China Sends Over 120 Troops To Venezuela In Defiance Of US Warnings

It doesn’t appear last Friday’s strong warning from national security adviser John Bolton for countries “external to the Western Hemisphere” to keep their militaries out of Venezuela had the intended effect. Bolton’s and other White House statements saying “Russia has to get out” came following Russian Air Force planes landing in Caracas with about 100 troops, which the Kremlin said were there as “specialists” servicing existing defense equipment contracts. 

And now according to Al-Masdar News, citing defense analyst photographs and local reports, “more than 120 soldiers from the Chinese People’s Liberation Army arrived at Venezuela’s Margarita Island to deliver humanitarian and military supplies to the government forces.”

Chinese soldiers pose with Venezuelan troops, via Al-Masdar News

The military flight appears to have touched down on Sunday, two days after a prior Chinese cargo plane delivered 65 tons of medicine and other aid to Venezuela. The Chinese troops are also there ostensibly to assist with the humanitarian mission, but it appears Beijing is also now alongside the Russians pushing back against Washington ultimatums to stay out of Venezuela, after repeatedly condemning any external coup plotting against President Nicolas Maduro. 

“We strongly caution actors external to the Western Hemisphere against deploying military assets to Venezuela, or elsewhere in the Hemisphere, with the intent of establishing or expanding military operations,” Bolton had warned in his statement.

Secretary of State Mike Pompeo had also last week accused external actors of assisting Maduro in “plundering” the already cash-strapped and impoverished Latin American country, stating in a tweet: “Maduro calls for hands off Venezuela while he invites security forces from Cuba and Russia, so he and his cronies can keep plundering Venezuela. It is time for Venezuelan institutions to stand for their sovereignty…”

The Maduro government has repeatedly blocked attempts of US aid from entering the country; however, late last week the Red Cross announced it now has unhindered access to bring aid into the increasingly desperate country amidst medieval conditions, of failing power and water infrastructure. Red Cross officials plan to begin delivering aid to “650,000 people within 20 days” —something which both sides, Maduro and Guaido supporters — are claiming as a victory. 

Meanwhile, as Al-Masdar comments of Beijing’s sending its own troops in to assist: “These moves by the Russian and Chinese armed forces appear to be a powerplay against the U.S. administration, who is actively pushing to remove Venezuelan President Nicolas Maduro from power.”

Early in the now months-long crisis since Maduro’s reelection, Paul Craig Roberts predicted the following: 

If Russia and China quickly established a military presence in Venezuela to protect their loans and oil investments, Venezuela could be saved, and other countries that would like to be independent would take heart that, although there is no support for self-determination anywhere in the Western World, the former authoritarian countries will support it. Other assertions of independence would arise, and the Empire would collapse.

And we previously highlighted the not so minor issue of China over the past decade lending over $50 billion to Caracas as part of an oil-for-loan agreements program. It underscores just how quickly what appears a new White House full court press for regime change could bring Washington again into indirect conflict with both China and Russia.

And in total Venezuela owes “more than $120 billion just to China and Russia” according to a FOX report. 

Source: WSJ

Both China and Russia further remain the Latin American country’s biggest arms suppliers and Beijing had an additional $3.2 in direct investments in Venezuela in 2017, not to mention at least three joint ventures between between China National Petroleum Corp and Venezuela’s now US-sanctioned state oil company, Petróleos de Venezuela SA, or PdVSA.

Though Venezuelan repayments to China reportedly began slowing to a “trickle” by 2015, current political unrest and Washington’s regime change efforts could prove devastating for Chinese investment:

China’s investments are now at risk under Mr. Maduro—and Beijing also recognizes that a U.S.-backed Guaidó administration might refuse to honor outstanding debts.

China’s Commerce Ministry spelled out this concern on Tuesday. “If the opposition party holds power in the future, a new Venezuelan government could use ‘protecting national interests’ as a reason to renegotiate contract terms with China and even just refuse to repay remaining debts,” the ministry said in its latest investment guidance report on Venezuela.

Given that Beijing is all to aware of the outcome to any Venezuelan transition of power, and given it remains the Maduro regime’s top weapons supplier, there’s no telling what kind of possible clandestine military-to-military cooperation or contingency plans are already in effect. 

Similar to China’s quiet military support to Syria’s Assad throughout the past years of international proxy war in the Levant, which has gone increasingly public, China could be gearing up to support Maduro in a more direct capacity. 

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NIMBYs Argue New Housing Supply Doesn’t Make Cities Affordable. They’re Wrong.

The idea that cities would be more affordable places to live if more housing construction were allowed to take place is both remarkably simple and remarkably controversial.

When the Los Angeles Times polled voters in late 2018 about the cause of the state’s housing shortage, just 13 percent identified a dearth of new residential construction as a primary factor, behind things like a lack of rent control, or foreign real estate speculators.

In Seattle, moderate, middle-class activists argued against a city council-led effort to allow for taller, denser construction in some neighborhoods on the grounds that it would make the city’s affordability problems worse, not better.

The same point was advanced by the much more left-wing Los Angeles Tenants Union, which argued in a recent Medium essay that new market-rate housing construction “does not lead to lower housing prices, but rather spurs gentrification and displacement.”

Yet just today, the Wall Street Journal offered a stunning rebuke of this argument with a profile on the one city that demonstrates free market housing policies can really work: Tokyo.

According to the Journal, the Japanese capital of nearly some 13 million people saw the construction of 145,000 new housing units started in 2018—more than New York City, Los Angeles, Houston, and Boston combined. The country as a whole has managed to add close to the same amount of new housing as the U.S., despite having about half the population.

All this new housing construction has kept rents relatively flat, with the average cost of renting a two-bedroom apartment in Tokyo hovering at $1,000 a month for the past decade. That’s well below median monthly rents for the two-bedroom apartments in, say, Los Angeles ($1,750), New York City ($2,500), or San Francisco ($3,110).

A Financial Times article from 2016 similarly notes that while home prices have more than doubled in San Francisco (where over 80 percent of homes are now valued at more than $1 million), housing prices in Tokyo have barely budged.

Tokyo, and Japanese cities more broadly, have managed to stay affordable by building more. These same cities have managed to build more by scrapping regulations that delay or forbid new housing construction.

According to today’s Journal article, the Japanese government made sweeping changes to the country’s zoning laws at the turn of the century, allowing larger, denser housing construction, and empowering private consultants to issue building permits, essentially creating “a free trade zone” for new development, in the words of one expert.

Indeed, while U.S. cities have hundreds of separate zoning categories that minutely control what kind of activity can take place on a single plot of land, Japan has just twelve zoning categories, which are also far more permissive.

In Japan, housing can still be built on land zoned for commercial or industrial uses, while even the most residential zoning permits small shops and offices. Compare that to some U.S. cities where zoning regulations will allow, for example, a restaurant on a plot of commercially-zoned land, but no other businesses.

Also helping things tremendously is the fact that most development in Japan is by-right, meaning so long as your project satisfies the underlying zoning code, you have a right to build it. Many cities in the U.S. give planning officials the discretion to deny projects, something that slows down approval of new construction and invites all manners of NIMBYism.

In short, Japan and Tokyo are living proof of how a much freer market in land use and construction can keep cities affordable even as their populations grow. Unfortunately, no U.S. city is even close to embracing Japan-style zoning reform.

Local governments are often far too beholden to incumbent homeowners (who fret that new construction will depress the value of their property) or anti-development activists (who are often desperately trying to keep the forces of gentrification at bay) to embrace Tokyo-style deregulation.

Efforts to move more zoning decisions up the state level—where pro-development interest groups might have more sway—have been met with stiff opposition.

Japan seems to have solved this by making zoning a national issue. Given the U.S.’s constitutional setup, that’s neither feasible or desirable.

That means that, in the short-run at least, U.S. cities will continue to get more expensive. Much of the blame for these price hikes will continue to fall not on restrictive regulations governing new building, but on the new building itself.

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MMT Is A Recipe For Revolution

Authored by Robert Wright via The American Institute for Economic Research,

Historian Stephen Mihm recently argued that based on his reading of the monetary system of colonial Massachusetts, modern monetary theory (MMT), which he cheekily referred to as PMT (Puritan monetary theory), “worked – up to a point.”

One can forgive him for misunderstanding America’s colonial monetary system, which was so much more complex than our current arrangements that scholars are still fighting over some basic details.

Clearly, though, America’s colonial monetary experience exposes the fallacy at the heart of MMT (which might be better called postmodern monetary theory): the best monetary policy for the government is not necessarily the best monetary policy for the economy. As Samuel Sewall noted in his diary, “I was at the making of the first Bills of Credit in the year 1690: they were not Made for want of Money, but for want of Money in the Treasury.”

While true that colonial governments controlled the money supply by directly issuing (or lendin)  and then retiring pieces of paper, their macroeconomic track record was abysmal, except when they carefully obeyed the market signals created by sterling exchange rates and the price of gold and silver in terms of paper money.

MMT in the colonial period often led to periods of ruinous inflation and, less well-understood, revolution-inducing deflation.

South Carolina and New England were the poster colonies for inflation, in part because they bore the brunt of colonial wars against their rival Spanish and French empires. Relative peace and following market signals eventually stabilized prices in South Carolina.

In New England, however, Rhode Island for decades was able to act as a “money pump” that forced inflation on other New England colonies until they abandoned MMT entirely in the early 1750s.

In New York, New Jersey, and Pennsylvania, by contrast, legislatures followed market signals and were never pressed as hard militarily as the buffers to their north and south were. They therefore did not inflate away the value of their paper moneys by issuing too much.

After the French and Indian War, however, the Middle Colonies suffered from a large deflation rooted in wartime excesses, structural economic changes, and new imperial regulations. Real estate prices plummeted and debtors’ prisons overflowed. The direct result was colonial unrest over the Stamp Act, which quickly escalated into a pamphlet war, a trade war, and then a shooting war.

About the only time the colonial monetary system functioned effectively was when paper money circulated in tandem with full-bodied gold or silver coins (specie). When the government found itself in dire straits, as it did during the American Revolution, the value of paper money vis-a-vis specie slipped.

This was the market’s way of signaling that too much paper money was in circulation at the current price level and that further emissions would spark inflation. This is precisely what happened. Yes, America eventually won the war, but only after returning to a monetary system anchored by the precious metals.

While the prospect of returning to a more solid monetary anchor after the inevitable failure of MMT may intrigue some, the socioeconomic costs of hyperinflation would be enormous. With everyone’s savings destroyed, as in Germany in the 1920s and Venezuela today, the end result is impossible to predict, but undoubtedly thornier than rosier.

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Sell Low Or Die Tryin’ – 50 Cent “Massacred” With 84% Price Cut On Connecticut Mansion

Cryptoinvestor and one-time rapper 50 Cent, famous for his now ironically titled 2003 album “Get Rich or Die Trying” and, more recently for his 2017 bankruptcy, just adding to his financial troubles – and perhaps nicknames – when he took an 84% haircut on a Connecticut mansion he has been trying to unload for nearly 12 years, during a decade long bull market in nearly all asset classes. The massive 52 room mansion of the rapper who will henceforth be known as “16 cents on the dollar” sold for just $2.9 million. 

But wait, it gets better.

The rapper, Curtis James Jackson III, originally purchased the property from former boxer Mike Tyson for $4.1 million in 2003, the year that Tyson himself filed for bankruptcy. At the time, the sale set a record for the “most expensive home ever sold” in Farmington, a town about 80 miles north of Greenwich, according to the Wall Street Journal. 

When Jackson went to sell the 52 room mansion in 2007, it was listed for $4.99 million. There was also an offer to rent the mansion for $100,000 a month. Listing photos show the mansion’s basketball court with a G-Unit logo at center court and a night club decorated with murals of 50 Cent.

The home also sports game rooms, a recording studio, a home theater, an indoor pool and a conference center. It was costing about $70,000 per month to carry, including mortgage payments and taxes. Jackson managed to hold on to the house despite his filing for bankruptcy several years ago. He also seemed to find the humor in not being able to sell the mansion. 

In 2017, after an attempted robbery at the house, he wrote in a now deleted Instagram post: 

“What my house got robbed, I thought I sold that MF. LOL.”

Jackson also joked about owning such a large home on the Late Show with Stephen Colbert earlier this year. On the show, he said:

“You know when you look down the hallway in your house and you don’t wanna go down there? Things would break because you didn’t use it. You didn’t turn it on, now the light is flickering.”

The white elephant home became a “sideshow of a sale” after staying on the market so long. One broker described it as “an outlier that has nothing to do with the state of any housing market in Connecticut.”

The median list price per square foot in CT is $173, which would price Jackson’s mansion at around $8.65 million.

If not anything else, Jackson’s inability to sell a mansion during the longest and most “prosperous” bull market in history should give him enough gravitas to make the switch from late night TV appearances to financial news media. 

We look forward to him joining rapper Pitbull as a guest on CNBC commenting about his investing strategies for Bitcoin, pot stocks, the Lyft IPO or the real estate market. 

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Turkish Lira Plunges As Funding Costs Tumble, Shorts Pounce

Commenting on recent gyrations in the Turkish currency, Rabobank’s Michael Every writes that the lira ended Monday’s volatile session on the firm footing appreciating more than 1% versus the dollar as the market continued to digest the outcome of local elections held on Sunday and tried to assess potential implications of Turkey’s biggest cities voting against President Erdogan’s AKP candidates.

That said, Every notes that he “would be careful trying to read too much into the price action in USD/TRY witnessed on Monday. Lira’s liquidity in the offshore market remains tight as reflected in the overnight swap rate sharply again to more than 300% on the day” and adds that “essentially, it is not a properly functioning market.“

As a result, investors who are concerned that the Erdogan administration may turn towards populist measures – instead of prudent policies to rebalance the economy – find it prohibitively expensive to short the lira. Every concludes that “unless the overnight swap rate falls back to the levels seen before the credit crunch, i.e. around 24%, any lira’s recovery should be taken with a pinch of salt.”

Well, that’s precisely what happened on Tuesday, when the Turkish lira’s overnight funding costs tumbled once again as it has become prohibitive difficult for the central bank to continue its vendetta against the shorts, with the rate plunging from over 300% to just over 18%, below levels seen during the credit crunch, and in fact below the central bank’s prevailing rate corridor.

As a reminder, last week the overnight swap rate gyrated wildly as a result of measures designed to curb short-sellers before this weekend’s local elections drove it to a high of more than 1,300% as liquidity in the offshore market evaporated. As a result, with local banks keeping a lid on lira funding, foreign investors were forced to access the currency by selling holdings of Turkish bonds and equities, resulting in a crash in local capital markets.

Of course, as discussed before, Erdogan’s play to punish lira shorts cut both ways, as the swap market is one of the biggest sources of Turkish lira funding for money managers trading the nation’s assets and the squeeze didn’t just cripple investors trying to bet against the currency, but also those who had sold dollars and bought liras. That’s because many of them had then lent out the local currency via short-term swaps to benefit from a juicy interest rate, then suddenly found themselves unable to get the funding needed to reverse the trades.

As a result, last week’s punishing short squeeze ended up hurting longs just as much as longs, but worst of all, it has crippled foreign investor confidence in the country’s capital markets, which is a major problem for Turkey which for years has been overly reliant on offshore capital to fund its current account gap.

As a reminder, two weeks ago, the most severe bout of market turmoil since Turkey’s August crisis was triggered after a plunge in central bank reserves and a recommendation to short the currency by JPMorgan sent the lira down more than 5%. As Bloomberg wrote at the time, that raised concerns that the money that had poured Turkey to take advantage of the central bank’s 24% benchmark rate would flee.

In any case, it appears that Erdogan’s experiment in currency micro management has ended with a thud, and after spooking shorts, they were back with a vengeance on Tuesday, then the Turkish lira tumbled more than 3% to session low of 5.6806 before fractionally trimming its drop.

And while traders curious just how much further the Turkish lira will fall if indeed Erdogan’s crusade against shorts is now over, one hints comes from Turkey’s CDS, which have historically tracked the USDTRY almost perfectly, and which would imply a fair value somewhere close to 6.00…

… which while quite bad, and in line with JPMorgan’s infamous 5.90 USDTRY reco, is still a ways away from the recent TD recent price target of north of 7.00.

 

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Is The LYFT IPO The Inflection Point In The Ponzi?

Submitted by AdventuresInCapitalism.com,

Over the past few quarters, I have become increasingly critical of the Profitless Prosperity Sector, known amongst my friends as the Ponzi Sector.

Why Ponzi Sector?

Because these companies have no profits yet continue to raise new capital by showing explosive revenue growth. Oddly, the more revenue they show, the more money they lose, because incremental revenue is at a negative gross margin. Many of these companies are in consumer facing sectors where the product is not particularly unique. Rather, they are using a tech interface to offer an existing product and effectively subsidizing the consumer to use more of the product. Nothing shows this better than the ridesharing duopoly of Uber and Lyft (LYFT – USA). Therefore, last week’s LYFT IPO was enlightening.

To start with, $2.3 billion of stock was offered. While large for an IPO, it wasn’t particularly large in dollar value or in relationship to the overall purported equity value. Since the IPO, the shares have dropped like a rock without an uptick. As I write this, they’re still dropping and now 10% below the offering price.

While the shares have only had 2 trading days to season thus far, the message seems to be that demand for the Ponzi Sector isn’t as high as previously anticipated.

This must be the panic moment amongst the VC community. Suddenly, their mark-to-fantasy valuations are in doubt. I can guarantee you that the VC community will rally together and find some way to prop LYFT up. Without idiot retail gladly taking these scams off their hands, VC portfolios will detonate. However, LYFT has already told you that outside of closed-door transactions amongst VCs marking up their books, the valuations are already suspect. Furthermore, since anyone who’s bought a share of LYFT on the stock exchange is underwater, I suspect that the desire to buy the next of these Unicorn IPOs will be substantially reduced.

This then weighs on the question of the future of the whole Ponzi Sector. LYFT and UBER need constant equity infusions to fund their never-ending stream of subsidized rides. Looking at the Ponzi Sector as a whole, who will be putting up a few billion a year (per Unicorn)? At some point, you’re talking about a whole lot of money. You can keep funding Unicorns if you believe the IPO will be at a premium to the Series D round. It doesn’t work if you have to actually analyze the business and determine a fair valuation for a company where losses will grow ad infinitum. Even worse, if the IPO window closes, you have to then start worrying about dilution as you raise new capital from private investors to offset accelerating losses. Remember, in a universe where billions are needed per year, the next offering can also be down from the last one done—sometimes by a shockingly large number. Money losing companies need to make payroll or they die—sometimes they cannot choose their cost of capital.

Is the LYFT IPO the inflection point in the Ponzi Sector? The next few weeks will tell. I’m on red alert as I have a list of similar companies that I’d love to buy puts on.

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If Trump Closes the Mexican Border, America Will Run Out of Avocados in 3 Weeks

If President Donald Trump follows through on what can only be described as a completely unhinged threat to close the U.S.-Mexico border, Americans would run out of guacamole about two weeks after the last American auto plant shuts down.

Those two consequences—one purely cosmetic, the other deeply devestating—do a pretty good job of summing up the importance of cross-border trade between the U.S. and Mexico. Without really ever thinking about it, millions of Americans depend on that trade for everything from the cars they drive to the food they eat—and a lot more.

America’s strategic avocado supply would be exhausted in just three weeks if imports from Mexico were stopped, according to NBC News.

“You couldn’t pick a worse time of year because Mexico supplies virtually 100 percent of the avocados in the U.S. right now,” Steve Barnard, president and chief executive of Mission Produce, the largest avocado supplier in the world, told NBC News. “California is just starting and they have a very small crop, but they’re not relevant right now and won’t be for another month or so.”

America gets nearly half of its avocado supply from Mexico, and replacing that market share with imports from Peru or elsewhere would be difficult on short notice. And the number of avocados currently growing in California won’t magically double in the next month before they are ready to be harvested.

Meanwhile, the 2.4 million Americans working in auto manufacturing would be facing almost immediate layoffs.

While many other industries also rely on U.S.-Mexico trade, the auto industry is particularly sensitive to disruptions at the border because of international supply chains established in the decades since the signing of the North American Free Trade Agreement. Thanks to a provision in NAFTA that allows car parts to cross the border multiple times but get taxed just once, the parts that are assembled to build a single car seat might zig-zag their way between the two countries several times—as Bloomberg demonstrated in a useful 2017 infographic—before being installed in a sedan built in South Carolina or a truck in Michigan. Shutting the border would put an end to all that.

Those cross-border supply chains have bolstered manufacturing jobs on both sides of the Rio Grande—there’s been a 50 percent increase in American auto-making jobs since 2011, according to the American Automotive Policy Council, and greater job prospects in Mexico have been credited with slowing illegal immigration.

The interdependence of American and Mexican markets—to say nothing of America’s demand for avocado toast—should give Trump $600 billion worth of reasons to avoid closing the border. That’s how much trade occurs every year between the two countries, and about $137 billion of that total is food. Not just avocados, but also tomatoes, other fruits, and liquor.

Closing the border would not be, as Trump says, a “profit-making operation.” Quite the opposite. Slamming the border shut would disrupt supply chains, destroy jobs, and ensure that many businesses and people no longer make a profit or a living. It could send both countries into an economic tailspin. And it would mean no more guacamole, too.

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Forget ‘Creepy’ – Biden Has A Major Ukraine Problem

Joe Biden appears to have made a major tactical error last year when he bragged to an audience of foreign policy experts how he threatened to hurl Ukraine into bankruptcy if their top prosecutor, General Viktor Shokin, wasn’t immediately fired, according to The Hill‘s John Solomon. 

In his own words, with video cameras rolling, Biden described how he threatened Ukrainian President Petro Poroshenko in March 2016 that the Obama administration would pull $1 billion in U.S. loan guarantees, sending the former Soviet republic toward insolvency, if it didn’t immediately fire Prosecutor General Viktor Shokin. –The Hill

“I said, ‘You’re not getting the billion.’ I’m going to be leaving here in, I think it was about six hours. I looked at them and said: ‘I’m leaving in six hours. If the prosecutor is not fired, you’re not getting the money,’” bragged Biden, recalling the conversation with Poroshenko. 

“Well, son of a bitch, he got fired. And they put in place someone who was solid at the time,” Biden said at the Council on Foreign Relations event – while insisting that former president Obama was complicit in the threat. 

Interviews with a half-dozen senior Ukrainian officials confirm Biden’s account, though they claim the pressure was applied over several months in late 2015 and early 2016, not just six hours of one dramatic day. Whatever the case, Poroshenko and Ukraine’s parliament obliged by ending Shokin’s tenure as prosecutor. Shokin was facing steep criticism in Ukraine, and among some U.S. officials, for not bringing enough corruption prosecutions when he was fired. –The Hill

And why would Biden want the “son of a bitch” fired?

In what must be an amazing coincidence, the prosecutor was leading a wide-ranging corruption investigation into a natural gas firm – which Biden’s son, Hunter, sat on the board of directors.  

The prosecutor he got fired was leading a wide-ranging corruption probe into the natural gas firm Burisma Holdings that employed Biden’s younger son, Hunter, as a board member.

U.S. banking records show Hunter Biden’s American-based firm, Rosemont Seneca Partners LLC, received regular transfers into one of its accounts — usually more than $166,000 a month — from Burisma from spring 2014 through fall 2015, during a period when Vice President Biden was the main U.S. official dealing with Ukraine and its tense relations with Russia. –The Hill

The Hill‘s Solomon reviewed the general prosecutor’s file for the Burisma probe – which he reports shows Hunter Biden, his business partner Devon Archer and their firm, Rosemont Seneca, as potential recipients of money. 

And before he was fired, Shokin says he had made “specific plans” for the investigation – including “interrogations and other crime-investigation procedures into all members of the executive board, including Hunter Biden.”

“I would like to emphasize the fact that presumption of innocence is a principle in Ukraine,” added Shokin. 

Joe Biden “clearly had to know” about the probe before he insisted on Shokin’s ouster. Via The Hill: 

Although Biden made no mention of his son in his 2018 speech, U.S. and Ukrainian authorities both told me Biden and his office clearly had to know about the general prosecutor’s probe of Burisma and his son’s role. They noted that:

  • Hunter Biden’s appointment to the board was widely reported in American media;
  • The U.S. Embassy in Kiev that coordinated Biden’s work in the country repeatedly and publicly discussed the general prosecutor’s case against Burisma;
  • Great Britain took very public action against Burisma while Joe Biden was working with that government on Ukraine issues;
  • Biden’s office was quoted, on the record, acknowledging Hunter Biden’s role in Burisma in a New York Times article about the general prosecutor’s Burisma case that appeared four months before Biden forced the firing of Shokin. The vice president’s office suggested in that article that Hunter Biden was a lawyer free to pursue his own private business deals.

President Obama named Biden the administration’s point man on Ukraine in February 2014, after a popular revolution ousted Russia-friendly President Viktor Yanukovych and as Moscow sent military forces into Ukraine’s Crimea territory.

***

Key questions for ‘ol Joe:

Was it appropriate for your son and his firm to cash in on Ukraine while you served as point man for Ukraine policy? What work was performed for the money Hunter Biden’s firm received? Did you know about the Burisma probe? And when it was publicly announced that your son worked for Burisma, should you have recused yourself from leveraging a U.S. policy to pressure the prosecutor who very publicly pursued Burisma?

Read the rest of Solomon’s report here.

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One Bank Spots An Ominous Signal In The Record Performance Of Risk Parity Funds

As we discussed yesterday, one would have to search long and hard to find an asset that was down in the first quarter; one can thank the world’s central banks for that – in Q1 is when the world’s money printers finally threw in the towel on the brief if painful attempt to normalize global interest rates, strongly hinting that the next move will be rate cuts.

And nobody benefited more from this outperformance of both stocks and bonds in the first quarter than the investor class that is concurrently long both: balanced (60/40) funds in general and risk parity funds in particular.

As Bank of America Chintan Kotecha explains, the dichotomous interpretation of the Fed’s policy U-turn as a sign of economic weakness by the bond market but a return of the ‘central bank put’ by equities and other risk assets resulted in record performance for a hypothetical risk parity portfolio.

And while that’s great for such risk-parity billionaires as Ray Dalio and the biggest hedge fund (excluding central banks) in the world, Bridgewater, with more details to follow below, Bank of America spots an ominous warning in the record gains by risk parities in Q1, warning that this kind of outperformance tends to be a clear danger signal as “history suggests such strong simultaneous performance across asset classes cannot be sustained in the coming quarter.” In fact, in 8 out of 9 past periods since 1972 of strong risk parity performance, “subsequent performance was at or below median levels with an even stronger tendency to mean-revert post the global financial crisis.”

Here are the details: risk parity portfolio of equity, bond, and commodity indices, which broadly tracks the benchmark risk parity indices, would have just had its largest quarterly risk-adjusted return on record.

Specifically, the Sharpe Ratio of a risk parity strategy applied to total return indices on the S&P 500, 10-Year US Treasury Bonds, and the S&P GSCI last quarter was near 7 (25% annualized return on 3% annualized volatility). For perspective, the average quarterly Sharpe Ratio for this hypothetical portfolio since 1972 was 0.65.

As noted above, the risk parity strategy’s performance is being driven by strong performance across all major risk assets year-to-date. Equity and commodity quarterly risk-adjusted returns this past quarter were in the 90th percentile and bonds in the 77th since 1972.

As BofA also notes, further helping risk parity portfolios is the strong diversification between this set of risk assets, with the average pairwise correlation between the equity, bond, and commodity indices residing near the bottom 10th percentile since the early 1970s. In particular, equity/bond correlation is now back near its lowest levels and in negative territory which makes it an even larger driver of the risk-reduction in risk parity or even other multi-asset portfolios (e.g. 60/40).

Of course, thanks the central bankers who just made the rich even richer. Consider that in the fourth quarter of last year risk parity performance was near the lowest (bottom 10th percentile since 1972). Therefore, the quarter-on-quarter change in risk parity performance is almost as striking as the current record performance in risk parity.

Outside of 1980 when 10-year yields were in double digits and moving nearly 300bps per quarter, we’ve never seen a higher quarter-on-quarter change in risk parity performance. Near fifty-year record setting returns in risk parity strategies, along with such a dramatic shift in performance quarter-on-quarter across risk assets, underscores the extent to which central bank policy (versus fundamentals) has been instrumental in driving today’s markets. In an somewhat paradoxical, but not really, fashion the recent interpretation of the Fed’s policy U-turn as a sign of economic weakness by the bond market but a return of the ‘central bank put’ by equities and other risk assets has contributed to this record risk parity performance.

And while this is great news for risk parity asset managers everywhere, what happens next may be problematic.

A simple mean-reversion argument would suggest that such strong performance across the S&P 500, 10Y US Bonds, and commodities cannot be sustained in the coming quarter and historical data confirms this. To test this assumption, Bank of America isolates the top 5th percentile quarters of risk parity performance since 1972, and finds underperformance in risk parity one quarter post which could imply a slow-down in one or more asset classes performance. In fact, in these historical periods, at least one of the major asset classes often saw quarterly performance drop to below the 20th percentile in the subsequent quarter.

Moreover in 8 of the 9 prior top quarters, subsequent risk parity performance in the quarter after was at or below median levels long term with stronger mean reversion lower in recent years.

All of the above, of course, is another way of saying that the “market jaws“, i.e. the massive divergence in the S&P and 10Y yields, which Goldman clients were obsessing over last week…

… can’t last. The only question, as one Goldman client told the bank’s chief equity stratgegist David Kostin is “which direction the jaws close – through higher rates or via lower equity prices.” The good news, according to BofA, is that we will know the answer inside the next three months.

via ZeroHedge News https://ift.tt/2Va15Xf Tyler Durden

Trump Says Republicans Are Working on a New Health Care Plan. Somehow, Mitt Romney Is Involved.

Obamacare repeal is back…sort of.

Although Republicans failed to repeal and replace the health care law in a months-long push in 2017, and have signaled in recent months that they were ready to move on—especially since Democrats ran successfully on maintaining Obamacare’s pre-existing conditions rules in last year’s midterm—President Donald Trump has put repeal back at the center of the GOP’s domestic policy agenda.

In a tweetstorm last night, Trump announced that Republicans “are developing a really great HealthCare Plan,” that will be voted on after the next election, once Republicans “win back the House.”

Trump’s tweets follow last week’s decision by the administration not to defend any part of the health care law in court, and reports that the White House is working with several conservative think tanks to develop a new health care plan, and that Mitt Romney is also involved in “preliminary discussions.”

You may now be thinking to yourself: Mitt Romney? That Mitt Romney? To which I can only answer: Yes, that Mitt Romney.

We all remember how Romney, who, as governor of Massachusetts, passed RomneyCare, a state-based health care system built around an individual mandate, a health insurance exchange, and subsidies for regulated health insurance. At the time, Romney said the plan should be a national model for health care reform. Then Democrats under the Obama administration used the Massachusetts system as a model for their own health care legislation, Mitt Romney ran for president and denied that he actually wanted it used as a model—and, well, here we are, about a decade later, with a national system of subsidies that can be used to purchase regulated insurance on an exchange, known as Obamacare, which Trump is pushing to repeal, with, apparently, Mitt Romney’s help. If this were a serialized television show, people would complain that the plot is too complex, and the lore contradicts itself, the characters aren’t consistent, and that despite tons of activity, the story never really goes anywhere…and they would be right.

Trump says Republicans are developing a plan to vote on right after the 2020 election. But, as with any of Trump’s promises, some skepticism is in order.

The first problem is that Trump’s plan doesn’t exist. Not only has the White House never put forward a health care plan of their own, Trump has never offered anything other than the barest, briefest explanation of what he would like to see a health care plan do. In his tweets last night, Trump simply says that it will lower premiums and “support Pre-Existing Conditions,” which, like “HealthCare” itself, have apparently risen to capital letter status in Trump’s mind.

In many cases, it’s reasonable for the White House to hang back from the legislative process, letting Congress take charge. But one of the reasons that the repeal effort failed in 2017 was that Trump was utterly clueless about the various plans and processes; without presidential leadership to guide them, Republicans couldn’t rally around an idea or even begin to attempt to sell it to the public. But Trump couldn’t be bothered to learn the most basic details about the health care legislation the GOP was attempting to pass, so, again, here we are.

That dynamic, and the perception amongst congressional Republicans (including and perhaps especially leadership) that the biggest factor contributing to the party’s midterm losses was Democrats campaigning on pre-existing conditions, is one reason why there now appears to be a huge split between Republicans on Capitol Hill, who are wary of putting health care back into play in 2020, and the White House, which is gung-ho about doing so.

On the election merits, Hill Republicans are probably right: A 2020 election about whatever replacement plan the Trump White House dreams up will probably ensure that Republicans remain a minority in the House, rendering this whole exercise moot.

Which bring us to the second problem: The plan the Trump administration settles on, assuming it does, will most likely be a bad plan that pleases almost no one. According to Mitt Romney (yes, still, that one), the new idea that is currently being cooked up is not a new idea at all, but a modification of an old one: The forthcoming GOP plan will likely be based on Graham-Cassidy, a last-ditch plan introduced in 2017 that was, itself, only sort of a plan. The short version is that it would eliminate Obamacare’s mandatory coverage requirements and take the money that is currently being spent on subsidies and Medicaid under the law and split them up between the states. States could then use that money to fund something like Obamacare (most blue states, presumably) or something else that they come up with later (most red states, presumably).

Almost everyone will hate this plan, including, probably, some people who say they are fine with this plan.

Liberals and defenders of Obamacare will hate it because it dismantles some of the regulatory infrastructure of Obamacare. In particular, it eliminates the health law’s essential health benefits—which include things like maternity care—and therefore undermines the law’s pre-existing conditions regulations.

Republicans running for reelection in 2020 will hate it, though many will admit this only in secret, in anonymous quotes attributed to “leading Republicans” and terse refusals to discuss the plan at length on the record, because it puts pre-existing conditions back on the table (see above), and Republicans in tight races don’t want to run re-election campaigns built around pre-existing conditions.

Republicans from states that expanded Medicaid under Obamacare will hate it because it will almost certainly penalize states that did so by taking that money and splitting it (more or less) equally among states, meaning states that chose not to expand Medicaid would get more, and states that did expand would get less. These Republicans may be coy about the precise reasons, but they will be there, looming in the background of the debate.

Or perhaps the foreground. Among the Republicans who represent an expansion state are Senate Majority Leader Mitch McConnell and Sen. Rand Paul of Kentucky. In 2017, the last time a Graham-Cassidy style block grant was proposed, Paul said he opposed the plan because “It just means you’re keeping all the money we’ve been spending through Obamacare, most of it, re-shuffling it, taking the money from Democrat states and giving it to Republican states. I think what it sets up is a perpetual food fight over the formula.”

He’s not wrong. Which is why critics of Obamacare are also likely to grumble about this idea as well. A Graham-Cassidy style block grant would merely take the money that’s already being spent and redistribute it a different way, to politically powerful states who would lobby not only for more money for themselves, but more money overall. It’s not a plan to improve the quality of health care in America so much as a politically contrived policy dodge, allowing Republicans in Washington, who don’t agree on much of anything about health care, to say they took down Obamacare while leaving current spending in place—and redirecting a bunch of it toward Republican states.

For all of these reasons, it’s hard to imagine that something like this passes, even if Republicans do retake control of the House in 2020, and hold control of the Senate and the White House. In other words, there’s no reason to think the underlying dynamic that kept a repeal bill from passing in 2017, when the GOP held all of Congress and the White House, would be different.

This is quite likely to go nowhere, anyway. As Trump ramped up the health care chatter last week, The Washington Post reported that administration insiders knew it was just for show: “White House aides acknowledge that there is no specific plan and that when Trump has said the Republicans need to be the party of health care, it is more of a branding exercise.” A branding exercise! Why, it’s almost like Trump is someone specializes in sticking his name on hacky, low-quality products he doesn’t actually create himself.

But to recap: Trump promises a great new health care plan is on the way, but there’s no plan yet, and when there is a plan, it will probably be a bad plan that can’t pass. And somehow Mitt Romney is involved.

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