Tag: finance

They once ruled the earth…

 

Source: Ben Garrison

via http://ift.tt/2jzziNK Tyler Durden

Submitted by Michael Snyder via The Economic Collapse blog,

January 20th cannot come soon enough.  Instead of stepping back and trying to ensure a smooth transition for Donald Trump, Barack Obama has decided to go hog wild and use every ounce of presidential power still available to him.  He has been establishing a bunch of new national monuments, he just stabbed Israel in the back at the United Nations, and on Thursday he even took time to give Joe Biden a Presidential Medal of Freedom.  But one of the things that has people the most concerned is his endless provoking of Russia.  Every few days it seems like Obama is doing something else to aggravate Russia, and if he wasn’t leaving office in about a week I am sure that the mainstream media would be full of speculation about a possible war.

Lame duck presidents are not supposed to make risky moves like this once a new president has been elected.  On Thursday, we learned that U.S. troops have been permanently deployed to Poland for the very first time…

American soldiers rolled into Poland on Thursday, fulfilling a dream some Poles have had since the fall of communism in 1989 to have U.S. troops on their soil as a deterrent against Russia.

Some people waved and held up American flags as U.S. troops in tanks and other vehicles crossed into southwestern Poland from Germany and headed toward the town of Zagan, where they will be based. Poland’s prime minister and defense minister will welcome them in an official ceremony Saturday.

Poland was once a key member of the Warsaw Pact alliance, and the Russians are quite alarmed that U.S. troops will now be stationed so close to the Russian heartland.  The following comes from ABC News…

“These actions threaten our interests, our security,” President Vladimir Putin’s spokesman Dmitry Peskov said Thursday. “Especially as it concerns a third party building up its military presence near our borders. It’s not even a European state.”

And it has also been announced that NATO troops will arrive in Lithuania in late January.  If you will remember, Lithuania was actually part of the Soviet Union during the Cold War.

All of a sudden, Russia has become enemy number one.  Barack Obama and Hillary Clinton say that Russia is to blame for Clinton’s election loss, and so at the end of December Obama expelled 35 Russian diplomats from the country.

That is the sort of thing that you do before a war starts.

Over in Europe, they are so freaked out about potential Russian interference in their elections that they are “erecting defenses to counter possible Russian cyber attacks”…

Nations in Europe, where Germany and France this year hold elections, are erecting defenses to counter possible Russian cyber attacks and disinformation to sway Western politics, but intelligence experts say this might be too little and too late.

 

The issue of Russian “influence operations” has taken on new urgency after U.S. intelligence agencies released a non-classified assessment that President Vladimir Putin ordered a campaign to move the U.S. election in favor of Donald Trump.

 

European nations and NATO are setting up centers to identify “fake news”, bolstering cyber defenses and tracking use of social media which target Russian-speaking communities, far-right groups, political parties, voters and decision-makers.

Back in 2012, Barack Obama mocked Mitt Romney for saying that Russia was a serious threat to our national security.  He even joked that the 1980s were calling Romney because they wanted their foreign policy back.

At that time, Barack Obama boldly declared that the Cold War had been over for 20 years.  But now here we are just four years later and Barack Obama has gotten us into a new Cold War.  The crisis in Ukraine, the civil war in Syria, the price of oil, cyber-espionage and a whole host of other issues have brought tensions between the United States and Russia to a boiling point.

Many are hoping that relations with Russia will improve during the Trump administration, but the truth is that things could go either way.

It is important to remember that Trump will be surrounded by military people that are virulently anti-Russia.  For example, retired Marine General James Mattis has been nominated to be Defense Secretary, and this week he told Congress that Russia is the “principal threat” to U.S. security…

While much of the hearing has so far been without controveries, in the most striking moment so far, Mattis told the Senate Armed Services Committee that Russia stands as the “principal threat” to the United States’s security. He said this is because of its actions and efforts to “intimidate” other countries.

 

Senator John McCain questioned Mattis to get his opinion on how much of a threat Russia represents. Mattis response was that the world order is “under biggest attacks since WW2, from Russia, terrorist groups, and China’s actions in the South China Sea”, agreeing with the neocon senator that Russia is trying to break up NATO.

 

“I’m all for engagement” with Russia, “but we also have to recognize the reality of what Russia is up to,” Mattis told Senator Jack Reed (D-Rhode Island).

There is a great deal of concern that Trump’s view of Russia could be significantly shaped by strong military men such as Mattis.  Both Democrats and Republicans want Trump to become much more anti-Russia, and let us hope that he does not give in to the pressure.

Over in Russia, they view us very negatively as well.  A Gallup survey taken in mid-2016 found that current U.S. leadership (the Obama administration) only had a one percent approval rating in Russia.

Yes, you read that correctly.

You can’t get much lower than one percent.

The Russians consider themselves to be the great force for good in the world, and they consider the United States to be the great force for evil.  They openly talk about the possibility of nuclear war on their news broadcasts, and on one recent broadcast people were actually encouraged to locate the closest nuclear bomb shelter to their homes.

And in response to U.S. troops being deployed to Poland, the Russian government has deployed advanced anti-aircraft missile systems around Moscow…

Russia has deployed anti-aircraft missile systems around Moscow to protect the capital from attack in the latest sign Vladimir Putin is preparing for war.

 

The s-400 Triumph air defence system has been providing air cover for Russian forces in Syria since November, and is now being deployed on home soil.

 

It is capable of hitting moving airborne targets including planes and incoming missiles and has a range of 400km.

We should be very thankful that Barack Obama is leaving office, because right now we are on a path that leads to war with Russia.

Every American should be hoping that Donald Trump will work to greatly improve relations with the Russians, but all it would take is one wrong move for things to start deteriorating once again.

A new Cold War has begun, and the stakes are incredibly high…

via http://ift.tt/2jNNEJA Tyler Durden

Authored by Oaktree Capital's Howard Marks,

In August, I mentioned that I had chosen the title “Political Reality” for my memo in part because of my liking for oxymorons.  I classed that title with other internally contradictory statements, such as “jumbo shrimp” and “common sense.”  Now I’m going to discuss one more: “expert opinion.”

This memo was inspired by a thought that popped into my head when the outcome of the election settled in.  You may point out that at the end of my November 14 memo “Go Figure!,” I said I wouldn’t write any more about politics.  True, but I didn’t say I wouldn’t think about politics.  Anyway, this memo isn’t about politics, it’s about opinions.

Last spring I attended a dinner where one of Hillary Clinton’s senior advisers was soliciting input, as she and her campaign were struggling to come up with an effective counter to Bernie Sanders’s populist message.  Most of those present expressed frustration on the subject, until an experienced, connected Democrat assured everyone, “Don’t worry.  She’ll win.  The math is irresistible.”  The Hillary supporters were relieved, and he turned out to be right: she won the nomination going away.

In late October, with the issue of Clinton’s private email server and the FBI’s new investigation further dogging her, that same seasoned Democrat was asked whether the election was in jeopardy.  “Don’t worry,” he said.  “She’ll win.  The math is irresistible.”  We all know the result.

The opinions of experts concerning the future are accorded great weight . . . but they’re still just opinions.  Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it.  This year’s election season gave us plenty of opportunities to see expert opinion in action.  I’ll start this memo by reflecting on them.

The Year Polls Stopped Working

Pollsters got off to a tough start last year with the June referendum concerning Britain’s membership in the European Union.  Right up to the end, both pollsters and bookmakers considered U.K. citizens 70% likely to vote to remain a member.  But, in the end, “Leave” won by a few percent. 

The reaction was shock.  Voters on both sides of the issue were unprepared for the outcome.  Within a day or two, the leaders of Britain’s main political parties had stepped down.  People began to seriously discuss what that outcome meant and how “Brexit” would be accomplished.

The explanations for the pollsters’ error centered around Britain’s lower level of experience with, and expertise in, polling.  It couldn’t happen in the U.S.  In fact, in the 2008 and 2012 presidential elections, Nate Silver, the proprietor of website FiveThirtyEight, correctly predicted the outcome in all 50 states once and in 49 the other time. 

In 2016, FiveThirtyEight estimated the odds of Hillary Clinton winning as slightly better than 50/50 as of the end of the Republican convention in July.  Then it had her as an 8-to-1 favorite in August, when the Democrats concluded their convention and Donald Trump’s perceived missteps peaked.  And then it again said she was slightly ahead just before the first presidential debate on September 26.  It never made her out to be an underdog.  And on election day, it estimated that she was 71.4% likely to win.*  Most other pollsters put her chances of winning at between 80% and 99%, and only one considered Trump the favorite.

In the end, of course, Trump won in the Electoral College by a final count of 304 to 227, despite losing the popular vote by almost 2.9 million votes, or about 2%.  In particular, he won in a number of “swing states,” such as Pennsylvania, Michigan and Wisconsin, where the polls had him well behind.  So much for experts’ forecasts.

Finally, rounding out the pollsters’ failures in 2016, the reform referendum that Italy’s Prime Minister Matteo Renzi bet his career on – which had been considered 3% behind – lost by 20%.  The outcome wasn’t a surprise, but the margin certainly was.

No one really knows why polling failed so miserably last year.  Clearly there was a groundswell of populist, anti-establishment and anti-insider sentiment, but shouldn’t it have been detected?  In particular, Trump did much better than predicted (or much less badly) with a number of important groups, such as Hispanics and college-educated women. 

For some reason, in 2016 pollsters in all three countries either failed to talk to a representative sample of voters, failed to elicit honest responses, or failed to accurately interpret the data.  Thus their opinions may be accorded less weight in the future.

So Much for the Experts

I’m struck by how dramatically opinion can flip-flop: 

• During the run-up to the election, Clinton’s campaign organization and “ground game” were considered sophisticated, efficient and unstoppable, and Trump’s were thought of as rag-tag, underfunded and uncoordinated. Now Trump’s machine is described as having been highly effective, and Clinton’s as having missed important signs and opportunities.
• Clinton’s message was thought likely to carry a lot of weight with a broad swath of the electorate, while Trump’s was viewed as appealing deeply to a few fervent but narrow fringe constituencies without enough voters for him to win. After the fact, Trump is described as having had “perfect pitch” and Clinton as having a “tin ear.”
• In particular, now it’s considered to have been a big mistake for Clinton to fail to address the concerns of white men and set out a solution for those who lost jobs and were omitted from economic progress. But during the campaign, no one pointed to this error.

* It should be noted – to his credit – that Silver insisted repeatedly that Trump could win.  In fact, he often reminded his followers that the Clinton landslide most people expected was no more likely than a modest Trump victory.  Silver also entered Election Day citing a 10.5% probability that Trump would lose the popular vote but win the presidency.  We can’t say he predicted that outcome, but (a) he was more explicit about it than most and (b) he assigned a fairly material probability to an event that in the past has been quite rare (so it can’t be said that he was just extrapolating).

• Finally, up until Election Day, most observers (including me) talked about the likelihood that the Republican Party would emerge from the election torn between its traditional faction, the Tea Party conservatives, and Trump’s economically disgruntled, anti-establishment supporters. That may turn out to be the case, but now the Democratic Party is described as being at risk as well because of the schism between the Clinton-type moderates and the Sanders/Warren progressives.

Here’s some of what I wrote in “Go Figure!,” six days after the election:

Think back to just before last week’s election.  What did we know? 

• The polls were almost unanimous in saying Hillary Clinton would win . . .
• There was a near-universal belief that a Trump victory – as unlikely as it was – would be bad for the markets.

  So what happened?  First Clinton didn’t win. . . .  And second, the U.S. stock market had its best week since 2014! . . .  Thus two key observations can be made based on last week’s developments:

• First, no one really knows what events are going to transpire.
• And second, no one knows what the market’s reaction to those events will be.

One of the key conclusions we should draw from the surprises of 2016 is that the pundits often failed to understand people and their views.  It’s clear that people who work in the media hadn’t understood many average Americans; people with college degrees hadn’t understood those without them; and people living on the coasts and in metropolises hadn’t understood the rest.  Strong sentiments and beliefs swung a pivotal election in ways the experts absolutely failed to grasp and thought were virtually impossible.

Of course there are no “facts” regarding most future events, just opinions.  Experts – especially people who are paid to be experts – often couch their statements as facts, but that doesn’t mean they’re sure to come true. 

And the Media?

When I was young, a limited number of media outlets were the public’s primary source of information.  There were three TV networks and four local stations – no more room on the dial – and until 1987 they were subject to the FCC’s Fairness Doctrine that required broadcasters to discuss controversial matters of public interest and air contrasting views.  Edward R. Murrow, a TV news anchor, was one of America’s most respected men, and I often make reference to the time he said, “Anyone who isn’t confused doesn’t really understand the situation.”  Walter Cronkite, Chet Huntley and David Brinkley were similarly trusted.  Newspapers may have had Democratic or Republican leanings, but outside the editorial pages they largely avoided partisanship in covering events. 

The subsequent proliferation of cable TV networks set off powerful competition for viewers.  A few chose to be full-time purveyors of news, along with some talk-radio stations.  Rush Limbaugh, Roger Ailes and Rupert Murdoch realized that a big following – and big money – could result from highly partisan, even inflammatory, broadcasting.  Radio “shock jocks” like Don Imus and Howard Stern chipped away at standards for language and demeanor, and news and talk shows emulated them.  So now we have outspoken, boisterous speech, along with highly partisan messaging.

These days the news media shows little resemblance to what it was 30, 40 or 50 years ago.  Many outlets are highly biased to one side or the other and make it possible to read, watch and listen all day and never be exposed to all aspects of the issues.  Thus most people find something to complain about in the media coverage of the 2016 presidential election.

Today’s media personalities rarely express the confusion Murrow did.  Rather, they tend to state forecasts as certainties.  When do you hear a TV commentator say “I think” or “it seems to me”?  

In fact, they often remind me of the description of economists I heard in the 1970s: “portfolio managers who never mark to market.”  That is, they find it easy to overlook the times when they’re wrong.  In August or September of 2015, when Donald Trump was beginning to achieve success in his pursuit of the Republican nomination, a New York Times columnist flatly stated that because Trump couldn’t stand the prospect of losing, he would drop out of the race before the primaries began in January.  We didn’t see that happen . . . or any further mention of his assertion.

What to Do About the Media

Given the nature of the candidates for the presidency, the starkness of the choice, and the recent trends in media coverage, I spent a great deal of time last year following political developments via websites, newspapers and television coverage.  Most people I know did, and you may have as well.  For many it became a preoccupation, even a mania.

My son Andrew has helped me dope out the media effects:

• Following events makes people feel they’re actively involved in them and well informed.
• People think and act with more confidence when they consider themselves informed.
• But the media pundits often are no more insightful than the rest of us.
• And anyway, people tend to follow media outlets that confirm their beliefs rather than challenge them.
• Thus following the media experts, while entertaining, can be a waste of time intellectually.

For these reasons, I greatly enjoyed an article that appeared in the Observer on November 16, a week after the election.  It was entitled “Want to Really Make America Great Again?  Stop Reading the News.”  Ryan Holiday, its author, talked about what it’s like to be caught up in the news cycle.

For a number of reasons, there has arisen in the media:

. . . a system that needs more and more eyeballs for longer periods of time while gutting high-quality, reliable sources of information.  We have more “news” but less original reporting than ever before, an order of magnitude more in the way of opinion and analysis, but as [author and academic] Tom Nichols has pointed out, somehow less expertise.

Chuck Klosterman [a writer on American culture] once remarked at how strange it was to walk through the front offices of a football team and find that everyone there was watching ESPN.  Didn’t they have better information than the average viewer or reporter?  Turns out, no – they’re addicted to the same media we are and subject to the same groupthink. . . .

Twitter isn’t designed to help you get in and out with the best information as quickly as possible – it’s supposed to suck you into either a contentious world of argument and debate or an echo chamber that reassures you everyone thinks like you do. . . .

We’re “participating” in the ecosystem because it’s addicting and because we’re curious.

So author Holiday came up with a useful prescription in response:

It’s not that I am going underground or completely disconnecting from current events.  It’s that I have decided I am no longer going to watch them develop in real time.  I’m going to watch the Saints play every Sunday, [but] I’m not going to fool myself into thinking that tuning into “Sports Center” on Tuesday will help.

A lot of people’s lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event – and whether you watch or not – won’t have any impact on the outcome.  

What Do the Experts Know?

One of the reasons I crafted this memo this way is so I would have a chance to return to a subject I introduced in 2015: the New York Post’s “NFL Bettor’s Guide.”  Each week during football season, the Post’s eleven experts advise its readers as to which teams to bet on.  Here’s how the experts did over the full 17-week season, covering 256 games:

• The best picker was right 55.1% of the time.
• The worst picker was right 48.8% of the time.
• On average the pickers were right 51.6% of the time.

The experts further help readers by specifying up to three “best bets” each week.  Here’s how they did on their strongest picks:

• The best picker was right 62.7% of the time.
• The worst picker was right 43.1% of the time.
• On average the pickers were right 54.0% of the time.

The available observations from this data are as follows:

• The way the overall results are distributed around 50/50 suggests the experts’ process is little more than a coin toss.
• On average the experts were right just 2.4% more often on their “best bets” than on all their picks.
• Two of the experts did worse on their “best bets” than on their other picks.
• Eight of the eleven pickers were right more than half the time. But since it costs about 5% per week on average to bet with the bookies, virtually none of the eleven experts’ overall picks added value after fees (sound familiar?). Even the average of the experts’ “best bets” wouldn’t have produced a positive return after fees.

Two additional observations:

• In week 16, all eleven of the experts predicted the favored New York Giants would beat the Philadelphia Eagles, and five of the eleven thought the underdog New York Jets would beat the New England Patriots (in both cases, after adjusting the scores for the “point spread” that the bookies impose to equalize the two teams’ chances of winning). When the games were played, the favored Giants lost by five points (meaning they did even worse after the 2½-point spread was subtracted from their score), and the Jets (who were expected to lose by 16½ points) lost by 38 instead. In other words, (a) the experts may have been heavily biased in favor of the New York teams and (b) they were wrong 73% of the time on these two games.
• Bettors also have the option to bet on the “over/under” in a game – that is, whether the two teams’ combined score will exceed or fall short of a threshold set by the bookies. It’s just another way for bettors to get “action.” The results show the experts were right in 128 games (52% of the time) and wrong in 123 (there were five ties). Again no value added, especially after fees.

If economists won’t publish their performance data, the Post at least performs a service by showing how its football experts did.  The bottom line is that their opinions are of little help, and the related coverage omits all discussion of their lack of predictive value.

The Importance of the Macro

Interest in “macro” has amped up meaningfully over the last dozen years or so.  I think it largely started with the increased activism on the part of the Greenspan Fed, and investors’ heightened interest in it.  Today many analysts seem preoccupied with central bank behavior, government actions, trends in interest rates and currencies, and the movement of markets, as opposed to the fortunes of individual companies.

These things are almost all we hear about.  And most people think knowledge regarding the outlook for them holds the key to investment success.  Thus I want to make this a major topic here.

Since I speak a lot to clients, prospects, CFA societies and student groups, I get a lot of chances to hear what’s on people’s minds.  And usually they focus on a relatively small number of questions.  Over the last few years, the ones I’ve gotten most often have been these:

• What month will the Fed raise interest rates?
• What could go wrong in the economy or the market?
• What inning are we in?
• And in each country I visit, how’s the outlook for that country?

When will the Fed raise interest rates? – On May 22, 2013, in testimony to Congress, then Fed Chairman Ben Bernanke surprised the world by saying, “If we see continued improvement, and we have confidence that that is going to be sustained, in the next few meetings we could take a step down in our pace of purchases [of bonds]. . . .”  By indicating the Fed could “taper” its bond buying – the quantitative easing that was an important part of its stimulus program – Bernanke was foreshadowing that interest rates, which had been suppressed for years, would begin to rise. 

Ever since then, people have been preoccupied with when interest rate increases would take place, and that’s the question I’ve been asked most often.  My response has been consistent: How would I know, and why do you care?

First, how would I know?  I always point out that I’m not an economist or Fed watcher.  And I don’t think economists or Fed watchers know the answer, either.  No one consistently knows the timing of these things in advance, in particular because the Fed itself probably doesn’t know.

But more importantly, why would anyone care?  If I say December, I ask them, what actions would you take?  And if I changed that to March, would you do something different?  The idea that you would do something different with a March expectation rather than a December expectation ignores the likelihood that the expectation of a March rate rise would begin to be reflected in asset prices well before March.  That means the likely date of a rate rise is not a very useful piece of information.

What could go wrong? – For years it has felt to most people that we’ve been in a Goldilocks environment: neither too hot nor too cold.  The economy hasn’t grown slowly enough to cause recession or deflation, or fast enough to bring on hyperinflation and the need for restrictive action.  The markets have been strong enough to bode well, but not so strong as to suggest a bubble.  Ditto for investor psychology.

Most people don’t want to tempt fate by saying things will go well forever, and in fact they know they won’t.  It’s just that they can’t decide what it is that will go wrong.  The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in.  It’s the surprises no one can anticipate that would move markets most if they were to happen.  But (a) most people can’t imagine them and (b) most of the time they don’t happen.  That’s why they’re called surprises.

So I can guess at “improbable disasters” like acts of war, disinflation or a sudden seizing up of the economy, but they’re unlikely to happen, and I don’t know much more about them than anyone else.  The greatest single influence of the last three years was doubtless the 75% decline in the price of oil from June 2014 to February 2016.  But who predicted it?

In my memo “It’s All Good” (July 2007), on the doorstep of the financial crisis, I insisted that the good times couldn’t roll on forever.  But I didn’t know it was sub-prime mortgages that would be the catalyst for a turn for the worst, and when I listed my candidates, I ended with “the things I haven’t thought of.”  That’s still about the best I can do . . . or most others, it seems.

What inning are we in? – Perhaps no one can say just what it is that will ring the bell on today’s positive trends, but people still want to know how advanced we are in the process, and thus when it will come to an end.  People began to ask me what inning we’re in during the financial crisis of 2008, and they’ve continued ever since.

First of all – admittedly I’m being picky here – people rarely specify which game they’re asking about.  Is it the economic recovery, the credit expansion, the string of low-default years, the upswing in investor psychology, or the stock market rise?  Certainly the answer could be different for each.

But, more importantly, the question assumes we know how long each game will go on.  A standard baseball game consists of nine innings, so “second inning,” “sixth” or “ninth” has a clear meaning.  But with the things we’re wondering about here, we never know how long the game will run.

So rather than “what inning,” I’d suggest investors ask whether things are or are not in an extended state.  Is psychology depressed, average or euphoric?  Is the capital market shut tight, normal or unthinkingly generous?  These are questions that can be answered in a helpful way, not how close the game is to being over.  No one knows the answer to the latter.

What’s the outlook for country xyz? – The bottom line for me here is that people tend to confuse general intelligence, good investment records, expertise in specific areas, and all-around insight.  Thus I’ll reiterate that I’m no economist (and even if I were, my chances of being right would be limited).  And then I’ll add that being experienced as an investor and even hopefully intelligent says nothing about being able to divine a specific country’s macro potential.

After I spend a day or two in a country, people often ask for my conclusions.  But in the course of my visits, I generally (a) visit only big cities, (b) meet only with financial types, and (c) spend more time answering questions than gathering information.  In fact, on one recent visit I responded to the usual question by telling my audience that I hoped each member knew more about their country than I did.  I sometimes gain visceral impressions of the countries I visit, but they’re usually data-lite and likely to come true only in the longest run, if at all.

Implications of the Election

Of course, the U.S. presidential election was the biggest story of 2016, and it brought me endless questions.  Who would win?  I’d read the same polls as everyone else, lived on the coasts, and reached the same conclusions.  I could bring no unique insight on the basis of which to question the likelihood of a Clinton victory.

How would the two candidates differ as president?  It didn’t take any brilliance to conclude that a Clinton administration would be quite predictable and operate within rather narrow boundaries, while anything was possible from a Trump presidency – in some cases better than a Clinton one, but also with considerable potential for worse.

I was in Australia on Election Day and just after, and questions about the implications started immediately.  In fact, they’re what inspired me to write “Go Figure!” over the following weekend in Seoul.  In it, I described the following questions as being open:

We still don’t have answers.  As for the markets, it’s clear Trump intends to be a very pro-business president.  But what actions he’ll take and whether they’ll succeed is very much up in the air. 

Of course, only nine weeks have elapsed since the election.  Any expert who tells you what’s in store from the Trump administration – or from Britain’s departure from the EU; Italy without reform and Renzi; the Indian economy with 85% of its currency cancelled (the highest-denomination notes, 500 and 1000 rupees, were declared no longer legal tender in order to rein in corruption and the underground economy); or the coming elections in France and Germany – is talking through his hat.

My Opinion of Opinions

Since I’ve discussed these things at great length over the years, I‘ll try here to sum up succinctly:

I’ll end this section by sharing my latest epiphany on the macro.  I realized recently that in my early decades in the investment business, change came so slowly that people tended to think of the environment as a fixed context in which cycles played out regularly and dependably.  But starting about twenty years ago – keyed primarily by the acceleration in technological innovation – things began to change so rapidly that the fixed-backdrop view may no longer be applicable. 

Now forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past.  That makes the job of those who dare to predict the macro more challenging than ever.

What about Facts?

While I take a dim view of forecasts, and especially of opinions presented as facts, I do believe there are such things as facts.  Unfortunately, however, the concept of “facts” is among the casualties of the increasingly partisan environment.  Recently we have seen both the elevation in status of “non-facts,” as well as the tearing down of “real facts.”

“Fake news” emerged as a significant issue in 2016.  Some people believe it influenced the election.  Ease of access to social media makes it quite simple to create and disseminate statements that others will believe, even if they’re total fabrications.  The pizzeria fronting for a child-abuse ring led by Hillary Clinton is just one of 2016’s wilder examples.  I expect to see continuing discussion of the proper role of social media in taking down untrue posts, and of the conflict between defending freedom of expression and preventing the publication of falsehoods.

At the same time, I’m concerned about the disappearance of real facts.  Nowadays it seems almost anything can be characterized as questionable.  There’s broad agreement among scientists that humans play a significant role in climate change – as there is among sitting world leaders – and yet we hear this idea dismissed as “a matter of opinion.”  The other day I heard a former U.S. Senator who now leads a policy think tank describe as “fake news” a Congressional Budget Office report with which his organization takes issue.  If the non-partisan CBO isn’t accepted as objective and truthful, who will be?

In a time of raging partisanship, disrespect for experts, and drastically debased standards for discourse, is there such a thing as a fact?  Can there be no distinction between opinion, fact and fake fact?  Can there be a figure everyone trusts, another Edward R. Murrow?  Can any statement be safe from disparagement even though it’s not 100% measurable and provable?  Is history subject to unlimited revision if there are no video images?  What will our grandchildren be taught is the meaning of the word “true”?  What authorities will they trust?  We certainly live in interesting times.

The Last Word

To close, I’ll weave together a few recent inputs: 

First, I had dinner with Warren Buffett about a year ago, and he pointed out that for a piece of information to be worth pursuing, it should be important, and it should be knowable.  These days, investors are clamoring more than ever for insights regarding the macro future, because it’s important: it moves markets.  But there’s a hitch: Warren and I both consider these things largely unknowable.  He rarely bases his investment actions on them, and neither does Oaktree.

Second, I want to include a final paragraph from the Observer article about the media that I mentioned earlier.  I think it’s golden:

“If you wish to improve,” Epictetus [first-century Greek philosopher] once said, “be content to appear clueless or stupid in extraneous matters.”  One of the most powerful things we can do as a human being in our hyperconnected, 24/7 media world is say: “I don’t know.”  Or more provocatively, “I don’t care.”  Not about everything, of course – just most things.  Because most things don’t matter, and most news stories aren’t worth tracking.  (Emphasis added)

Finally, I want to describe a great phone call I received this past spring, from a sell-side economist I worked with in the early ’70s and have stayed in touch with since.  “You’ve changed my life,” he said.  “I’ve stopped making forecasts.  I study data and report on my inferences.  But I no longer express opinions about the future.”  Mission accomplished.

Bonus section:  I’ve been collecting (and recycling) quotations for almost forty years, more of them concerning forecasts than anything else.  Here are five of the very best.  Together they say virtually everything that has to be said on the subject:

We have two classes of forecasters:  Those who don’t know – and those who don’t know they don’t know.

                                                – John Kenneth Galbraith

No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.

                                                – Ian Wilson (former GE executive)

Forecasts create the mirage that the future is knowable. 

                                                – Peter Bernstein

Forecasts usually tell us more of the forecaster than of the future.

                                                – Warren Buffett

I never think of the future – it comes soon enough.

                                                – Albert Einstein

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In two separate, and quite striking, interviews with Germany’s Bild (paywall) and London’s Sunday Times (paywall), Donald Trump did what he failed to do in his first US press conference, and covered an extensive amount of policy and strategy, much of which however will likely please neither the pundits, nor the markets.

Among the numerous topics covered in the Bild interview, he called NATO obsolete, predicted that other European Union members would join the U.K. in leaving the bloc and threatened BMW with import duties over a planned plant in Mexico, according to a Sunday interview granted to Germany’s Bild newspaper that will raise concerns in Berlin over trans-Atlantic relations. Furthermore, in his first “exclusive” interview in the UK granted to the Sunday Times, Trump said he will offer Britain a quick and “fair” trade deal with America within weeks of taking office to help make Brexit a “great thing”. Trump revealed that he was inviting Theresa May to visit him “right after” he gets into the White House and wants a trade agreement between the two countries secured “very quickly”.

Trump told the Times that other countries would follow Britain’s lead in leaving the European Union, claiming it had been deeply ­damaged by the migration crisis. “I think it’s very tough,” he said. “People, countries want their own identity and the UK wanted its own identity.”

Elsewhere, quoted in German from a conversation held in English, Trump predicted Britain’s exit from the EU will be a success and portrayed the EU as an instrument of German domination with the purpose of beating the U.S. in international trade. For that reason, Trump said, he’s fairly indifferent whether the EU breaks up or stays together, according to Bild. According to Bloomberg, Trump’s comments “leave little doubt that he will stick to campaign positions and may in some cases upend decades of U.S. foreign policy, putting him fundamentally at odds with German Chancellor Angela Merkel on issues from free trade and refugees to security and the EU’s role in the world.”

Trump then attacked another carmarker, previosuly unnoticed by the president-elect, when he warned the United States will impose a border tax of 35 percent on cars that German carmaker BMW plans to build at a new plant in Mexico and export to the U.S. market.  A BMW spokeswoman said a BMW Group plant in San Luis Potosi would build the BMW 3 Series starting from 2019, with the output intended for the world market. The plant in Mexico would be an addition to existing 3 Series production facilities in Germany and China. Trump said BMW should build its new car factory in the United States because this would be “much better” for the company.

He went on to say Germany was a great car producer, borne out by Mercedes Benz cars being a frequent sight in New York, but there was no reciprocity. Germans were not buying Chevrolets at the same rate, he said, making the business relationship an unfair one-way street. He said he was an advocate of free trade, but not at any cost. The BMW spokeswoman said the company was “very much at home in the U.S.,” employing directly and indirectly nearly 70,000 people in the country.

Going back to foreign policy, Trump discussed his stance on Russia and suggested he might use economic sanctions imposed for Vladimir Putin’s encroachment on Ukraine as leverage in nuclear-arms reduction talks, while NATO, he said, “has problems.”

“[NATO] is obsolete, first because it was designed many, many years ago,” Bild quoted Trump as saying about the trans-Atlantic military alliance. “Secondly, countries aren’t paying what they should” and NATO “didn’t deal with terrorism.”

While those comments expanded on doubts Trump raised about the North Atlantic Treaty Organization during his campaign, he reserved some of his most dismissive remarks for the EU and Merkel, whose open-border refugee policy he called a “catastrophic mistake.” He further elaborated on this stance in the Times interview, where he said he was willing to lift Russian sanctions in return for a reduction in nuclear weapons.

When asked about the prospect of a nuclear arms reduction deal with Russia, Trump told the newspaper in an interview: “For one thing, I think nuclear weapons should be way down and reduced very substantially, that’s part of it.”

Additionally, Trump said Brexit will turn out to be a “great thing.”  Trump said he would work very hard to get a trade deal with the United Kingdom “done quickly and done properly”.

Trump praised Britons for voting last year to leave the EU. People and countries want their own identity and don’t want outsiders to come in and “destroy it.” The U.K. is smart to leave the bloc because the EU “is basically a means to an end for Germany,” Bild cited Trump as saying. “If you ask me, more countries will leave,” he was quoted as saying.

While Trump blamed Brexit on an influx of refugees he said that Britain was forced to accept, the U.K.’s number of asylum applications in 2015 was a fraction of the 890,000 refugees who arrived in Germany that year at the peak of Europe’s migrant crisis.

With Merkel facing an unprecedented challenge from the anti-immigration Alternative for Germany as she seeks a fourth term this fall, Trump was asked whether he’d like to see her re-elected. He said he couldn’t say, adding that while he respects Merkel, who’s been in office for 11 years, he doesn’t know her and she has hurt Germany by letting “all these illegals” into the country.

Among Trump’s other comments to Bild::

• the Bush administration’s decision to invade Iraq may have been the worst in U.S. history;
• that Jared Kushner, Trump’s son-in-law, is a natural talent who will bring about an accord with Israel
• Trump plans to keep using social media including Twitter once he’s in the White House to sidestep the press and communicate directly with his followers
• People entering the U.S. will face “extreme” security checks, possibly including some European nationals

But perhaps the most troubling, if only to legacy US diplomatic relations, was that, as the Times noted, “despite all of Mr Trump’s expressions of admiration for Mr Putin and Mrs Merkel, he revealed that he was prepared to cut ties with both: “Well, I start off trusting both –  but let’s see how long that lasts. It may not last long at all.”

It is unclear if this litany of strategic and tactical announcements, many of which quite shocking in their audacity and scope, is merely meant to serve as a launching pad for further negotiations, something Trump has proven quite adept at doing by stunning his counterparties into a state of abrupt silence, or if these are actually meant to serve as a basis for future US policy; if it is the latter, when US markets reopen they may have a distinct case of indigestion because while the market had desperately hoped for more clarity out of Trump on his policies, what emerged in these two interview is hardly it.

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While currency and fixed-income traders are having second thoughts about the extent of the Trump reflation trade just days before the inauguration of the 45th U.S. president as Bloomberg’s Vincent Cignarella writes, most readily observed in the recent 50% drop in 10Y real yields, which have slid from 0.74% in mid-December to just 0.38% in the past month, it is still far too early to call the time of death on the Trump rally.

Which brings us to the Icarus trade, laid out by Bank of America, which we pointed out last week. As a reminder, BofA’s tactical view is that after a Jan/Feb wobble, stocks & commodities will have one last 10% melt-up in H1. Call it the “Icarus trade”. The current melt up, which started back in Feb 2016, will be followed by a meltdown later in ’17 BofA’s Michael Harnett predicts.

This is how it will play out according to the BofA strategist. The current rally started in Feb 2016 with…

• bearish Positioning (BofAML Bull & Bear indicator = 0, cash = 5.6%, big >2SD underweights in Emerging Markets & energy)
• excessively bearish Profits (credit spread blowout, PMI’s crashing toward 45, global EPS negative)
• and Policy impotence (“Quantitative Failure”).

Thus the rally is likely to end with…

• bullish Positioning (BB indicator = 8, cash = 4%, unambiguous long positions in stocks, Japan & banks)
• excessively bullish Profit expectations (global PMI’s >55, US wage growth >3%)
• and Policy hawkishness (Fed jacks up short end of yield curve, ECB tapers).

Are we there yet? No, says BofA. Here’s why:

• Positioning is bullish but not dangerously euphoric (B&B indicator is 3.6, FMS cash @ 19-month lows of 4.8% but elevated versus 15-year history, global equities trade just 3% above 200-day moving average).
• Profits likely to be revised higher following strong Dec’16 ISM print (implies 10% US EPS growth – Chart 2); credit spreads well-behaved with US & European spreads at 18-month lows; however PMI’s getting closer to “peak” and US wages close to 8-year highs.
• Bond market yet to aggressively price-in hawkish monetary Policy: US financials conditions in “easy” territory according to our simple model; US yield curve has stopped steepening but yet to see a “bear flattening”; ECB “taper” remains one of the key catalyst for rates volatility, although for the time being it remains unlikely.

 

Sure, Hartnett concedes, you can get a wobble in coming weeks. Investors are partial to the “buy the election, sell the inauguration” argument. Fed anxiety could pick-up between the two winter FOMC meetings: Feb 1st & March 15th, especially given December surge in US wage growth. And Trump/Mexico/China headlines/tweets have the ability to rattle sentiment as the new President seeks to immediately boost his ratings via populist trade policies & legislation …from Occupy Wall Street to Occupy Detroit or Occupy Silicon Valley.

Still, Hartnett does not see it… yet.

Positioning, Policy & Profit arguments for a big Q1 correction. The conventional wisdom has flipped from “Davos Man” portfolios to “Joe Six-Pack” portfolios in recent quarters. But let’s not forget the extremity of the starting point of this Great Rotation: global interest rates were at 5,000 year lows in Jul’16 and this induced acute dislocations in asset/sector/regional valuations…

• $1.5 trillion inflows to bond funds in past 10 years vs $0 to equity funds
• Real assets at 90-year lows versus financial assets
• US stocks at 60-year highs versus European stocks, and so on.

Thus we should expect the ongoing rotation out of entrenched Wall Street to Main Street (Table 1) assets to be violent, extreme, and ultimately overshoot 

* * *

Which brings us to the just as sensitive topic of “Treasury Wars”

Recall that one of the most hotly debated issues in the past week, one which involved such bond titans as Bill Gross, Jeff Gundlach and Scott Minerd, is what level of bond yields will hurt all financial markets. Gross said 2.60%; Gundlach and Minerd agreed on 3.0% as the magic number. Previously, Goldman said 2.75% is the 10Y yield bogey.

So, to add to the confusion, here is BofA’s Harnett with his own (inconclusive) take on this most critical of topics.

According to BofA, 5.0% on the 10-year Treasury yield has historically been the level above which rising bond yields = falling stock prices. Using data from 1962, the relationship between Treasury yields and the correlation between stock and bond returns has exhibited a number of different regimes (Chart below). For example, high 6-16% yields in the stagflationary 1970s were often associated with equity bear  markets (especially in real terms), while more recently, the post-GFC era of excess liquidity & financial repression has coincided with a big bull market in equities.

However, while the historic 5% threshold offers comfort to today’s equity bulls, the “hurt” level from bonds is likely lower this cycle given the starting point for rates. And note that the “taper tantrum” showed that much lower bond yields can be associated with stock market selloffs. This is well worth bearing in mind given the likely end of QE in Europe and Japan in the next 12-18 months. Once that is signaled to the markets, look for rates volatility to hit stocks.

And the punchline: note that the current Treasury drawdown is the 4th largest since the Volcker/oil shocks of ‘80-81. Losses in recent months exceed the losses leading up to big financial market events such as the Continental Illinois bankruptcy (1984), Orange County & Mexico defaults (1994), the dot-com crash in 2000 & Japan VaR shock in 2003.

And should the 30-year yield rise >3.5% in Q1, the Treasury (G8O2) drawdown would be the largest ever.

In other words, the “bond shock” story bubbles away in the background. And with the next 50-75bps rise in yields (due to perhaps expectations of trade wars or Chinese repatriation, or even further gains in inflation), the risk of a financial “event” is likely to jump.

As Hartnett concludes, ominously, “2016 started with pessimism and ended with optimism; 2017 starts with optimism…“

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While U.S. political journalist Matt Taibbi has made no bones about his dislike of Donald Trump… (via Rolling Stone a day after the election)

Most of us smarty-pants analysts never thought Trump could win because we saw his run as a half-baked white-supremacist movement fueled by last-gasp, racist frustrations of America’s shrinking silent majority. Sure, Trump had enough jackbooted nut jobs and conspiracist stragglers under his wing to ruin the Republican Party. But surely there was no way he could topple America’s reigning multicultural consensus. How could he? After all, the country had already twice voted in an African-American Democrat to the White House.

 

Yes, Trump’s win was a triumph of the hideous racism, sexism and xenophobia that has always run through American society. But his coalition also took aim at the neoliberal gentry’s pathetic reliance on proxies to communicate with flyover America. They fed on the widespread visceral disdain red-staters felt toward the very people Hillary Clinton’s campaign enlisted all year to speak on its behalf: Hollywood actors, big-ticket musicians, Beltway activists, academics, and especially media figures.

 

Trump’s rebellion was born at the intersection of two toxic American myths, the post-racial society and the classless society.

CBC reports that the Rolling Stone columnist admits in his new book – “Insane Clown President: Dispatches from the 2016 Circus” – the president-elect got more than a few things right during an election campaign that brought to the forefront America’s struggles with racism, class divide and economic stagnation.

One of Trump’s gambles that really paid off, according to Taibbi, was
painting a target on the back of the U.S. political media.

“The media and politicians had spent so much time with each other that they lost touch with regular people, and Trump capitalized on that. He made us in the media villains, representative of this out of touch, ivory tower political culture,” he said.

 

“I think there’s some fairness to it, as much as I dislike Donald Trump, he hit a note, several notes, in this campaign that were true, and that was one of them.”

Another one, he says, is Washington corruption.

Taibbi believes Trump was correct to say that both Democrats and Republicans have become more beholden to their political donors than to their constituents, and his vow to “drain the swamp” struck a chord.

 

But he doesn’t think Americans should hold their breath for their incoming president to fix any of the issues at the heart of his campaign rhetoric.

 

“Even though his diagnoses on some things in some cases are accurate, it’s his solutions that are the problem,”  Taibbi said. “He’s not a deep thinker and his instincts for fixing everything are purely authoritarian.”

As Taibbi concluded in a lengthy article just a day after Trump’s election victory,

“We journalists made the same mistake the Republicans made, the same mistake the Democrats made. We were too sure of our own influence, too lazy to bother hearing things firsthand, and too in love with ourselves to imagine that so many people could hate and distrust us as much as they apparently do.

 

It’s too late for any of us to fix this colossal misread and lapse in professional caution. Now all we can do is wait to see how much this failure of vision will cost the public we supposedly serve. Just like the politicians, our job was to listen, and we talked instead. Now America will do its own talking for a while. The world may never forgive us for not seeing this coming.”

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Goldman is starting to get concerned.

As chief strategist David Kostin writes in his latest weekly kickstart, while stocks have surged by 6% since the election on the prospect of higher earnings under potential Trump policies, consensus bottom-up 2017 EPS forecasts for S&P 500 have been unchanged. While Goldman explains that “the surge in equity prices to investor optimism about potential policy changes under President-elect Trump; the hope is that new business-friendly legislation will increase EPS and drive shares higher” it then admits that “if new policies eventually lead to upward EPS revisions, it would be a rare occurrence. Since 1984, there have been just six years with materially positive EPS revisions: 1988, 1995, 2004-06, and 2011.“

Not to make a too fine point of it, Goldman also notes that as of this moment, the S&P trades at 20.3x times its 2017 operating EPS forecast, and a vertigo-incuding 18.6x 2018 operating earnings.

Ok, but somehow the delta has to be bridged – how to make up the difference? How about lots of adjustments and addbacks, and hope that Trumpforia will lead to results. In fact, when factoring those two components alone, 2017 EPS surges from 116 to a whopping $130.

Here, Goldman has some advice to investors who are just a little concerned by this particular earnings bridge. Kostin’s advice is frankly, just as concerning:

During the quarterly reporting season that ramps up this week, we encourage investors to focus less on actual 4Q results and more on management insights on how firms are positioned on five policy issues that will drive 2017 earnings revisions and share prices. For 4Q, consensus estimates imply modestly positive results: decent sales growth will be partially offset by lower margins, resulting in adjusted EPS growth of 5% compared with last year.

So… just ignore earnings. Ok, why not. After all, Morgan Stanley had a reported titled “What, If Anything, Is Relevant About Earnings?” last week.

And yet, we – and others – are worried about the complete lack of aggregate upward 2017 EPS revisions. To Kostin this is consistent with elevated policy uncertainty, and that while Congressional leaders have outlined their agenda, details from the Trump Administration have been scant.

So, looking ahead, here is what investors should look at in terms of the five policy issues will drive the 2017 S&P 500 earnings outlook.

(1) Corporate tax rate: Our economists expect the corporate statutory tax rate will be lowered to 25%, around the OECD average but above the Trump campaign (15%) and House Republican proposals (20%). All else equal, a statutory federal rate of 25% would boost S&P 500 EPS by 8%. Stocks with the highest tax rates stand to benefit most from a lower statutory rate, and our High Tax Rate basket of stocks (GSTHHTAX) has outpaced the S&P 500 by 423 bp since Election Day. See Exhibit 5 for the constituents of this basket.

 

(2) Destination-based border-adjusted tax: Under this system, US firms would bear no tax burden (or a reduced tax burden) for export revenues but would no longer be able to deduct import costs when calculating their tax bases. Our economists currently assign a probability of just 30% that this proposal will be enacted. This is due in part to the potentially difficult transition to such a system, which could prove to be a significant headwind for net importers. Our apparel and retail sector analysts recently identified companies most at risk, including: NKE, VFC, RH, DLTR.

 

(3) Interest deductibility and depreciation policy: Changes to interest deductibility and the depreciation of capital investment appear more likely than a change to a destination-based system. However, numerous questions remain about implementation. For example, it is not yet clear whether or for how long interest payments on current debt would be grandfathered. At the index level, we estimate that an elimination or reduction of interest deductibility would partially offset the EPS benefit of a lower statutory rate. Companies with high leverage such as those in our Weak Balance Sheet basket (GSTHWBAL) would likely be adversely impacted by the change.

 

(4) Fiscal spending: We estimate that infrastructure spending of $25bn per year (below the $100bn per year outlined in the Trump campaign proposal) would have a modest impact on real GDP growth, increasing S&P 500 EPS by about $1. Our sector analysts expect that construction materials companies would benefit significantly from an increase in infrastructure spending. These stocks include VMC, MLM, and SUM. On the other hand, a repeal of Obamacare, an apparent priority of Congress, is likely to weigh on health care facilities. Stocks most at risk include: CYH, LPNT, HCA, and THC.

 

(5) Regulation: The Trump Administration will have discretion in reshaping key regulations. Much uncertainty exists, but banks and midstream energy firms are likely beneficiaries of relaxed regulations. Our Financials analysts believe MS, C, and PNC have the most EPS upside from lower regulatory costs. At the GS Energy conference last week, midstream and E&P panelists noted optimism that the regulatory environment will improve. Pipeline/MLP stocks that our sector analysts expect to outperform: EPD, MPLX, and WMB.

 

Divergent stock returns provide insight into what policy changes equity investors are expecting. The equity market appears to expect large health care cutbacks, but has moderated its expectations for increased fiscal stimulus. On the tax side, the equity market seems to expect meaningful corporate tax cuts, though the evidence that the market has even partially priced a switch to destination-based taxation is only mixed. Despite recent Financials and Energy outperformance and positive EPS revisions, we see little evidence that the equity market expects major financial or energy-sector deregulation that meaningfully affects profits.

* * *

With earnings season upon us, roughly 9% of S&P 500 market cap reports next week, marking the beginning of the busiest four weeks of the 4Q season (Exhibit 3). Excluding Financials, Real Estate, and Utilities, consensus expects year/year sales growth of 5% and slightly lower margins. For the aggregate S&P 500, consensus estimates imply that adjusted EPS will grow by 5% (Exhibit 4).

However, in light of the “great unknown” facing corporate America, Goldman continues to recommend “investors look past the quarterly results” and focus instead on management insights about how firms are positioned on the five policy issues discussed above that will determine  potential positive or negative earnings revisions and stock returns in 2017.

Goldman remains concerned… but optimistic. And why not if earnings no longer matter, and it’s all up to Trump.

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A national “teach-in” movement is asking professors to set aside class time between Martin Luther King, Jr. Day and the presidential inauguration to “protest” oppression and challenge “Trumpism.”

As CampusReform's Anthony Gockowski reports, so far, 17 American colleges and universities have signed on to participate in the campaign originating out of UCLA, including such prestigious institutions as Princeton and UC-Berkeley.

The movement, known as “Teach, Organize, Resist,” is set to kick-off on January 18, strategically “poised between Martin Luther King Jr. Day and the presidential inauguration” as an explicit means of “challenging Trumpism.”

“Transform your classrooms and commons into spaces of education that protest policies of violence, disenfranchisement, segregation, and isolationism,” the organizers urge educators on the movement’s homepage, clarifying elsewhere on the site that participation “is an opportunity to affirm the role of critical thinking and academic knowledge in challenging Trumpism.”

 

“On that day, we intend to teach about the agendas and policies of the new administration, be it the proposed dismantling of economic and environmental regulations or the threatened rollback of the hard-won rights that form the fragile scaffolding of American democracy,” a description for the teach-in explains, later accusing Trump of institutionalizing “white supremacy” and allegedly proposing the “expansion of state violence targeting people of color” and other marginalized groups.

 

“On that day, we intend to organize against the proposed expansion of state violence targeting people of color, undocumented people, queer communities, women, Muslims, and many others,” the description continues.

 

“On that day, we intend to resist the institutionalization of ideologies of separation and subordination, including white supremacy, misogyny, homophobia, Islamophobia, and virulent nationalism.”

The movement, which has been spreading on social media under the hashtag “J18,” was started by “departments, centers, and collectives at UCLA,” but has since amassed the support of 18 other institutions, many of them public.

Professors at the University of California, Santa Barbara, for instance, are asking “all UCSB faculty to actively support” the teach-in, even suggesting that they “insert a note” about it in syllabi or “use your regular class time to attend a panel with your students.”

Those professors who elect not to require their students to attend the events, however, are still asked to “not penalize students for a missed class if they intend to attend panels.”

Scripps College, on the other hand, will be hosting a teach-in on “conservatism and right wing movements,” which will discuss Republican “strategies and tactics of mobilizing support, producing consent, and fragmenting opposition” in order to “help fellow students understand our present political moment.”

Other prestigious institutions, including Princeton University and the University of California, Berkeley, are also among the 17 American institutions participating (two others are foreign, and another is the American Anthropological Association). All told, nine of the participating schools are public, and a total of 46 teach-ins are currently scheduled to take place.

“Let it be known that on #J18 and beyond, universities, colleges, and high schools refused to bear silent witness to the politics of hate and fear; that in these times, these places of teaching and learning not only served as a sanctuary for its students and workers but also stood up to proclaim the power of knowledge on the frontlines of social justice,” the organizers declare optimistically.

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One month ago we reported that having successfully avoided a calamity for most of 2016 despite being massively net short, somewhere to the tune of around -90%, at times rising as high as -105%, Horseman Global, finally had a bad month, in fact, losing -12.80% in November, the hedge fund which we previously dubbed “the world’s most bearish hedge fund”, just suffered its worst month in history as “the short book, the bond book and the forex book lost money.”

And, with just one month left in the year, we wondered if Horseman, which was down over 16% in the first 11 months, would also have it worst year ever, outpacing the -24.7% return in 2009.  We now have the answer, and it’s no… but just barely. After a 7.81% drop in December, Horseman Global has closed the books on 2016 with a 24.03% net loss, its second worst in history.

So what happened? Instead of paraphrasing, here is the answer straight from the horse’s mouth.

* * *

Horseman Capital December Letter by Russel Clark, CIO

Your fund lost 7.81% net this month to end the year down 24.03% net.

So how did a year that started so well end so badly? Since the Trump election, we have lost money in currency, bonds, and the short book. But in total over the year, we have made money in bonds and currencies. The real losing trade for 2016 has been short equities.

The losses in the short book came during two periods. The first was in February and March of this year. The bear market in commodities and emerging market had a huge reversal, and they have continued to rally all year. The fund held on to these shorts for a while, but in March decided that the dollar was in a weakening bias, and closed emerging market and commodity shorts, and in fact reversed Brazilian short positions to go long. The flip side of this was to move the fund to European and Japanese short positions, and to be long Euro and yen.

This strategy worked well into Brexit, but with the Trump election, the previously well performing short book in Europe and Japan as well as airlines reversed. Unusually, a strong dollar has also been accompanied by higher commodity prices and bond proxies have held up despite the selloff in bonds.

Shorting has been hard this year. I would say that most of my shorts have been down 30% at some point this year, but the majority have finished the year much higher. A good proxy for this would be the Dow Jones Transport Index. This was down 16% for the year in January. From the lows, it has rallied as much as 48%, to close the year up 20%.

One of the reasons that I run the fund the way that I do is that I do believe that a Chinese financial or currency crisis (probably both at the same time) seems inevitable. The implications of this to me have been that commodities would do badly, deflation would become prevalent, and exporters to China would suffer. Given the unreliability of Chinese data, I feel it right to be bearish on China as long as its banks continue to trade sideways to down, as they have done since 2011.

For many years, I have been able to play into market trends that would also do well in a China crisis. But suddenly, with the election of Trump, the broader market trends are all the opposite of how you want to be positioned in a China crisis. Higher commodity prices, higher US yields, and cyclicals over staples. One answer would be to go to cash and wait it out. The problem with this is that, if you believe that a Chinese crisis is inevitable then what would be the signals to begin to put on a China crisis trade? The answer would be capital flight from China, rising Chinese yuan deposit rates in HK (as this is a commercial rate, not set by the PBOC), and increasing market talk of capital controls. Unfortunately, these are all happening today.

I prefer using non-equity market indicators in deciding whether to close a short or not. And most of the non-equity indicators I look at tell me to be net short. However, I do not like to short a sector, market or stock where the 200 day moving average has begun to trend higher. Most of my shorts were well behaved prior to the Trump election, but with the move in the markets, that is no longer true.

So despite what I think, we are beginning to close parts of our short book. We have largely exited airline related shorts. We have also closed staple shorts, as they were largely there to protect against a fall in yields, which they did to a degree. We have also closed many developed financial shorts to make some space for Chinese financial shorts. We have also reduced the bond position and moved much of in to German bunds. The majority of the bund position is in 5 year bunds, the buy case I made a few months ago.

2016 has been a chastising year. The sharp move higher in yen, and the flattening of the yield curve in the US led me think we were in a period of stagnation in the US. Spreads on auto lending and emerging markets while slightly elevated, were nowhere near levels I would have associated with a buy signal, while a continuing RMB devaluation was in the backdrop. That a Trump election has caused a strong dollar, higher yields, strong equities and strong commodities caught me by surprise. Market trends now seem higher despite what looks like a dangerous background to me. Your fund will be reducing its gross, but still long bonds and short equities.

* * *

On the other hand, despite some short covering, it appears that Clark still has a ways to go.

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The overnight report by Esquire magazine that the incoming Trump administration is “seriously considering” a plan to evict the press corps from the White House prompted a frenzied response by the White House Correspondents Association, and led to a scramble among Washington’s press elite to demand if this report was accurate. As it turns out, Trump’s intentions may be just the opposite of what was reported, because according statements by Priebus, Pence and Spicer, the incoming Trump administration is actually considering expanding the number of journalists who have access to Trump, not limiting it.

As a result, the Trump admin is now considering moving White House press briefings out of the West Wing to accommodate more than the “Washington media elite,” incoming White House Chief of Staff Reince Priebus said on Sunday, cited by Bloomberg.

VP-elect Mike Pence said any change would be made for logistical reasons, in response to heavy demand from media organizations. “There’s such a tremendous amount of interest in this incoming administration that they’re giving some consideration to finding a larger venue on the 18 acres in the White House complex, to accommodate that extraordinary interest,” Pence said on CBS News’ “Face the Nation.” 

“The interest of the team is to make sure that we accommodate the broadest number of people who are interested and media from around the country and around the world,” Pence said. For a president who has made Twitter into his preferred mode of communication with the outside world, this would appear sensible.

Speaking on ABC’s “This Week”, Priebus said the team discussed moving news conferences out of the small West Wing briefing room to the Old Executive Office, which is part of the White House complex.

“The one thing that we discussed was whether or not we want to move the initial press conferences into the Executive Office Building,” Priebus said, adding, “you can fit four times the amount of people.” He added that no decision had been made.

“I know that some of the folks in the press are uptight about this, and I understand,” Priebus said. “The only thing that’s been discussed is whether or not the initial press conferences are going to be in that small press … the press room that people see on TV is very, very tiny.” Priebus added that demand for conference credentials far exceeds the “49 people” who can fit into the current briefing room.

After “500 or 600” people attended Trump’s press conference in New York on Jan. 11, the president-elect’s first since the election, “we started thinking, man alive, if we have more people involved instead of less people involved, wouldn’t that be a good thing,” Priebus said.

“So no one is moving out of the White House. That is the White House, where you can fit four times the number of people in the press conference, allowing more press, more coverage from all over the country … That’s what we’re talking about.”

“This is about greater accessibility, more people in the process,” Trump’s press secretary Sean Spicer added Sunday on Fox News Channel’s “Media Buzz.” Involving more people, including bloggers and others who aren’t from the mainstream media, “should be seen as a welcome change,” he said. Indeed, it will be… by the alternative press; the “media elite”, however, will be quite disappointed that their exclusive access rights to the president will be stripped away if only for the next four years, commoditizing their “value added” to the level of your lowly. neighrborhood blogger.

Meanwhile, the White House Correspondents’ Association objected in a statement to “any move that would shield the president and his advisers from the scrutiny of an on-site White House press corps,” and said that it would fight to keep the briefing room and access to senior administration officials open. Jeff Mason, a Reuters White House correspondent, is president of the WHCA.

According to Reuters, the existing briefing room was built in 1970 by Richard Nixon over an old swimming pool installed by Franklin Roosevelt that was used regularly by John F. Kennedy but underutilized by later administrations. But the presence of reporters at the White House dates back even farther. In addition to theater-style seats where the White House press secretary conducts daily briefings, the press area of the White House includes workspace for television, radio, print and online news organizations that cover the administration on a daily basis.

And soon, it will include bloggers.

via http://ift.tt/2irnxvO Tyler Durden