest payments alone to sustain and if we were to assume rates climb to 5%, then another $475Bn per year would have to be figured into the budget (without asking the Top 1% or Corporations to contribute, of course!).

On the other hand, with Sweden now CHARGING 0.5% to put money in the Riksbank, 2.5% on US debt looks like a pretty good deal, doesn’t it?  I already sent out an Alert this morning (tweeted too, with the hashtag #CurrencyWars) on what happened and how we’re playing the Futures, so I won’t rehash all that here.

Oil, meanwhile, is down another 4% this morning ($26.25) and that’s on me as I told Canada that oil was not going to make a comeback on Money Talk last night – and it was not a happy conversation.  We would like to play the $25 line for a bounce on /CL but we’re EXTREMELY concerned about the MASSIVE overhang of FAKE!!! contracts (see Monday’s post and here is a good place to say “I told you so!”) with 324,000 open orders still remaining in the March contracts (but they did cancel 191,000 fake orders in 3 days, so catching up).

In fact, since I get a lot of mail from people who can’t believe the NYMEX is a complete and utter scam used only to defraud the American people by creating a false demand for oil and driving up prices, let’s compare the “open order ‘demand'” (had to double quote demand as it’s such BS) from Monday morning to yesterday’s close.  Here’s Monday’s NYMEX contract strip:

 

Here’s yesterday’s closing strip (Wednesday 2-10-16):

 

Updated numbers from Thursday 2-11-16:

Screen Shot 2016-02-12 at 9.58.17 AM

Phil: “Oil Contracts – Looks like they ditched a healthy 66,000 yesterday. At that pace they’ll get it done no problem but they’ll need a new OPEC rumor every day and, eventually, it won’t work well enough to get buyers to step in. Still, there’s record shorts on the NYMEX (and energy stocks) so pretty easy to squeeze them, my bias is still to bet long off support lines (0.50s).”  

 

Where did the fake orders for 191,000,000 barrels (1,000 per contract) go?  We know they can’t possibly be delivered since Cushing, OK can only handle 40M barrels a month (less than 10% of the fake order capacity) so what happened?  Well, if you noted the next 4 months from Monday – they totaled 665,000 contracts and now, amazingly, they total 875,000 contract – that’s a gain of 210,000 contracts!

In other words, there is no actual change to the fake, Fake, FAKE!!! orders at the NYMEX, they just roll them along to the next months so they can pretend there is demand there as well.  Since all those trading and rolling losses are worked into the price of oil – only the consumer suffers the losses while the traders and the Banksters that work with them make Billions in fees for their barrel-rolling trick.

And I will tell you now that, as usual, 90% of the remaining 324M barrels worth of contracts to buy oil at $27 will be CANCELLED and not delivered to the US in March – in hopes of screwing you with higher prices later.

And this is the problem Canada, and the rest of the World, have now.  There has been a scam, pretty much since the deadly Commodity Futures Modernization Act Revisions, which were literally signed into law the day after Bush won his Presidency in the Supreme Court (hidden inside an 11,000 page appropriations bill that HAD to be signed to avoid a Government shut-down a week before Christmas).  This bill and it’s repercussions are now wreaking havoc with the Global Economy for the 2nd time.

The first time, aside from Enron (Bush’s biggest single donor) et al (made possible by the deregulation in the Act, which was sponsored by Enron) ripping off consumers all over the country, the unregulated trading caused oil to jump from $20 per barrel under Clinton to $140 a barrel under Bush, which ultimately broke the consumers’ backs and led to our 2008 market collapse.

Now it’s time for round two as the misallocation of capital towards energy projects, based on the assumption that $100 oil was a REAL price based on market demand (it’s not, it’s completely unaffordable) has caused MASSIVE over-production of oil all around the World and the companies and countries that borrowed money to finance that production growth AND the banks that lent them the money are now in BIG TROUBLE with oil back at it’s NORMAL price of $26.50 per barrel.

 

 

As I said on BNN last night, countries like Canada, where 20% of their GDP comes from the energy sector, are going to have a very painful time adjusting to normal oil prices but the sooner they come to grips with that reality, the better.

The worst thing they can do is attempt to prop up a failing industry that is drastically in need of a consolidation wave as they are currently over-producing, according to the IEA, 1.75Mb of oil per day.  That’s about 2% of global production that needs to go off-line before we’re even close to sopping up the GLUT of oil that has flooded Global storage facilities to near capacity.

The worst part is (for OPEC and the North American Energy Cartel – you know who you are!) is that the sanctions lifted on Iran are now going to put another 1.5Mb/d of production on-line by the end of this year (already over 500,000/day) which is accelerating the problem. OPEC has, so far, not made any moves to cut back – part of their problem is they now only control 30% of the World’s oil because their previous policy of holding back production to jack up oil prices has backfired as the high prices led 60M daily barrels of competing oil to come to market and their share of the global market has fallen 50% since they held us hostage in the 70s.

And now we head towards the end game and it’s the Chinese curse of living in “interesting times” indeed for oil producers. As I told Money Talk last night – don’t rush to find “bargains” in the energy sector – a lot of these guys are never coming back!

This article follows Oil Fears Spook Investors (Again).

Click on this link to try Phil’s Stock World FREE! (click on text at the top). 


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US Oil Rig Count Plunges By Most In 10 Months

Following last week’s dramatic 31 rig decline, Baker-Hughes reports another major decline of 28 oil rigs (dropping the total oil rigs to 439 – lowest since Jan 2010 – for the 8th consecutive week). The total rig count dropped 30. On the heels of OPEC rumors overnight and then re-rumored bullshit from Venezuela, oil prices had already surged during the day and the biggest 2-week rig count decline in 10 months after initially being sold, is rallying once again.

  • *U.S. OIL RIG COUNT DOWN 28 TO 439, BAKER HUGHES SAYS
  • *U.S. TOTAL RIG COUNT DOWN 30 TO 541 , BAKER HUGHES SAYS

As the rig count continues to track almost perfectly the lagged oil price…

 

The declines were widespread with Texas dropping the most absolutely…

 

Oil did not rip on this “great” news… but minutes later pushed to new highs

 

Charts: Bloomberg


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“Distressed” Bonds Accelerating At “Alarming Pace”, Markit Warns

It is becoming increasingly difficult to ignore the collapse of global credit markets… as Markit warns the number of distressed bonds (trading greater than 1000bps) is "escalating at an alarming pace."

 

 

26% of the entire high yield bond universe is now at "distressed" levels – the highest since the financial crisis.

As we noted previously, credit is screaming and for now stocks are shurgging… and credit is always right in the end!

1,100 is the target…


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How €3.5 Trillion In NIRP Debt Made Europe’s Credit Market “Most Vulnerable Since Lehman”

Earlier today, we discussed how after 8 long years spent wandering punch drunk through a dream-like Keynesian wonderland where all financial assets rise inexorably, the world finally woke up last month with a terrible hangover only to discover that after 637 rate cuts and $12.3 trillion in asset purchases, “quantitative easing” has been a “quantitative failure.”

Perhaps it was the harrowing volatility that tipped investors off to the fact that central bankers were failing. Or perhaps it was the realization that the persistent disinflationary impulse that hangs over developed markets isn’t exactly compatible with the notion that central banks are “succeeding.” Or maybe it was the BoJ’s move into NIRP which was quickly followed by a canceled JGB auction, a soaring JPY, and crashing Japanese equities. Of course it could have been tumbling yields on the US 10Y. Take your pick, but whatever the catalyst, everyone suddenly began to talk about central banker impotence as opposed to central banker omnipotence, and at that point, the narrative was lost.

Of course it’s too late to turn back now. There’s no telling what markets would do if central banks were to suddenly admit that this has all been one giant mistake and so, the monetary powers that be stick to the script. For instance, Haruhiko Kuroda – who is known for saying things so at odds with reality that one can only laugh – said last night that “negative rates are clearly having an effect” – just as Japanese stocks were collapsing on themselves (again).

And central bankers aren’t just doubling down on the rhetoric. They’re doubling down on the easing. Earlier this week, Stefan Ingves and the Riksbank cut Sweden’s repo rate by 15 more bps to -0.50% and Mario Draghi and co. are almost sure to follow suit next month. Meanwhile, Janet Yellen admitted that NIRP has been studied for the US.

In a note out Friday, BofA takes a fresh look at what the plunge down the NIRP rabbit hole has meant for the proliferation of negative-yielding assets in Europe.

A prolonged period of USD strength (in part due to policy divergence between the Fed and the ECB) quickly took its toll on a variety of markets including, of course, commodities and EM FX. “the negative effects of this deflationary wave have been visible,” BofA’s Barnaby Martin writes, adding that “credit rating downgrades have increased [while] European high-yield spreads reached their cycle tights right before” the dollar strength began to manifest itself in earnest. “[And] not because of rising defaults, but rather because of the growth in EM-domiciled credits in the index, thus raising the market’s sensitivity to the strong Dollar/weak commodity story,” he continues.

With that as the backdrop, here’s the rest of the story which explains how NIRP initially offset the bearish themes that accompanied the strong dollar/weak commodity deflationary deep dive but ultimately left the world with a $9 trillion pile of negative-yielding debt and created a “stealth” bear market in European corporate credit.

*  *  *

From BofA

For a while, these bearish themes in credit were suppressed by central bank stimulus in Europe. As interest rates were cut through zero, the phenomenal growth of negative- yielding bonds exacerbated the reach for higher returns in fixed income. The numbers continue to astound: total negative-yielding Euro debt now stands at €3.5tr, encompassing many asset classes. And after Japan’s foray into negative rates at the end of January, total negative-yielding global debt now stands at close to $9tr.


Yet, we argued towards the end of last year (and to our detriment not soon enough) that the chronic lack of yield was undermining the robustness of the corporate bond market, and was in fact creating a bear market “by stealth”. The clearest sign of this, in our view, has been the constant stream of credit outflows. The peak of retail inflows into the Euro IG market was May-15. Since then, retail investors have withdrawn close to $35bn (25% of the cumulative inflow since 2010) – the largest drawdown by investors in the post-Lehman bankruptcy era. So much central bank liquidity, and yet so little inflow…

Further down the rabbit hole…

However, the fascination with NIRP policies continues after Sweden cut rates from -35bp to -50bp yesterday. Negative central bank rates now seem to be the norm rather than the exception. But amid the “race through zero”, not all currencies will weaken.

*  *  *

BofA’s conclusion: “QE has, ironically, left the credit market in a more vulnerable position to outside shocks than at any time in the post-Lehman bankruptcy era, we think.”

Ah yes, more unintended consquences of central bankers gone Keynesian crazy. Don’t expect Mario Draghi to mention this at next month’s presser.


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Here Is The ETF Liquidation That Sent Shockwaves Through The Crude Oil Market

A week ago we exposed the real reason for the "crazy volatility" in crude oil markets, and specifically the driver of the immense rally (despite weak data) in crude – a massive liquidation of the triple-inverse ETF DWTI. Today we have another mysterious, even larger spike in crude oil prices (for no good reason other than 'old' misunderstood rumors about OPEC production cuts). The driver, it would appear, is another liquidation as the ETF trades at a huge discount to NAV. The last time this happened, it didn't last.

We saw the same actin last week (and the delayed data exposed the liquidtaion)… it's happening again…

 

And DWTI is trading at a dramatic discount to NAV – which suggests – given the day lag (There is a day's lag between when redemptions and creations are ordered and when they show up in share figures) that buying pressure hits today…

On Wednesday, oil prices surged more than 8 percent to $32.28 a barrel, despite a seemingly bearish report from the U.S. Energy Information Administration showing nationwide crude inventories rose by 7.8 million barrels last week.

 

The evidence is even clearer in the sudden spike in the 1st-2nd month spread – despite no news whatsoever on the storage constraints (as ETF managers are forced to buy back futures in the front-month as the inverse ETF is liqudated)

 

So that explains the sudden squeeze carnage today… and without further liquidation in the fund whythe rip won't hold.


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Bernie Sanders to Hillary Clinton – “I’m Proud to Say Henry Kissinger is Not My Friend”

Screen Shot 2016-02-12 at 11.02.14 AM

He’s a thug, and a crook, and a liar, and a pseudo-intellectual and a murderer. Ok? Those things are factually verifiable.

Kissinger deserves vigorous prosecution for war crimes, for crimes against humanity, and for offenses against common or customary or international law, including conspiracy to commit murder, kidnap, and torture.

A good liar must have a good memory: Kissinger is a stupendous liar with a remarkable memory.

– Quotes by Christopher Hitchens

One of the more bizarre memes that continues to be parroted by the establishment media is this idea that Hillary Clinton is so much stronger than Bernie Sanders when it comes to foreign policy. Sure, if your definition of “strength” consists of cheerleading for the cataclysmic Iraq War and propagating a series of war crimes and international fiascos as Secretary of State, then I suppose that’s true.

For some of Henry Kissinger’s greatest genocidal hits, I turn to a fantastic article published in the Nation last week titled, Henry Kissinger, Hillary Clinton’s Tutor in War and Peace:

continue reading

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Why Republican Party Delegate Rules Might Cause Them Convention Trouble

A wade into the weeds of Republican Party delegate assignment rules, by former Reagan staffer Donald Devine over at American Conservative, which have changed in important ways since 2016, are leading some to wonder if the Party isn’t creating a very strong possibility that the Party will enter the convention with no clear winner.

The core of the potential problem:

The Southern Super Tuesday primaries and the other Southern contests before March 15 are required for the first time to award their primary delegates by proportional representation where each candidate wins only the percentage of delegates he receives from the popular vote, rather than the first-place candidate winning all delegates. That method guarantees no candidate will be able to build a commanding lead until after March 15 when winner-take-all nomination contests become possible.

Southern states made a bargain of sorts with the Party and the nation: they were willing to make their results actual impact in delegate assignment smaller in order to make themselves seem more relevant by occurring earlier in the process before everything seemed like a done deal. 

This leads Devine to strongly suspect, in a world where neither Trump nor Cruz or any other non-Trump is able to start a true sweep of delegate numbers, that this might lead to a contested convention this summer, with no clear winner going in. But:

Republican party chairman Reince Priebus is confident that there will be no contested convention. He recently told Time magazine: “I know the rules pretty well, I’m pretty confident in how delegates are allocated, I helped write a lot of the rules and I believe that clarity will come very soon” as to who will win the nomination. The current plethora of candidates “doesn’t mean that, by the end of March or mid-April, the end of April, that it isn’t going to be very clear. There’s only so much money to go around, there’s only so long everyone can keep fighting.” He claimed he was prepared for a contested convention but based on his expertise did not expect one, “so it’s not like I need some sort of expert help to understand our own governing rules or how our convention might run.”

Devine thinks it looks likely that at least three or more somewhat appealing candidates can stay in the game through the Spring or perhaps beyond.

Another change, aimed at making sure Ron Paul or future Ron Paul types could carry no weight on the convention floor, states that no candidate who does not command a plurality of the delegations of eight states or more can even have their man officially placed in nomination or have his vote counted, which could disenfranchise a lot of delegates whose guys or gals don’t win enough states.

These leads old Party hand Morton Blackwell, who hates the new rules, to posit this potential conundrum for the GOP come convention time:

Assume that Candidate A wins 38% of the delegate votes at the national convention, then that Candidate B wins 39% of the delegate votes, and that candidates C, D, E, F, and G among them win the remaining 23% of the delegate votes.  With many states binding their delegate votes proportionally to their presidential primary votes, this could happen.

Assume also that none of the five candidates whose numbers made up that 23% of the convention votes won the majority of delegate votes in at least eight states.  That would be likely.

Then assume that a big majority of the Delegates whose votes were bound to Candidates C, D, E, F, and G would vote for Candidate A on a second ballot. That couldn’t happen because there wouldn’t be a second ballot.  Under the current rules, the votes for Candidates C, D, E, F, and G wouldn’t be counted. Candidate B would receive the presidential nomination with the votes of only 39% of the duly elected Delegates, although a majority of the total number of Delegates preferred Candidate A over Candidate B.

Will the Party powers care if that happens? Probably not much. But lots of potential Republican voters who feel disenfranchised just might. 

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The Size of Government Question

How big should government be? That was the gist of the very first question at last night’s Democratic presidential debate. The question, posed to Bernie Sanders, noted that spending by the federal government is already equal to about 21 percent of the economy. How much bigger would it be in a Sanders administration?

Sanders, you may not be surprised to discover, did not directly answer the question. Instead, he simply insisted, as he has so many times before, that government has a responsibility to do much more than it is doing right now, on health care, education, infrastructure, jobs, and more. After a follow-up from the moderator, he briefly acknowledged that there should be some sort of limit on the size of government, but did not even attempt to suggest what that limit should be. Instead, he reiterated his belief that the government has a responsibility to do much more than it is doing now.

Sanders’ response was a dodge, and a telling one for a candidate whose plans for the federal government are so ambitious. But he was onto something anyway. Because the way he answered the question was essentially to reframe it, not as a question about the size of government, but about its role.

This is the hidden debate in American politics today, the big question that is rarely discussed directly but arguably lies at the foundation of nearly every major policy and political debate. What is the purpose of government? What is it essential nature and character, its mission statement? What are its essential duties and functions?

The question Sanders actually answered was not, “How big should the government be?” but “What should the government do?” This is a question worth dwelling on, and one for which neither party has a particularly good answer.  

For Sanders, the answer is just about everything, or pretty close. He acknowledges, when pushed, that government should have limits, but he cannot articulate where those limits might because he cannot really imagine any arena where government might not have some role. That’s not to say that Sanders, who has worried darkly about the threats posed by too many styles of deodorant and sneakers even as children starve, has a plan for government to everything right now, but it is difficult for him to imagine any area where government might not ever need to intervene at some point.

Later in the debate, when asked about what parts of government he might cut, he initially could not name anything except a vague reference to “waste.” In what department? In what program? Sanders didn’t say, and it didn’t appear to be a question he’d given much thought to over the year. A moment later, he interjected to say he favors unspecified cuts at the Department of Defense, where he is sure there is excess spending and duplicative effort of some kind, but even here he had nothing specific. His view of government’s role is both practically unbounded almost undefined: It’s job, potentially, is to do anything and everything he thinks should be done.

For Sanders’ opponent in the Democratic presidential race, Hillary Clinton, the answer is somewhat different. Her follow-up to Sanders on the size of government question was instructive: Sanders’ plans would grow the size of government by about 40 percent, she said, but the main problem with his plans is that they aren’t practical. “Every progressive economist who has analyzed [Sanders’ health care plan] says that the numbers don’t add up, and that’s a promise that cannot be kept,” she said. The problem with his plan, for her, isn’t that the government would be too big or doing too much or going beyond its mandate, but that it wouldn’t work.

Clinton’s view, in other words, is that the government should do everything it’s doing now, whatever that is, plus a little bit more. She seems to view herself as a caretaker and manager, nurturing government as it exists today, and growing it somewhat, here and there. Her response on the what would you cut question was that she’d streamline some training and education programs, and “take a hard look at every part of the federal government and really do the kind of analysis” needed to see what might not be necessary anymore, which is another way of saying she’d make no significant cuts. This is a view of government bounded only by practical and political considerations. There are things government cannot do, at least right now, but nothing, really, that it simply should not do. There’s no mission statement either, no real idea about government’s specific place and purpose—no sense of what exactly it is for.

This sort of fuzziness about government’s purpose is perhaps an occupational hazard for politicians of the left, where active government is a default assumption, but in different forms it is evident on the right as well. The Republican presidential field is united in the belief that taxes should be lower, but have far less to say about the sorts of program cuts and reforms that would be necessary to account for the reductions in tax revenues that would certainly result even under optimistic dynamic scoring scenarios. Similarly, too many GOP policy reforms are merely focused on making existing programs leaner or more efficient rather than on fitting them into a larger government schema. There is nothing wrong, of course, with saying that “government should take in less revenue and be more efficient,” but it is not a vision of what government should be, and most Republicans do not really seem to have one, or at least not one they can explain.

This inability to clearly articulate a rationale for government’s existence, to explain what sort of business it is in, is responsible for much of the confusion and frustration on both the left and right, and for much of the sprawl, complexity, and inefficiency in government today. We have Republicans whose idea of government is lower taxes and better management, and Democrats whose idea of government is higher taxes and more programs—perhaps a few more, perhaps a lot more—and maybe better management too. And this is why it is so hard for both sides to answer questions about the proper size of government: Neither side really has a clear sense of what it should do and what it should be.

There’s a lesson here for reformers of all stripes, but especially for those who, like me, would prefer to see a smaller, more restrained government: It’s not enough to talk about what to cut and what to shrink; it’s important to talk about what government should be doing, and how to ensure that it does it well. Give government a purpose and a mission—a clear, positive, and limited mission—and get enough people on board, and the size will right itself.

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