iftttwall

CNN Pentagon correspondent Barbara Starr reports that Saudi Arabia has paid the United States an estimated $500 million to assist the cost of US troop deployments in the kingdom, according to one unnamed US defense official:

The payment was made in December last year. President Donald Trump asserted last week in an interview with Fox News that Saudi Arabia had “already deposited $1 billion in the bank.”

It was in early December that Trump began boasting he got “billions of dollars” out of Saudi Arabia for the current heightened American military presence there to ‘deter Iran’. The thousands of troops sent there followed the Sept.14 Saudi Aramco facility attack, which Washington said Iran was behind.  

“You know, Saudi Arabia – we moved more troops there.  And they’re paying us billions of dollars. Okay? You never heard of that before. You’ve never heard of that in your whole life,” he said in a Dec.4 question-and-answer session while sitting next to NATO Secretary-General Jens Stoltenberg.

The new CNN report marks the first time the media has been able to get affirmative confirmation that this ‘deal’ was actually done following the president’s ambiguous and for many, shocking remarks. 

One week ago Trump gave more details and raised eyebrows when he told Fox’s Laura Ingraham the Saudis “already deposited $1 billion in the bank” — resulting in outrage among some Congressional leaders and media pundits, given the apparent secretive quid pro quo nature of the arrangement .

He sells troops.

“We have a very good relationship with Saudi Arabia—I said, listen, you’re a very rich country. You want more troops? I’m going to send them to you, but you’ve got to pay us. They’re paying us. They’ve already deposited $1B in the bank.” pic.twitter.com/rc1f7heyCP

— Justin Amash (@justinamash) January 11, 2020

But it’s not the first time the Saudis have foot the bill for major troop presence on its soil, as the CNN report notes:

Saudi Arabia, Kuwait and other Gulf states paid $36 billion towards the costs of the Gulf War in 1990-91.

While not giving specifics — and certainly with regard to any specific one billion number or expected cost — the Pentagon has issued official statement that “cost-sharing” discussions are ongoing with the Saudis. 

“Consistent with the President’s guidance to increase partner burden-sharing, the Department of Defense has engaged Saudi Arabia on sharing the cost of these deployments, which support regional security and dissuade hostility and aggression. The Saudi government has agreed to help underwrite the cost of these activities and has made the first contribution,” Pentagon spokeswoman Cmdr. Rebecca Rebarich said.

“Discussions are ongoing to formalize a mechanism for future contributions that offset the cost of these deployments,” the statement added. 

Submitted by Nicholas Colas of DataTrek Research

Davos 2020 is next week, and it will center on how capitalism must change to address climate change. We had a preview of this yesterday, with Larry Fink’s annual CEO letter explaining how Blackrock will start voting its proxies based on how well managements disclose and address this issue. Bottom line: expect ESG topics to absolutely dominate the headlines coming out of the conference next week.

With today’s signing of a US-China trade deal, President Trump can head off to Davos next week with a win in his pocket. In case you didn’t see the particulars of the agreement, there is a link towards the end of today’s note. We didn’t see much new in there, but getting something done will allow Mr. Trump (who is scheduled to speak) to show the world that he is not bent on escalating global trade tensions further.

That’s a pretty Davos-friendly message, even if the specter of 100% US tariffs on French champagne still lingers. Those stem from a long standing American complaint about European subsidies for Airbus, agitated more recently by a 3% French tax on digital services provided by US companies like Apple, Google and Facebook. There’s some chatter that the American delegation to Davos will sort things out with Team France next week, but don’t pop the champagne corks just yet…

On the subject of Davos 2020 more generally, if you are like us the invite to this confab of bold-face names has once again been lost in the mail. That’s actually OK, because every year more and more of the presentations are live-streamed/recorded. As those happen next week, we will review the most useful ones in these notes.

Not to throw stones, but we have found over the years that the central theme of any Davos meeting is more a reflection of current events than any really forward-looking thinking. For example:

• Ahead of the 2008 – 2009 Financial Crisis, the prior 3 Davos conferences were titled “The Creative Imperative” (2006), “Shaping the global agenda, the shifting power equation” (2007) and “The power of collaborative innovation” (2008).
• Despite ample evidence that technology is remaking the world, only 1 Davos meeting in the last decade has led with that idea: “Mastering the fourth industrial revolution” (2016).
• The Davos crew also missed the global rise in populism, only hitting their radar at 2018’s meeting under the title “Creating a shared future in a fractured world”.

This year the conference title is “Stakeholders for a Cohesive and Sustainable World”. A bit of the description from the Davos website:

• “People are revolting against the economic ‘elites’ they believe have betrayed them, and our efforts to keep global warming limited to 1.5 degrees C are falling dangerously short.”
• “With the world at such a critical crossroads, this year we must develop a ‘Davos Manifesto 2020’ to reimagine the purpose and scorecards for companies and governments. It is what the World Economic Forum was founded for 50 years ago, and it is what we want to contribute for the next 50 years.”
• Those are direct quotes from Klaus Schwab, who founded the WEF in 1971 while a professor at the University of Geneva, and is still its Executive Chairman.

The message here is much the same as Larry Fink’s recently released annual CEO letter, which we reviewed yesterday. Davos’ central theme will be the introduction of fresh requirements for disclosure and planning related to climate change. The WEF’s International Business Council will roll out a universal “ESG scorecard” next week. It will no doubt get a lot of attention in the US, if only because the current council chair is Brian Moynihan, CEO of Bank of America.

To round out this Davos preview, here are the 7 subthemes that will guide the +200 sessions next week:

• How to Save the Planet
• Society and the Future of Work
• Tech for Good
• Fairer Economies
• Better Business
• Healthy Futures
• Beyond Geopolitics

Summing up: environmental, social and governance topics will dominate the headlines out of Davos next week. Larry Fink’s letter is the template as far as what that means for investing. Expect to hear more about how even notionally passive managers will take a more active role in promoting ESG topics, especially those related to climate issues. Just remember: Davos has a long track record of missing important trends that inform future asset prices and societal change. Maybe 2020 is different. But probably not…

Trump supporting Senate Republicans have warned their moderate GOP colleagues that if they side with the Democrats to force witnesses in the upcoming impeachment trial, they’re going to flip the script and weaponize the process to call controversial witnesses such as Hunter Biden and Alexandra Chalupa – people central to the core claims behind the impeachment, yet were ignored like the plague by House Democrats during their investigations.

The pressure tactics are the latest shift in strategy as Republican leaders try to navigate the factions in their caucus, where moderates want to leave the potential for witnesses on the table and conservatives are anxious to quickly acquit President Trump. –The Hill

Sen. Rand Paul (R-KY) warned fellow GOP senators that if four or more of them join with Democrats to entertain witness testimony, he’ll make sure the Senate holds a vote on subpoenaing President Trump’s preferred witnesses – including the Bidens.

“If you vote against Hunter Biden, you’re voting to lose your election, basically. Seriously. That’s what it is,” Paul told Politico on Wednesday. “If you don’t want to vote and you think you’re going to have to vote against Hunter Biden, you should just vote against witnesses, period.”

Paul added that if GOP senators insist on calling people “who are unhappy about being fired,” referring to former National Security Adviser John Bolton, “then I think the president should get to call his [witnesses] and we should have votes on those.”

“The president gets to call anybody he thinks would be good for his defense, the prosecution can call who they want, but I don’t think we should selectively call witnesses that don’t like the president,” he said.

Louisiana Republican Sen. John Kennedy says he expects that if moderate GOP join with Democrats to call their preferred witnesses, it’s only fair that Trump’s team can call theirs.

“I assume that if we’re going to be fair … that if we get into having witnesses and evidence that both the prosecution and the defense will be able to weigh in as well,” said Kennedy. “I feel pretty confident, though I don’t know it for a fact, that the defense team is going to want to call its witnesses, including but not limited to the Bidens, [and] as a fact witness the whistleblower.”

Senate Minority Leader Charles Schumer (D-N.Y.) declined to weigh in on Thursday about if he would be willing to engage in a trade where Democrats could call Bolton in exchange for Republicans calling Hunter Biden, who has emerged as a prime fixation for Trump and his allies over his work on the board of a Ukrainian energy company. 

“I’m not going to negotiate out here,” he told reporters. “They haven’t made any offer about any witnesses or any documents.”  –The Hill

Meanwhile, Sen. Ted Cruz (R-TX) has floated the idea of “witness reciprocity” across the aisle.

“If they are going to bring witnesses in, we’re not going to do what the House did of a one-sided show trial, and I think it should be at a bare minimum one-for-one,” Cruz told Fox News’ Sean Hannity. “So if the prosecution brings … John Bolton, then President Trump can bring a witness. He can bring Hunter Biden.”

Hannity told Cruz he “loved your proposal” and that he hopes the Democrats agree so that Republicans can call the Bidens, whistleblower Eric Ciaramella and House Intelligence Committee Chairman Adam Schiff (D-CA), whose staff met with the whistleblower and steered him to Democratic operative attorney Mark Zaid – who loves going to Disneyland alone.

Senate Majority Leader Mitch McConnell (R-KY) has worked behind the scenes to unite various factions within his caucus as the impeachment trial looms – meeting recently with moderates such as Susan Collins (R-ME) and Lisa Murkowski (R-AK) – the latter of whom was bullied mercilessly by Sen. Dianne Feinstein (D-CA) during the Kavanaugh confirmation.

Sen. Roy Blunt, meanwhile, the #4 GOP senator, said McConnell has convinced Republicans to entertain a decision on witnesses after the trial begins.

“I think he’s done a good job listening and trying to understand that everybody has their own unique set of considerations here as to how they move forward,” said Blunt, adding “By doing that [he] has all of us in the same place on the rules that we’ll vote on next Tuesday. That’s a good way to start.”

Authored by Michael Howell, op-ed via The Financial Times,

It’s liquidity, stupid. Rephrasing the words of Bill Clinton’s adviser James Carville helps explain why many stocks are hitting record highs, why gold is breaking higher and why economies look set to rebound sharply this year.

About a year ago we described how modern financial systems have grown dependent on central bank balance sheets, and why another round of easing from the US Federal Reserve — a “QE4” — was vital for markets. Fed chair Jay Powell has so far proved sufficiently flexible to reverse the balance sheet shrinkage, to which his immediate two predecessors, Ben Bernanke and Janet Yellen, had been committed.

The “Fed Listens”, as the name of its tour of US cities suggests and, true to form, recent worries in the repo market spurred the central bank to inject a further $400bn into the financial sector. It increased its balance sheet by about 10 per cent between last September and the year end.

Yet, the Fed’s spin-doctors are trying to persuade us that this is not quantitative easing. Certainly, it has not involved direct buying of US Treasury notes and bonds, but it has still led to a sizeable uptake of short-term Treasury bills. The difference between QE and “not QE” is mysterious, then, because liquidity has expanded and, in the process, relieved funding pressures and reduced systemic risks. As a result, the prices of haven assets, such as the 10-year US Treasury note, have fallen, while risky assets such as equities have gone up.

We measure liquidity through the funds that flow through both the traditional banking system, and through the repo and swap markets. The global credit system increasingly operates through these latter wholesale markets, and often with the active participation of central banks. For some years now, the wholesale money markets have been fuelled by vast inflows from corporate and institutional cash pools, such as those controlled by cash-rich companies, asset managers and hedge funds, the cash-collateral business of derivative traders, sovereign wealth funds and foreign exchange reserve managers.

Today, these pools probably exceed $30tn and have outgrown the banking systems, as their unit sizes easily exceed the insurance thresholds for government deposit guarantees. This forces these pools to invest in alternative short-term secure liquid assets. In the absence of public sector instruments such as Treasury bills, the private sector has had to step in by creating short-term vehicles known as repurchase agreements, or repos, and asset-backed commercial paper. The repo mechanism bundles together “safe” assets such as government bonds, foreign exchange and high-grade corporate debt, and uses these as security against which to borrow. While credit risk is to some extent mitigated, the risk of not being able to roll over or refinance positions remains.

At the same time, markets have remained fixated on policy interest rates, which are supposed to control the pace of real capital spending and, hence, the business cycle. That, at least, is what the textbooks tell us. But the world has moved on. We must think of western financial systems as essentially capital re-distribution mechanisms, dominated by these giant pools of money that are used to refinance existing positions, rather than raising new money. New capital spending has itself become eclipsed by the need to roll over huge debt burdens.

If debts are not to be reneged upon, they must either be repaid or somehow refinanced. However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product — and roughly double the $130tn pool of global liquidity.

This refinancing role means that quantity (liquidity) matters more than quality (price, or interest rates). Central banks play a key role in determining liquidity, or this funding capacity, by expanding and shrinking their balance sheets, and in the US, of course, this is closely linked to the Fed’s QE operations. Consequently, more and more liquidity needs to be added to facilitate the re-financing of the world’s debt. QE is here to stay. We should expect QE5, QE6, QE7 and beyond.

Take a step back, though.

A rising tide of liquidity floats many boats, but we know from experience that liquidity-fuelled asset markets usually end badly, as they did in 1974, 1987, 2000 and in 1989 in Japan. In this regard, the scale of recent Fed interventions needs to be understood. Last year, US markets enjoyed their biggest effective inflow of liquidity in more than 50 years, by our measures. That liquidity is already spilling around the world, with our global indices registering their sixth best year on record.

So remember what former Citigroup chief Chuck Prince said about “still dancing”, on the eve of the 2008 crash. Enjoy the party, yes. But dance near the door.

*  *  *

The writer is managing director of CrossBorder Capital