Bay Area Sues Big Oil For Billions

Authored by Irina Slav via OilPrice.com,

The cities of San Francisco and Oakland have filed lawsuits against Chevron, Exxon, ConocoPhillips, BP, and Shell for the effect of their activities on climate change: higher sea levels. The cities seek billions in damages to counteract the effects of the changing climate.

Reuters quoted San Francisco officials as saying that the five oil companies “knowingly and recklessly created an ongoing public nuisance that is causing harm now and in the future risks catastrophic harm to human life and property.”

The companies themselves were restrained in their comments, with Chevron saying the lawsuits would only serve special interests rather than effect a real change, and Exxon finding the claims made by the cities lacking in merit. Conoco and BP did not comment, and Shell said climate change should be addressed by government policy and cultural change rather than by litigation.

This is not the first time that communities decided to sue Big Oil like they sued Big Tobacco 30 years ago.

Louisiana’s Plaquemines Parish is pursuing 21 different lawsuits against Big Oil for damage to the state’s wetlands, which is causing coastal erosion. Five of the lawsuits have already been scheduled for 2019.

Chevron is the defendant in 19 of the 21 cases.

California itself is no stranger to such legal action. In July, three coastal communities—Marin and San Mateo Counties, and City of Imperial Beach—filed suits against 37 oil, gas, and coal companies for damage done to the environment through carbon dioxide pollution.

The plaintiffs claim the companies have know for half a century that greenhouse gas emissions are conducive to climate change but have deliberately concealed this, leaving the local communities to pick up the check for remedial measures.

In all likelihood, this is just the start of a flood of lawsuits as the debate about who should bear the costs of climate change heats up. The dominant opinion seems to be shifting away from taxpayers and towards energy companies, as research-based evidence suggests that some of the emissions causing climatic change can be traced back to companies producing oil and gas.

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Household Wealth Hits A Record $96.2 Trillion… There Is Just One Catch

In the Fed's latest Flow of Funds report, today the Fed released the latest snapshot of the US "household" sector as of June 30, 2017. What it revealed is that with $111.4 trillion in assets and a modest $15.2 trillion in liabilities, the net worth of US households rose to a new all time high of $96.2 trillion, up $1.7 trillion as a result of an estimated $564 billion increase in real estate values, but mostly $1.23 trillion increase in various stock-market linked financial assets like corporate equities, mutual and pension funds, and deposits as the market soared to new all time highs thanks to some $2 trillion in central bank liquidity injections this year.

Total household assets in Q2 rose $1.8 trillion to $111.4 trillion, while at the same time, total liabilities, i.e., household borrowings, rose by only $15 billion from $15.1 trillion to $15.2 trillion, the bulk of which was $9.9 trillion in home mortgages.

The breakdown of the total household balance sheet as of Q2 is shown below.

And the historical change of the US household balance sheet.

And while it would be great news if wealth across all of America had indeed risen as much as the chart above shows, the reality is that there is a big catch: as shown previously, virtually all of the net worth, and associated increase thereof, has only benefited a handful of the wealthiest Americans.

As a reminder, from the CBO's latest Trends in Family Wealth analysis published last year, here is a breakdown of the above chart by wealth group, which sadly shows how the "average" American wealth is anything but.

While the breakdown has not caught up with the latest data, it provides an indicative snapshot of who benefits. Here is how the CBO recently explained the wealth is distributed:

  • In 2013, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held 1 percent.
  • Average wealth was about $4 million for families in the top 10 percent of the wealth distribution, $316,000 for families in the 51st to 90th percentiles, and $36,000 for families in the 26th to 50th percentiles. On average, families at or below the 25th percentile were $13,000 in debt.

In other words, roughly 75% of the $1.8 trillion increase in assets went to benefit just 10% of the population, who also account for roughly 76% of America's financial net worth.

It also means that just 10% of the US population is worth $73 trillion, while half of the US population was worth just ~$9.6 trillion.

Even worse, when looking at how wealth distribution changed from 1989 to 2013, a clear picture emerges. Over the period from 1989 through 2013, family wealth grew at significantly different rates for different segments of the U.S. population. In 2013, for example:The wealth of families at the 90th percentile of the distribution was 54% greater than the wealth at the 90th percentile in 1989, after adjusting for changes in prices.

  • The wealth of those at the median was 4 percent greater than the wealth of their counterparts in 1989.
  • The wealth of families at the 25th percentile was 6 percent less than that of their counterparts in 1989.
  • As the chart below shows, nobody has experienced the same cumulative growth in after-tax income as the "Top 1%"

The above is particularly topical at a time when either party is trying to take credit for the US recovery. Here, while previously Democrats, and now Republicans tout the US "income recovery" they may have forgotten about half of America, but one entity remembers well: loan collectors. As the chart below shows, America's poor families have never been more in debt.

The share of families in debt (those whose total debt exceeded their total assets) remained almost unchanged between 1989 and 2007 and then increased by 50 percent between 2007 and 2013. In 2013, those families were more in debt than their counterparts had been either in 1989 or in 2007. For instance, 8 percent of families were in debt in 2007 and, on average, their debt exceeded their assets by $20,000. By 2013, in the aftermath of the recession of 2007 to 2009, 12 percent of families were in debt and, on average, their debt exceeded their assets by $32,000.

 

The increase in average indebtedness between 2007 and 2013 for families in debt was mainly the result of falling home equity and rising student loan balances. In 2007, 3 percent of families in debt had negative home equity: They owed, on average, $16,000 more than their homes were worth. In 2013, that share was 19 percent of families in debt, and they owed, on average, $45,000 more than their homes were worth. The share of families in debt that had outstanding student debt rose from 56 percent in 2007 to 64 percent in 2013, and the average amount of their loan balances increased from $29,000 to $41,000.

And there – as we say quarter after quarter- is your "recovery": the wealthy have never been wealthier, while half of America, some 50% of households, own just 1% of the country's wealth, down from 3% in 1989, while America's poor have never been more in debt.

 

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Feminist Porn Isn’t Free

“Our goal was to undress Pinterest, not dress up Pornhub,” the press kit for Bellesa, a Montreal-based web startup, proclaims with lofty feminist ambitions. A recent writeup on Bustle hails the (NSFW) site as “good both for women and for men who want something outside what our patriarchal, heteronormative society dictates they should like.”

Little of Bellesa’s video content, however, distinguishes it from other porn sites; it’s Pornhub in a Pinterest wrapper. Nothing wrong with that per se—in fact, a porn platform with serves up a variety of videos (not just the softcore, romantic stuff that’s often assumed to appeal more to women) with a less aggressively masculine interface would probably do well.

But for a site to live up to its idealistic, feminist branding, it needs to account for the labor and intellectual property of those producing the content—the performers, directors, and others who actually make the adult videos—whether that means making content distribution deals with independent sex workers or ethical-porn production companies; producing content in house; or working out some sort of profit-sharing platform for user-created content.

Bellesa—Catalan for beauty—does none of these things. Canadian magazine The Link describes founder Michelle Schnaidman’s role as curating or facilitating porn—”she makes it available for those who seek it.” It solves what Bustle writer Joanna Weiss described as the “pesky paywall” problem by featuring porn clips cribbed from all around the web, without paying or promoting the people who made them.

Bellesa also asks women to upload their own “erotic stories, sexy photos and GIFs, and feminist blog posts” for free, for the fun of it. Apparently all it takes to find feminist pornography is being willing to band together with other feminists and become unpaid porn stars, erotica writers, and digital content producers for the cause!

Shnaidman assures women she created this porn clearinghouse for only the best and most feminist reasons.

“We need to put an end to slut-shaming and to the antiquated idea that sex is something men do to women,” she told Bustle. “Or something women do for men. Because it’s not. Once society finally accepts the notion that women like sex (like, really like sex), we can begin shattering the stigma surrounding female sexuality—and of course porn.”

The Bellesa website decries the “male-dominated paradigms that have defined sex on the internet” so far, and porn that is “derogatory and exclusionary towards women.”

“The market for services meeting women’s sexual needs is often neglected due to the myth that women are less sexual than men,” explains Bustle. But on Bellesa, there will be “relatable” bodies, performers expressing “authentic” pleasure, and as many shots of nude men as women.

Refinery29 even recommends women against signing up for a non “female-friendly” porn subscription service and instead find “free porn” on Bellessa.

Both the women’s media and Shnaidman here showcase problems (long) prevalent among mainstream feminists: a willingness to throw certain sorts of women under the bus when it’s convenient; an apparent inability to consider how creating some preferable condition for some normative class of women will affect those not in this class; and a tendency to embrace personal liberation on the backs of more marginalized groups.

Several adult-film producers have already asked Bellesa to take down their content.

And sex workers on social media have been protesting the feminist-friendly narrative around the pirated-video platform.

Bellesa may have recognized a market opportunity and leapt on it, but company rhetoric about serving up adult-entertainment in an ethical or feminist manner is just branding drivel. The most feminist-friendly way to consume porn is to make sure the performers are getting paid.

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Public School Accuses 5 Year Old of Making Terrorist Threats

Via The Daily Bell

When I was in kindergarten, I found a knife in the pocket of a hand-me-down jacket I was wearing for the first time. I gave it to my teacher, and I don’t remember her reacting at all. She gave the knife to my parents when they picked me up at the end of the day. And that was that.

I used to run around at recess at that age with the other kids, and use bent sticks as fake guns. We shot at each other, rolled down hills dying from fake bullet wounds, and used pinecones as grenades. Looking back that sounds a little bit morbid, but I think I ended up fine. I didn’t torture small animals nor did I become a serial killer. In fact, I never killed anything bigger than a bug until a few weeks ago when I slaughtered some chickens for the first time.

I’m pretty confident that some of my 5-year-old artwork in school included death and destruction. But that was decades ago. Now, kids are labeled terrorists for acting like kids.

It’s no wonder kids pretend the way they do with the violent focus of the media. You probably couldn’t insulate your kid from bombs and bloodshed if you tried. I wouldn’t be surprised if they discussed it in the kindergarten class.

Yet a 5-year-old was suspended for making a terrorist threat. The tuition-free public charter school in Modesto California said the five-year-old intentionally made threats meant to intimidate and harass.

The kid, Jackson, told the teacher he couldn’t take off his backpack because there was a bomb in it, and it would explode if he did. Sounds like a hero to me.

The school initially sent the Rileys a letter saying their son was suspended for his intent to “threaten, intimidate or harass others.” The family was told that was the school code violation that best fit what happened, Ian Riley said.

When the Rileys pointed out that code applied only to fourth- through 12th-graders, not kids as young as Jackson, the school agreed and so sent a second letter, changing the violation to one about making terrorist threats.

“My son never made a threat, never wanted to blow up the school,” Riley said. “He was almost victimizing himself in his imagination, making himself the hero” by keeping the backpack on.

Though it was “all in the world of pretend play,” Michelle Riley told Fox, his not wanting to take off the backpack meant Jackson didn’t want to hurt anyone. “Where was the threat?”

Public Schools Are Trash

Public schools are more than just a waste of time. Public schools are a threat to parents and a psychological liability to kids. As this case points out, they punish kids for pretending. Better watch that imagination! And watch what you say.

Public schools put kids in the presence of strangers that they and you do not know. It opens kids up to the influence of other kids they may never otherwise come into contact with.

Some people might think this is a good thing, but why? Why expose your kids to bullies and tiny thugs? If you want your kids to get some culture, you can certainly find groups that you can vet first. There is no psychological benefit to putting your kids in contact with questionable authorities and abusive peers.

“They’ll have to deal with it when they are older.” Maybe, maybe not. If so, let them deal with it when they are older. Then they will hopefully not be scarred by authority figures labeling them a terrorist for no reason. They should be secure in themselves by then to know their peers’ derision is not a reflection on them.

If they never come into contact with bullies and bigheaded authorities, great! You helped them avoid being around terrible people.

Homeschool your kid, find an alternative program, hire a tutor, send them to private school, or whatever. Do what you have to in order to insulate them from agents of the state and their asinine methods of dealing with children.

Otherwise, you are gambling with their wellbeing. You can’t control everything, but you can stop the state from programming your kid to be what they think is a perfect citizen. Obedient, only acting with permission, and having no imagination.

I’m not knocking all public school teachers. My mom has taught fifth grade for nearly twenty years. What has she witnessed?

Ballooning administration who get hired for their last two years before retirement to boost their pension. A growing focus on lessons to do well on state standardized tests in order to make the school look good. Being told she is not allowed to fail a kid, and that it is against policy to hold kids back a grade. And she works for probably one of the better public schools!

Last year she was blamed for a fifth grader being unable to read, and for her failure to bring it to the attention of administration and parents. Yes, the parents didn’t know that their kid couldn’t read, it was the teacher’s responsibility!

That is how much some of these people have abandoned their parental roles to the state.

Like my mom, plenty of teachers truly love teaching. Lucky for her, she will soon retire and be able to teach in the private sector without state pressure directing her methods.

Lucky for young teachers, there are many other private sector options if you want to teach kids, but not serve as a state behavior enforcer.

Parents can encourage these alternative schooling methods by finding unique programs, homeschooling, and supplementing specific classes and tutoring.

Don’t let the government mold the psychology of the next generation.

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Government Regulation, Crony Capitalism Is Keeping 1000s In Florida Without Power

Authored by Tho Bishop via The Mises Institute,

Almost two weeks have passed since Hurricane Irma made landfall in South Florida, yet tens of thousands remain without power. With temperatures regularly eclipsing over 90 degrees, these outages are not only a grave inconvenience for Floridians cleaning up after the storm, but have proved to be deadly. Given the power of Irma, it is not surprising that it has left behind incredible devastation. Unfortunately it is also not surprising that it is a government-protected utility that has done the most to impede recovery. The pain and suffering currently being felt is the direct result of government policy and the perverse incentives of crony capitalism.

One of the talked about examples of how bad policy is making things worse for Florida families are a variety of government policies that discourages the use of solar power in the Sunshine State. Government policy dictates that Floridians are required to be connected to the central power grid, even if they have enough solar panels installed to power their entire house. Because of this requirement, a family stuck in areas without power with solar panels installed cannot use them now because doing so could endanger workers trying to restore power for their neighbors. Once again government’s desire for centralized control has unintended consequences.

Of course, even without such rules, it’s unlikely that all of Florida would decide to go off the grid. Given that, it’s important to understand how the legal monopoly granted to electric companies not only traps customers into being entirely reliant upon a single company, but actively incentivizes those companies to be reactive – rather than proactive – when it comes to natural disasters and other events that threaten service.

After all, companies like Florida Power & Light will respond to Irma as they have done to hurricanes past, by increasing prices on their customers.  Unfortunately, the revenue reaped seems to have made little impact in FPL’s preparedness for future storms. While the company has reported that its recovery efforts have moved faster this year than when Hurricane Wilma hit South Florida in 2005, more residents suffered outrages due to Irma – in spite of the fact that Wilma actually had higher sustained winds when it made landfall.  

Along with the temporary wage hikes following storms, the company also charges annual “storm fees” meant to pay for tree maintenance around power lines. FPL is now facing a class-action lawsuit in the aftermath of Irma over their apparent failure to do so.  Legal cases are certainly nothing new to FPL, as they have often legally fought measures requiring more of their powerlines to be buried underground, rather than be subjected to tropical storm winds above.

While FPL may be skimping on storm preparedness, they do make significant investments in the one resource that is truly vital to their business model: government.

FPL and other power companies are regularly among the largest political contributors in the state of Florida. In return, their lobbyists have been able to earn significant influence in writing energy legislation in the state of Florida. Of course this is the inevitable result of government granting monopolies to private companies. Isolated from the competition of the market, a business has no need to satisfy the needs of the customer, they only need to protect the relationship they have with government. Mises summed it up well in Human Action when he wrote, “Corruption is a regular effect of interventionism.”

Now given the amount of heat companies like FPL are facing following Irma, it’s possible the companies may finally have the political incentive to make some changes in the way they conduct business. Legislators may even be shamed into removing some of the restrictions on solar panels.

What Florida really needs, however, is to do away with the entire concept of natural monopolies for public utilities. There should be no legislation arbitrarily awarding either private or public companies a commercial fiefdom by legally protecting them from competition. Doing so ensures that desires of customers will always take a back seat to the good will of politicians, and will stifle the ability of the market to innovate superior methods of delivering such important services.

As Murray Rothbard wrote in Man, Economy, and State:

Regulation of public utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction of their wants. For it distorts the resource allocations of the free market. Prices set below the free market create an artificial shortage of the utility service; prices set above those determined by the free market impose restrictions and a monopoly price on the consumers. Guaranteed rates of return exempt the utility from the free play of market forces and impose burdens on the consumers by distorting market allocations.

Hurricanes in Florida are as inevitable as Florida Man headlines. It is not a matter of if Florida will be hit with another powerful storm, but when will it happen next. If its state government wants to truly do everything it can to protect its citizens from the damage Mother Nature can wrought, it should free them from the devastation they face at the hands of government monopolies and crony capitalism. 

 

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The Future Will Be Decentralized

I heartily accept the motto, “That government is best which governs least”; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe — “That government is best which governs not at all”; and when men are prepared for it, that will be the kind of government which they will have.

– Henry David Thoreau, Civil Disobedience 

Some people live their existence in a great state of dread, convinced a totalitarian, centralized world government of sorts is in our future. Not only do I not think this is going to happen, but I predict the exact opposite will occur. I believe the world has already hit “peak centralization” and decentralization will be the defining trend of human existence on this planet going forward.

Naturally, this is just one man’s opinion, but I strongly believe it and will make my case in this piece. When I look around and think about the major trends of our time, they all point in the direction of decentralization, something which invariably scares the living daylights out of authoritarians worldwide.

Irrespective of what you think of Donald Trump, the fact he was elected proves the power of decentralization in the modern communications and media realm. As was well documented throughout the campaign, the mainstream media came out in clownish and historically lopsided fashion in favor of his opponent Hillary Clinton. We all remember seeing headlines like the one below and then reading stuff like the following.

continue reading

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Jeff Sessions to America: The Crime Fearmongering Will Continue Until Y’all Obey

Sessions protestersStats so far from 2017 show that violent crimes in America’s major cities are generally dropping again after a brief, sharp uptick. Some individual cities are still in bad shape, but the broad trend is looking up.

But Attorney General Jeff Sessions did not land his job in President Donald Trump’s administration by assuring the populace that the country is generally a safe place to live. And that’s certainly not the narrative Trump used to get elected.

So Sessions is weaving a different story as he continues his attacks on sanctuary cities and criminal justice reform. Speaking before federal law enforcement officials in Portland, Oregon, this week, he refused to make even the slightest adjustments to his rhetoric:

After decreasing for over 20 years because of the hard but necessary work our country started in the 1980s, violent crime is back. The murder rate surged nearly 11 percent nationwide in 2015—the largest increase since 1968. Per capita homicide rates are up in 27 of our 35 largest cities.

And Portland is not immune to these problems. Between 2013 and 2015, the city saw an increase in homicides of more than 140 percent. In 2015, Portland Police received more than 180 calls related to gangs, including shootings, stabbings, and assaults—the highest number since they began recording that number nearly 20 years ago, and almost double the count from 2014.

Note that we’re about three-quarters of the way through 2017, and he’s still using numbers from 2015.

Also—speaking as someone who has done a lot of crime stat analysis over the years—consider it a red flag whenever you see seemingly outrageously high percentage changes showing either increases and declines. What that often means is that the flat numbers are actually very low, so when those changes are presented as percentages, they seem very large. If a city has two murders one year and then four murders the next year, that’s a 100 percent increase in the murder rate. That does not, however, indicate a crime wave.

The actual numbers in Portland here don’t support Sessions’ fearmongering. In 2013, the city had its lowest number of homicides in decades: 16. That number doubled to 32 over the course of two years. That’s certainly a cause for concern, but it’s an increase in a number that was very low; presenting it as a percentage makes it seem much more alarming than it actually is. Even then, Sessions got the percentage wrong by calling it a 140 percent increase.

Also, as The Portland Mercury notes, homicides for 2016 dropped back down to 16, the same level they were back in 2013. The crime spike in 2015 looks more like an anomaly than a dangerous new trend.

But the fearmongering is necessary to sell the Sessions/Trump agenda of attacking sanctuary cities—such as Portland—for declining to help the Department of Homeland Security (DHS) detain and deport immigrants here illegally. Here’s Sessions again:

When federal immigration authorities learn that this criminal alien is in a jurisdiction’s custody, our ICE officers issue a detainer request accompanied by a civil arrest warrant and ask the city to either notify them before they release the criminal or to hold the criminal alien long enough to transfer him to federal custody in a safe setting.

But political leaders have directed state and local officers to refuse these requests. Cooperation has been a key element in informed crime fighting for decades.

The result is that police are forced to release the criminal alien back into the community without regard to the seriousness of his crimes or the length of his rap sheet. Think about that: Police may be forced to release pedophiles, rapists, murderers, drug dealers, and arsonists back into the communities where they had no right to be in the first place. They should according to law and common sense be processed and deported.

This is a tremendously misleading representation of what actually happens, and Sessions is leaning heavily on a couple of really bad cases to suggest that this is commonplace. In reality, sanctuary cities usually do cooperate with DHS in exactly these circumstances.

Sessions also urged Gov. Jerry Brown not to sign a bill essentially making California a “sanctuary state” where local police are forbidden from assisting DHS in deportations. But the bill specifically permits police to work with DHS to deport immigrants when the immigrants have been convicted of a whole host of crimes, including each and every crime Sessions lists above.

What Sessions really seems to want is for sanctuary cities to cooperate with detainer requests on demand, period, no questions asked. Yet local law enforcement officers are not federal immigration officials. Local police do not have the authority to simply detain people without warrants or arresting them, even if they suspect they’re in the country illegally.

According to The Oregonian, Sessions apparently “refused to acknowledge” a federal magistrate’s ruling in Oregon holding a county legally liable for continuing to detain an inmate past her release date as federal immigration officials investigated her citizenship status. When even the attorney general doesn’t seem interested in grasping that local police simply do not have the authority to hold people for the feds on demand, we have a problem. It’s hard enough to get the police themselves to understand that they cannot simply detain people.

Read Sessions’ speech here.

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What Catalyst Could Trigger A Credit Risk-Off Event? Here’s The UBS Answer

“What is THE catalyst?”

As all traders know, and as UBS repeats this morning in a new report by credit strategist Matthew Mish, one if not the mostly commonly asked questions is “what events could disrupt global corporate credit markets heading into year-end and early 2018.”

Also, as traders may or may not also know, until August corporate credit markets had experienced a prolonged period of relative stability since February 2016; empirically, the last time markets experienced 18 months in which US high yield bond spreads m/m failed to widen materially was back in 1992-93.

So, in an attempt to answer this most frequently asked question, UBS utilize two approaches.

First, it categorized historical bouts of widening going back 12 years (based on the US high yield synthetic spreads) to capture vol events in the largest higher beta segment of global corporate credit. Further, developed market spreads (US, European) are highly correlated across most time periods, suggesting this analysis is more broadly applicable.

Cumulatively, UBS observes approximately 42 months or 23% of the sample in which CDX.HY spreads widen more than 20bp (roughly equivalent to 3-month breakeven levels), with an average spread widening of 58bp. The Swiss bank then reviewed news headlines to approximately identify the root causes of the sell-offs.

In short, the key catalysts for prior sell-offs included US monetary policy tightening (#1), financial and sovereign crises (#2, 3), deterioration in US economic data and/or corporate profits (#4), geopolitical shocks (#5), oil price declines/ global growth weakness (#6), and credit-specific (more idiosyncratic) events.

Mish’s analysis then looks at the “qualitative perspective” of rising risk. Below the strategist discusses his core views across the key historical catalysts for spread widening episodes.

US monetary policy tightening: The Federal Reserve announced balance sheet tapering with implementation in October, but do not expect significant market volatility as UBS economists project a shorter and smaller unwind than consensus (with the balance sheet only declining from $4.5trn to $3.3trn in 2.7 years). However, Fed rate hikes are a bigger concern. UBS expects the Fed to hike in December and twice in 2018, while bond yields imply a ~60% chance of a December rate hike, and a similar likelihood of a second additional rate hike by December 2018. This is too low, given improving inflation dynamics (albeit from low levels) and easier financial conditions. This could pressure lower-quality US HY moderately (akin to the March sell-off) while reducing the attractiveness of US investment-grade credit for non-US investors (on a FX-hedged basis). Further, UBS also believes the nomination of a new Fed chair before year-end could create near-term volatility in markets. Mish notes that his client conversations suggest most are expecting little change in the status quo; that said, the nomination process has triggered material short-term vol previously (e.g., Bernanke’s candidacy in 2005 triggered a 20-30bp rise in 10yr Treasury yields).

EU monetary policy tightening: UBS also expects the ECB to announce tapering on October 26th to being January 2018. While the pace of tapering may be less than initially expected, given Euro strength, the direction of travel is clear. With deflation risks having dissipated, the ECB will have to reduce its asset purchases as PSPP issuer limits become binding. That said, like with the Fed, ECB tapering is now well-flagged. Hence, while clearly not a positive for European credit markets, it no longer creates the cliff which was feared previously. The ECB is expected to remain accommodative, be present in credit markets well into 2018 and rate hikes are expected in 2019 at the earliest.

Credit-specific risks: As the US credit cycle matures micro or industry-specific credit risks are increasingly relevant to monitor (e.g., telecoms in ’99, housing in ’06). Here are some specific observations from the UBS credit team:

US high grade and high yield markets currently exhibit material dispersion among industries, and similar divergences, while imperfect, can foreshadow pressure points and potential broader market weakness (Figures 4, 5). In HY the laggards are all service sectors – retail (702bp, 2.6% market weight), broadcasting (637bp, 3.2%) and oil and gas (555bp, 6.7%) vs. the broader market (388bp, 100%), reflecting pressures due to significant debt/ leverage growth and/or secular fundamental headwinds. In IG the outliers include telecoms (160bp, 5.1%), gas pipelines (172bp, 3.7%), and cable media (147bp, 3.5%) vs. the overall index (109bp, 100%), representing a mix of significant (long-dated) debt issuance and releveraging related risks.

 

 

In Europe, comparatively, IG spread dispersion is more compressed in part given the indiscriminate ECB bond buying across non-financial corporates (Figures 6, 7). While this could distort more idiosyncratic credit stresses, net leverage across bond market issuers is not overly concerning, especially given European issuers have had ample opportunity to re-gear balance sheets but thus far have not moved aggressively. We don’t rule out increased shareholder activism and M&A for IG firms, but we believe Europe is earlier in the credit cycle and more sector-specific events are less likely to be a primary catalyst for macro spread performance.

Oil price projections: UBS’ energy analysts expect oil prices to trade sideways (WTI at $47, $51, and $49 in Q3, Q4 and Q1’18) as the rebound in US production and uncertainty around the OPEC agreement  has counterbalanced stronger global demand. The key downside risks include weaker global growth and a breakdown in the current OPEC/non-OPEC production agreement. Both scenarios, while not the bank’s base case, could push WTI back into the high $30s, triggering a material spread widening event.

China economic outlook: The material slowdown in China’s credit impulse is contributing to a slowdown in the property sector and import demand. However, alternative definitions of the Chinese credit impulse look more benign and one has actually bottomed. Recent data suggests recent property activity rebounded across the board, while retail sales, IP and FAI all missed expectations; this is consistent with a stable albeit slower economic backdrop, with real GDP expected to soften slightly to 6.7-6.8% this quarter vs. 6.9% in Q2. Shadow loan books remain a sleeper issue that is highly concentrated in regional banks and smaller joint-stock banks; while these loans pose potential contagion risk between banks, UBS does not conclude a systemic event is imminent.

US economic/earnings outlook: Fundamentally, at least on paper, global economic data has improved in recent weeks while US consumer and business sentiment remain elevated, even as inflation remains largely missing. ISM surveys continue to make new highs while corporate profits, even in the (revised) Q2 GDP report, showed a stronger-than-expected rise. Dollar weakness will also create a tailwind to US earnings by Q4’17 and Q1’18, boosting multinational profits. That said, earnings growth is improving but has not been broad based (ex- resource firms), the USD tailwind will accrue less to domestically focused firms (84 and 78%, respectively, of US HY and IG revenues) and firms on balance are not de-levering materially from near peak levels (Figure 8).

EU economic outlook: European economic data had a very strong performance in 1H17, and is expected to continue into 2H17, albeit at a slower pace. Eurozone GDP is to remain well above its trend in both 2017 and 2018 (Eurozone GDP is estimated to be 2.0% and 1.6% for 2017 and 2018 respectively), but slow from its highs of 2Q17 (0.6% q/q and 2.3% y/y). PMIs and corporate earnings momentum also peaked in May and are now stabilising and holding steady heading into 2H17 with 2017 on target to be the first solid profit growth in seven years (13% y/y consensus) but further Euro strength suggests potential downside risk to future earnings in non-domestic companies. Finally, European companies (excluding lower quality HY firms) are not re-levering balance sheets in similar fashion as seen in the US.

Furthermore, like Goldman last week, UBS which has a decidedly cautious bias toward credit has shifted its allocations within the space, but unlike Goldman, UBS is rotating away from IG and into HY: “we shift our preference for US high grade over high yield back to neutral on a total return basis as US yields normalize incrementally higher from current levels (YE targets: 10yr 2.4%). The narrowing in US high yield market vs. model spreads coupled with outperformance in US Treasury yields leaves us incrementally more positive on US high yield.“

In short: anyone hoping for a “gotcha” and a specific date with risk-off destiny will be disappointed because while UBS points out risks in general are rising – especially on the monetary policy front – it does not see any one explicit catalyst as launching an imminent risk-off event in credit markets. While the recent low-vol regime is certainly an outlier, and is now the most extended in a quarter century, absent a notable change in the status quo the Swiss bank is confident the current path will continue. 

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World’s Richest Woman Dies Age 94

Alice Walton, of Wal-Mart family infamy, is now the richest woman in the world, as The FT reports Liliane Bettencourt, the heiress of cosmetics giant L’Oreal and world’s richest woman, has died at the age of 94.

The FT details that Bettencourt was the daughter of chemist Eugène Schueller, who founded the company in 1909. According to Forbes magazine’s ranking of global billionaires, she topped the list of the world’s richest women for the second year in a row in 2017 with an estimated net worth of $39.5bn. She stepped down from L’Oreal’s board in 2012 following a 17-year tenure, and her shareholding has been under the guardianship of family members since 2011, when a court concluded that she was unfit to look after it herself.

Bettencourt was the richest woman in the world but only the 15th richest person in the world. And with Bettencourt's passing, Wal-Mart's Alice Walton (19th overall in the world) becomes the richest woman in the world…

L’Oreal chairman and chief executive Jean-Paul Agon said in a statement that Bettencourt “personally contributed greatly” to the company’s success and “was a great lady of beauty who has left us and whom we will never forget.”

“We all had a great admiration for Liliane Bettencourt, who always looked after L’Oreal, the company and its employees, and was very attached to its success and development.”

 

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Trump Launches New Sanctions On North Korea Through Executive Order

As Gen. McMaster previewed earlier in the day, moments ago President Trump announced a new executive action that “significantly expands” US authority to target individuals, companies and financial institutions that finance or facilitate trade with North Korea.

“I am announcing a new executive order to sign that significantly expands authorities to target individuals, companies, financial institutions that finance and facilitate trade with North Korea,” Trump said.

While details remains scarce, among the notable big picture actions to be taken include:

  • TRUMP SAYS CHINA’S CENTRAL BANK HAS ORDERED THEIR BANKS TO STOP DOING BUSINESS WITH NORTH KOREA
  • TRUMP SAYS EFFORT WILL ALSO TARGET NORTH KOREAS SHIPPING, TRADE NETWORKS

The official announcement, which was made just before a United Nations summit with Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in.

Japan was happy with the announcement”:

  • JAPAN’S SHINZO ABE WELCOMES NEW ACTION BY UNITED STATES
  • JAPAN’S ABE: `NEW STAGE OF PRESSURE’ AGAINST NORTH KOREA

That said, as discussed earlier, Trump has once again refused to push the boundary too far and anger China, and as a result the president once again refused to implement any oil-linked sanctions, potentially limiting the only trade flow between China and North Korea that matters.

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