Peso Tumbles As Mexican President Warns “Will Take Immediate Actions To Defend Interests With US”

In a much anticipated speech, Mexican President Enrique Pena Nieto warned that “Mexico is obliged to take steps to defend itself given the new vision in U.S.,” reaffirming Mexico “as a nation open to the world on trade.” The peso is leaking lower as he speaks, erasing post-inauguration gains.

Further headlines include:

  • *MEXICO PRESIDENT PENA NIETO SPEAKS IN MEXICO CITY
  • *PENA: MEXICO REAFFIRMS ITSELF AS NATION OPEN TO WORLD ON TRADE
  • *PENA: MEXICO WILL DIVERSIFY, STRENGTHEN WORLD TRADE POSITION
  • *PENA NIETO: MEXICO IS BECOMING A GLOBAL LOGISTICS CENTER
  • *PENA: MEXICO WILL KEEP, STRENGTHEN RELATIONSHIPS AROUND WORLD
  • *PENA NIETO: MEXICO WILL STRENGTHEN ROLE IN CARIBBEAN, LATAM
  • *PENA: MEXICO LOOKING TO STRENGTHEN TRADE W/ ARGENTINA, BRAZIL
  • *MEXICO SEEKS STRATEGIC ALLIANCES WITH MIDDLE EAST COS.: PENA
  • *PENA NIETO: MEXICO WILL TAKE ACTIONS TO DEFEND INTERESTS W/ U.S
  • *NEITHER CONFRONTATION, NOR SUBMISSION IN U.S. TALKS: PENA NIETO
  • *U.S.-MEXICO RELATIONS OF UTMOST IMPORTANCE FOR U.S.: PENA NIETO

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Kunstler Warns “Disassembly Of This Vast Array Of Rackets Will Cause Dangerous Friction”

Submitted by Howard Kunstler via Kunstler.com,

If the first forty-eight hours are any measure of the alleged Trumptopia-to-come, the leading man in this national melodrama appears to be meshuga. A more charitable view might be that his behavior does not comport with the job description: president. If he keeps it up, I stick to my call that we will see him removed by extraordinary action within a few months. It might be a lawful continuity-of-government procedure according to the 25th Amendment — various high officials declaring him “incapacited” — or it might be a straight-up old school coup d’état (“You’re fired”).

I believe the trigger for that may be an overwhelming financial crisis in the early second quarter of the year. In, the first case, under Section 4 of the 25th Amendment, it works like this:

Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.

Or else, it will be an orchestrated cabal of military and intelligence officers — not necessarily evil men — who fear for the safety of the nation with the aforesaid meshuganer in the White House, who is summarily arrested, sequestered, and replaced by an “acting president,” pending a call for an extraordinary new election to replace him by democratic means. I’m not promoting this scenario as necessarily desirable, but that’s how I think it will go down. It will be a sad moment in this country’s history, worse than the shock of John Kennedy’s assassination, which happened against the background of an economically stable Republic. History is perverse and life is tragic. And shit happens.

Returning to the first forty-eight hours of the new regime, first the ceremony itself: there was, to my mind, the disturbing sight of Donald Trump, deep in the Capitol in the grim runway leading out onto the inaugural dais. He lumbered along, so conspicuously alone between the praetorian ranks front and back, overcoat open, that long red slash of necktie dangling ominously, with a mad gleam in his eyes like an old bull being led out to a sacrificial altar. His speech to the multitudes was not exactly what had once passed for presidential oratory. It was not an “address.” It was blunt, direct, unadorned, and simple, a warning to the assembled luminaries meant to prepare them for disempowerment. Surely it was received by many as a threat.

Indeed an awful lot of official behavior has to change if this country expects to carry on as a civilized polity, and Trump’s plain statement was at face value consistent with that idea. But the disassembly of such a vast matrix of rackets is unlikely to be managed without generating a lot of dangerous friction. Such a tall order would require, at least, some finesse. Virtually all the powers of the Deep State are arrayed against him, and he can’t resist taunting them, a dangerous game. Despite the show of an orderly transition, a state of war exists between them. Anyway, given Trump’s cabinet appointments, his “swamp draining” campaign looks like one set of rackets is due to be replaced by a new and perhaps worse set.

Trump was correct that the ruins of industry stand like tombstones on the landscape. The reality may be that an industrial economy is a one-shot deal. When it’s gone, it’s over. Even assuming the money exists to rebuild the factories of the 20th century, how would things be produced in them? By robotics or by brawny men paid $15-an-hour? If it’s robotics, who will the customers be? If it’s low-wage workers, how are they going to pay for the cars and washing machines? If the brawny men are paid $40 an hour, how would we sell our cars and washing machines in foreign markets that pay their workers the equivalent of $1.50 an hour. How can American industry stay afloat with no export market? If we don’t let foreign products into the US, how will Americans buy cars that are far more costly to make here than the products we’ve been getting? There’s no indication that Trump and his people have thought through any of this.

Trump can pull out the stops (literally, the regulations) to promote oil production, but he can’t alter the declining energy return on investment that is bringing down the curtain on industrial society. In fact, pumping more oil now at all costs will only hasten the decline of affordable oil. His oft-stated wish to simply “take” the oil from Middle Eastern countries would probably lead to sabotage of their oil infrastructure and the cruel death of millions. He would do better to prepare Americans for the project of de-suburbanizing the nation, but I doubt that the concept has ever entered his mind.

The problems with Obamacare, and so-called health care generally, are burdened with so many layers of arrant racketeering that the system may only be fixable if it is destroyed in its current form — the overgrown centralized hospitals, the overpaid insurance and hospital executives, the sore-beset physicians carrying six-figure college-and-med-school loans, the incomprehensible and extortionate pricing system for care, the cruel and insulting bureaucratic barriers to obtain care, the disgraceful behavior of the pharmaceutical companies, all add up to something no less than a colossal hostage racket, robbing and swindling people at their most vulnerable. So far, nobody has advanced a coherent plan for changing it. Loosing the Department of Justice to prosecute the medical racketeers directly would be a good start. Overcharging and defrauding sick people ought to be a criminal act. But don’t expect that to happen in a culture where anything goes and nothing matters. A financial crisis could be the trigger for ending the massive medical grift machine. Then what? Back to locally organized clinic-scale medicine… if we should be so lucky.

Saturday afternoon, Trump paid a call at CIA headquarters, ostensibly to begin mending fences with what may be his domestic arch-enemies. What did he do? He peeved and pouted about press reports of the lowish attendance at his swearing in. Maximum meshuga. I’m surprised that some veteran of The Company’s Suriname outpost didn’t take him out with a blowgun dart garnished with the toxic secretions of tree frogs.

Do you suppose Trump is going to improve? That was the hope after the election: that he’d take on some POTUS polish. No, what you see is what you get. I can only imagine that what’s going on behind the scenes in various halls of power would make a Matt Damon Bourne movie look like a sensitivity training session — grave professional men and women on all fours with their hair on fire howling into the acoustical ceiling tiles.

Don’t forget that it was the dismal failure of Democratic “progressive” politics that gave us Trump. His infantile lies and foolish tweets were made possible by a mendacious political culture that excuses illegal immigrants as “the undocumented,” refuses to identify radical Islamic terror by name, shuts down free speech on campus, made Michael Brown of Ferguson a secular saint, claims that there’s no biological basis for gender, and allowed Wall Street to pound the American middle class down a rat hole like so much sand.

You think this is the dark night of the national soul? The sun only went down a few minutes ago and it’s a long hard slog to daybreak.

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Russian Warplanes Fly First Joint Mission With US-Coalition Aircraft Kremlin Says, Pentagon Denies

According to the Russian Defense Ministry, cited by AP, Russian warplanes have flown their first combat mission in Syria with U.S.-led coalition aircraft. Russian Interfax added that various ISIS storage facilities, and militants were eliminated in the “joint strike”:

  • ISIL STORAGE FACILITIES, MILITANTS ELIMINATED IN JOINT STRIKE CONDUCTED BY RUSSIAN AEROSPACE FORCES, INTL COALITION FORCES IN SYRIA, WITH COORDINATES RECEIVED FROM U.S. – RUSSIAN DEFENSE MINISTRY. IFX.

However, the report was promptly denied by the Pentagon after spokesman Major Adrian Rankine-Galloway told reporters Monday that “there is no military-to-military coordination for airstrikes over targets in Syria,” Pentagon. Instead what appears to have happened is that U.S.-led coalition and Russia have communicated to prevent unforseen incidents, a process known as “deconflicting.”

This however is also suspect, because earlier in the day Sputnik reported that Russia had received coordinates of Daesh targets in Al-Bab, Aleppo Province, from the US via the ‘direct line,’ according to the Russian Defense Minsitry said Monday. The United States has provided coordinates of the terrorists’ targets in the city of Al-Bab in Aleppo province for Russian airstrikes. After the reconaissance check, Russia and two coalition jets have conducted joint airstrikes on the Daesh targets in the region.

“On January 22, the Russian command center at the Hmeymim airbase has received coordinates of Daesh targets in Al-Bab, Aleppo province, via the ‘direct line’ from the US-led coalition headquarters. After further data verification with the assistance of unmanned aircraft and space reconaissance, the Russian Aerospace Forces and two jets of the international coalition have conducted airstrikes on the terrorists’ targets,” the statement said.

It appears that the source of the confusion is that instead of US planes, Russia was conducting joint strikes with Turkish warplanes: according to Sputnik Russian and Turkish combat planes have carried out a new series of joint airstrikes against Daesh targets in war-torn Syria, the Russian Defense Ministry said on Monday.

“On January 21, the Russian Aerospace Forces and the Turkish Air Force conducted a new joint operation striking Daesh group near Al-Bab in the province of Aleppo,” the ministry said.

According to the statement, the missions involved three Russian planes, including two Su-24M and a Su-34 aircraft, and four Turkish planes, including two F-16 and two F-4 fighter-bombers.

A total of 22 Daesh targets have been struck. A day later, Russia received Daesh’s coordinates in the area from the United States and struck them jointly with the US-led coalition aircraft, the ministry said. This was the second joint operation by Russian and Turkish aviation in Syria. On Wednesday, the first joint airstrikes have been launched against Daesh in Al-Bab.

Turkey is currently conducting an operation in Syria dubbed Euphrates Shield. On August 24, Turkish forces, supported by Free Syrian Army rebels and US-led coalition aircraft, began a military operation dubbed the Euphrates Shield to clear the Syrian border town of Jarabulus and the surrounding area from Daesh terrorist group. As Jarabulus was retaken, the joint forces of Ankara, the coalition and Syrian rebels continued the operation to gain control over Al-Bab in the Aleppo province.

Al-Bab is one of Daesh’s last remaining strongholds near the Turkish border. Capturing the city is of strategic importance to Turkey in order to prevent the Syrian Kurds taking it and unifying their own territories.

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Billionaire Dem Donor Thinks His Party Needs A New Message – “No One Votes For Polar Bears”

Tom Steyer, the Billionaire founder of the hedge fund Farallon Capital, spent $87mm funding liberal campaigns and ballot measures all across the country in 2016 and got absolutely nothing in return but a Republican-controlled Congress and White House.  Something tells us the 2016 election cycle was one of the worst “investment” ROI’s of Steyer’s life.

But despite his stunning losses, like Obama, Steyer is convinced that Americans still overwhelming agree with liberal policies…it’s just that those policies aren’t being explained well enough for people to understand them.  Per The Hill:

He said he still believes most voters agree with Democratic ideals, though the party didn’t effectively convey them in November.

 

“I think there’s no doubt that we reflect the will of the people to an overwhelming extent. I don’t think we were successful in conveying the
spirit behind those policies, and I don’t think we were successful in transmitting the urgency behind those policies,” Steyer told The Hill.

 

While the economy added millions of jobs under former President Barack Obama, the recovery from the worst recession since the Great Depression brought with it stagnant wage growth. Steyer said that drove voters away from Democrats, who shepherded the slow-growth economy during Obama’s eight years in office.

Steyer

 

Sure, because it couldn’t possibly be that the electorate actually understands the following data, or at least feels the impact of the Obama “economic recovery” farce in their daily lives, and chose to try something new.  Perhaps Steyer could more “successfully convey” why the following facts about Obama’s “economic recovery” are positive for the majority of Americans.

Harvard

 

But, unlike many political hopefuls and the majority of the establishment in Washington D.C., at least Steyer is somewhat self-aware.  After considering a run for the California Governor’s seat, Steyer admits that the 2016 election cycle left him, as well as the mainstream media, completely confused about the priorities of American voters. 

He had expected to make a decision about whether to run for governor, he said, in a world in which Hillary Clinton had taken the presidential oath of office, not Trump.

 

“The truth of the matter is, it’s different. The world did not play out on November 8 the way I expected it to, and I want to make sure whatever I do is well considered and responds to the reality of what’s going on,” he said. “I’m still intending to do the most impactful service I can in terms of standing up for the values I care most about.”

 

Steyer said climate change issues can appeal to middle-class Americans, but only if those issues are cast as an economic appeal.

 

“On an economic basis, acting on clean energy is positive in every single fashion, including creating millions of net good jobs,” Steyer said. “No one votes for polar bears. People care about local, human issues, period.”

Oh well, we do hope that Steyer runs for office soon as we look forward to a solid, concise explanation of exactly how the abysmal Obama recovery was good for the country…we, apparently like most Americans, still don’t fully understand it.

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The Smoothest Transition Ever (For Markets)

By most mainstream media accounts, the first weekend of the Trump Administration wasn’t good. Characterized as rocky, erratic, terrible, and full of false claims, the ‘not ready for prime time’ transition team is now the ‘not ready for prime-time administration.’ However, as Bespoke details, by at least one measure, though, the Trump Administration’s transition has been pretty smooth… the smoothest ever for markets.

The table below was from this week’s Bespoke Report newsletter and shows how the DJIA performed from Election Day through Inauguration Day for each newly elected President since 1896.  Along with the DJIA’s performance during each transition, we also show the maximum percentage decline the index saw from a closing high during each period.  

With a gain of 7.62% during Trump’s transition, the DJIA had its second best transition performance since 1896.

More importantly, with a maximum decline of 1.2% from a closing high, no other newly elected President has ever seen a less volatile transition period!

Call it whatever you want, but from the stock market’s perspective at least, the Trump transition was the smoothest ever.

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Trump Signs 3 Executive Orders: Withdraws From TPP, Freezes Federal Hiring, Limits Overseas Abortion Funding

As we previewed and was widely expected, President Trump has just signed 3 executive orders: one officially withdrawing the US from the Trans Pacific Partnership, a second one instituting a federal hiring freeze except for the military, and a 3rd executive order limiting abortion funding overseas.

“It's a great thing for the American worker, what we just did,” Trump said on Monday after signing an order withdrawing the U.S. from the Trans-Pacific Partnership accord with 11 other nations. He didn’t sign any actions to direct a renegotiation of the Nafta accord with Mexico and Canada, yet he said on Sunday he would begin talks with the two leaders on modifying the accord, BBG reported. “We’ve been talking about this a long time,” Trump said.

As the AP notes, the move is basically a formality, since the agreement had yet to receive required Senate ratification. Trade experts say that approval was unlikely to happen given voters' anxiety about trade deals and the potential for job losses.  It remains unclear if Trump would seek individual deals with the 11 other nations in TPP— a group that represents roughly 13.5 percent of the global economy, according to World Bank figures. Trump has blamed past trade deals such as the North American Free Trade Agreement and China's entrance into the World Trade Organization for a decline in U.S. factory jobs.

Trump’s trade focus fulfills a campaign promise to rewrite America’s trade policy during his first days as president. In declaring his determination to renegotiate Nafta, Trump would rework an agreement that has governed commerce in much of the Western hemisphere for 22 years. By scrapping the Trans-Pacific Partnership accord negotiated by former President Barack Obama, Trump will delight many of his most fervent supporters as well as a good many Democrats, while opening an economic vacuum in Asia that China is eager to fill.

Trump campaigned against the TPP and other trade deals, including Nafta, during his campaign for the White House. In a video released in November, Trump promised to exit TPP “on day one,” calling it “a potential disaster for our country.”

The TPP, a 12-country deal that sought to liberalize trade between the U.S. and Pacific Rim nations including Japan, Mexico and Singapore, was a signature piece of former Obama’s attempt to pivot U.S. global strategy to focus on the fast-growing economies of Asia.

With TPP now history, Trump will next focus on NAFTA.

The president said Sunday that he’ll meet with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto to begin discussing NAFTA, which he has routinely blamed for the loss of U.S. jobs. The newly sworn-in president praised Mexico for being “terrific” and signaled that he’s willing to work with the U.S.’s closest neighbors.

“We’re going to start renegotiating on Nafta, on immigration, and on security at the border,” Trump said at the start of a swearing-in ceremony for top White House staff. “I think we’re going to have a very good result for Mexico, for the United States, for everybody involved. It’s really very important.”

 

Officials in Canada, which is the biggest buyer of U.S. exports, have indicated they want to avoid getting entangled with the Trump administration’s targeting of imports from Mexico and China. The three countries are the biggest trading partners of the U.S.

 

David MacNaughton, Canada’s ambassador to the U.S., told reporters his focus is on avoiding Canada being "collateral damage" in trade actions.

We wish David the best of luck, especially since the ball is now entirely in Trump's court.

* * *

 A second Executive order confirms a federal hiring freeze, “except for military,” President Trump tells reporters while signing order.

President Donald Trump is signing a memorandum that freezes hiring for some federal government workers as a way to reduce payrolls and rein in the size of the federal workforce.

 

Trump's directive is fulfilling one of his campaign promises. He tells reporters that members of the military will be exempted from the hiring freeze.

 

The new president has vowed to take on the federal bureaucracy and the action could be the first step in an attempt to curtail government employment.

 

The memorandum signed by Trump's is similar to one that President George W. Bush signed at the start of his administration in 2001.

And a third executive order saw President Donald Trump is reinstating a ban on providing federal money to international groups that perform abortions or provide information on the option.

The regulation has been something of a political football, instituted by Republican administrations and rescinded by Democratic ones since 1984.

 

Most recently, President Barack Obama ended the ban in 2009.

 

Trump signed it one day after the Jan. 22 anniversary of the Supreme Court's 1973 Roe vs. Wade decision that legalized abortion in the United States, the date which is traditionally when presidents take action on the policy.

 

The policy also prohibits taxpayer funding for groups that lobby to legalize abortion or promote it as a family planning method.

As we laid out before, here is a brief summary of what Trump can (and can not do) on day one. Exhibit 3 lists the President’s “Contract with Voters”, which includes several items that can be accomplished through executive action but involves significant legislative activity as well.

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Aetna’s Takeover Of Humana Blocked As Anticompetitive

Back in August, we reported of a fascinating case of crony capitalism, whereby Aetna gave the DOJ a not too subtle ultimatum which boiled down to the following: “If the Humana deal is blocked, we exit Obamacare.”

 

Well, be careful what you wish for, because moments ago, a US federal judge blocked Aetna’s $37 billion deal to buy rival insurer Humana, thwarting one of two large mergers that would reshape the U.S. health-care landscape. The judge’s ruling, which was filed in Federal court in Washington, said the deal would be “anticompetitive”adding that the deal would have hurt competition among insurers. With the deal now scrapped, it means Aetna will owe Humana a $1 billion breakup fee.

Of course, with Obamacare on its way out, it would not be a surprise if the insurance companies would not have quietly preferred that the deal was blocked. For now, however, the shareholders of Aetna are less than excited, sending the stock of the company nearly 3% lower, while Humana was rebounded to almost unchanged after plunging as much as 7% in kneejerk reation.

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As China Slaps Fees On Bitcoin Trades, Japan Monthly Volumes Soar by 8,900%

There is one reason why bitcoin quickly became the darling of HFT and various high speed algo traders operating out of China and the rest of the world: domestic transactions were “frictionless”, as there were no fees on buys or sells. Until last night, that is, because as China’s three largest bitcoin exchanges, BTCC, Huobi and OkCoin, all said in separate statements on their websites late on Sunday, starting Tuesday they will charge traders a flat fee of 0.2% per transaction. This is only the latest fallout from the recent crackdown on Chinese bitcoin exchanges whose activities have drawn increased scrutiny from the central bank.

Each of the statements said assessing fees will “further curb market manipulation and extreme volatility”.

One of the reasons why China has dominated bitcoin trading volumes in recent years, in addition to the US of the digital currency to bypass capital controls, has been the absence of trading fees which encouraged volumes and boosted demand at Chinese bitcoin exchanges. However, when the price of bitcoin soared to near-record highs – as this website predicted would happen in the summer of 2015 – driven by a stampede of Chinese momentum chasers, it attracted attention from Chinese regulators. Helping the surge, was the collapse in the yuan which weakened 6.6% against the dollar, its worst performance since 1994 as local savers sought the relative “safety” of bitcoin relative to the renminbi.

The standoff between local bitcoin traders and exchanges on one hand, and regulators on other culminated on Jan. 11, when the People’s Bank of China launched spot checks on BTCC, Huobi and OkCoin to look into a range of possible rule violations, amid increasing government efforts to stem capital outflows and relieve pressure on the yuan. According to Reuters, citing “a person familiar with the matter”, the exchanges had not received direct instructions from the PBOC, but decided to introduce trading fees to align with its wishes to see the bitcoin market cool down.

So far, the impact of the new fees has been negligible, with the price of Bitcoin on the BTCChina exchange largely unchanged overnight.

 

And as one bitcoin bubble fizzles, a new one appears to be born. Japan.

As Cryptocoinsnews reported over the weekend, a major factor that has sent the trading volume of Bitcoin in Japan soaring, is the new virtual currency law which will be enforced by this spring, says the Business Development Lead of CoinCheck, the country’s top exchange. According to Kagayaki (Kaga) Kawabata, the introduction of the proposed law made Bitcoin a darling of top media organisations in the country. He explains:

“After this announcement, various large media that once negated Bitcoin started to feature Bitcoin again this time as an innovative technology (After the Mt. Gox incident, the media broadcasted Bitcoin as a tool for money laundering). Japanese national TV shows and newspapers such as NHK and NIKKEI featured about cryptocurrency expanding awareness of the general public and bringing in various users with diverse backgrounds from college students to elderlies.”

Kawabata, whose CoinCheck’s parent company, ResuPress, also provides Bitcoin payment processing for merchants similar to the service BitPay offers, the announcement could have contributed to a key new trend in Japan which is the changing view that Bitcoin is not just an investment vehicle. He says:

“Many still think of Bitcoin as an investment vehicle. However, the situation is changing where Bitcoin is also starting to be used as a payment method in the past few years. Currently, there’s around 5,270 merchants and website that accept Bitcoin as payment in Japan (99% of them use Coincheck payment). Regarding payment volume, compared to last year January, the monthly volume increased by 8900%. This number could accelerate in the next few years.”

He added that the enforcement of the new law may have positive side effects on Bitcoin as it was once considered a toy for geeks but is now changing dramatically now to be seen as a legit currency. Ironically, Japan was also the epicenter of the first mass bitcoin casualty, when Mt.Gox went under, wiping out hundreds of millions in the process. Then again, human memory tends to be quite shallow when potential profits are involved.

Such a change in perception, he says, has the potential to migrate serious traders to trade in Bitcoin and other cryptocurrencies which will inadvertently surge cryptocurrency trading volume remarkably. Which is why he is very optimistic about the future:

“We believe the hype in Bitcoin price is not just a fluke,” Kawabata says on the general outlook of cryptocurrencies. “Many factors exist that accelerate the trading volume. We believe cryptocurrencies market will grow dramatically in the next few years. Many large corporations and banks in Japan have started to show interest in cryptocurrency and started to experiment with the Blockchain technology. I think remittance will be the first practical usage of cryptocurrency where many corporations/banks will adopt cryptocurrencies.”

Of course, if and when the second coming of the Japanese bitcoin bubble fizzles, we are confident some other country in the world will open it with open arms, as the rolling digital currency bubble continues its fascinating drift around the globe.

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“Pulling Awesome Forward”

Submitted by Jason Leach via FusionPoint Capital,

U.S. markets have “celebrated” the Trump election, with the S&P 500 rising ~8% after a quick ~4% drop pre-election (and much deeper drop in futures the night of the election). There are quite a number of themes, positive and negative, continuing into the new year from 2016. The “positives” – infrastructure spend, tax reform, healthcare reform, and deregulation – have built a relentless bid, or scared off sellers…for the time being.

The “negatives” – dollar strength, dollar scarcity, global debt bubble, Fed divergence, stress in European and Chinese banks, Yuan devaluation, rising populism in Europe (with French, Italian, German elections around the corner), low but rising probability of Euro-Exits, protectionist leanings (Smoot-Hawley tariffs contributed to a 66% decline in global trade from 1929-1934), and U.S. equity valuations at the third highest level ever (median stock on the S&P 500 at 98th percentile, and the all-time highest valuation for the index when including the enormous amount of corporate debt growth over the past decade) – are relegated to the dark recesses of pre-election…pre-light.  

There are myriad estimates of what Trump's policies could add to GDP and thus corporate earnings. If these policies are well thought out and passed quickly, no doubt there will be boosts. But, and there are several big “buts” here, with the current state of divisiveness, every issue is “third rail” and unless Republicans are willing to use the nuclear option (reconciliation where simple majority passes in the Senate) like a tactical weapon (i.e., repeatedly), the “positives” being pulled forward into today's market pricing may take many more moons than anticipated. And, as detailed in iterations of Trillion Dollar Sam, these deep structural problems are decades in the making and will require more than outpatient Trump surgery in the first 100 days to rectify.

The Trump election is seen as the hand off or inflection point from monetary policy to fiscal policy. Significant infrastructure would have been nice…5-6 years ago before the national debt rose another 33% to ~$20 trillion (missed window), and before the Fed started a hiking cycle. If infrastructure is somehow passed this year, and employment and wages continue to improve, the Fed could be forced to move faster. This could contribute more to dollar strength (along with repatriation, a potential border tax/tariff, and dollar shortages in Europe and Asia). Fed hikes (particularly moving the 10-year above 3%) and a continuation of the bull market dollar move could ameliorate the benefit from infrastructure spend, tax fixes, deregulation etc., or worse, invert the yield curve (historical 9-month to 1-year lag to recession), disrupt markets (more on this below), and put a pin closer the $231T global debt bubble, where dollar denominated debt approximates $57T. Remember, the last two major bull market dollar moves ended in crises in Latin America in the mid-late ‘80s, and Asia/Russia in the late ‘90s.

S&P 500: Gimme Three Steps

Every recession has been preceded by a significant increase in Fed Funds, margin or reserve requirements – tightenings. And as my colleague Arun Chopra, CFA CMT notes, major market downdrafts can occur after “3 steps and a stumble”. Some argue that 75-100 basis points, or 3-4 increases is not significant, but it comes off the zero bound and follows a 25% increase in the dollar. In Arun's chart below, note the interesting “dollar tightening” perspective on this tightening cycle.  Link to content here.

  • From late 2011 through late 2015, the S&P 500 glided up on Fed & BOJ QE-induced auto pilot. 
  • Since late 2014, the dollar has risen 25% and the Fed has raised the Fed Funds rate twice – 3 effective tightenings.
  • These three tightenings did not result in market declines.

"Three steps and a stumble" posits that if markets endure three hikes without declines, they are vulnerable to a substantial or serious setback possibly on the fourth hike. Interesting perspective.

And, below is another chart from Arun contrasting the 1980s rate environment, valuations and S&P 500:

  • At Reagan's inauguration, PE10 was 8.6x and 10-year Treasury yields were 14.6%.
  • From '81 to '87 markets witnessed a 50% decline in rates, and a 100% increase the S&P 500.
  • Earnings growth began to take off after 8 years of “real great rotation” from fixed income to stocks.

Today, the S&P 500 PE10 stands at 27.9x and 10-year Treasury Yields at 2.47%, pretty much the opposite scenario. A great rotation from here would be much different in a debt laden world.

The euphoria in markets is based on a seismic change in policy. The questions are on timing, efficacy, and whether the Fed tightening cycle overcomes any benefits. And, the environment today is much different than the 1980s, and just ten years ago.

The market is pricing in a lot of “Everything is Awesome”, but has all that awesome, real or fantasy, been pulled forward? We will see.

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Europe’s “VIX” Spikes Most In 4 Months

While still at relatively low levels, the VStoxx index (Europe's VIX) spiked over 17 this morning, its highest in 3 weeks and the biggest jump since September…

The post-election low vol regime is under pressure…

Is that regime about to change?

 

Time for Draghi to get even more dovish?

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