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In just a few hours, on July 1, the US economic expansion will become the longest on record, entering its 121st month since the end of the 2009 recession (which according to the NBER ended in June of that year), and surpassing the previous record – the March 1991 – March 2001 expansion – which ended with the bursting of the dot com bubble.

As Deutsche Bank’s Jim Reid writes, since US business cycles have been tracked from 1854 there have been 34 expansions. The last four have all been long relative to the past and are all in the top six in terms of duration. The other two in this top six were the June 1938-cycle which was boosted by the WWII rearmament efforts, and the Feb 1961-cycle where the Fed were late to deal with ever increasing US inflation, leading to too loose monetary policy and an extended cycle.

As part of a recent analysis, Deutsche Bank explains why this cycle – and the past four – have been so long relative to history, show various economic and market indicators from this cycle relative to the past to put the record-breaking expansion in some context, and predict what may happen next.

It may come as a surprise to exactly nobody, that there is a distinct correlation between the rising length of the US business cycle – and ensuing economic and market crashes which terminate said expansion – and the advent of the Federal Reserve. Oh, and globalization has a lot to do with everything too.

But first, a quick stroll down memory lane…

As Deutsche Bank writes, during the earliest monitored business cycles, the US economy was predominantly agriculturally based. Indeed the share of employment made up from this sector was 59% in 1850 and only dipped below 30% by 1920 and below 10% by 1960. This likely made GDP more volatile as the economy was more exposed to the boom and bust crop cycles without much sector diversity. In addition, prior to 1913 there was no central bank and banking runs and panics were a fairly regular feature of the economic landscape.

As the economy became more diverse and less dependent on agriculture and the Federal Reserve appeared in 1913 and became increasingly more active in the economy and capital markets, economic cycles were able to be extended. However, WWI and its aftermath, the stock market crash, the 1930s Depression, and the fact that the US operated under a gold standard ensured that cycles were still relatively short by modern standards until at least WWII.

The gold standard and subsequent Bretton Woods system (1946-1971) restricted stimulative policy (both fiscal and monetary). The dollar was convertible into gold at a fixed price and policy had to ensure that there wasn’t a run on gold reserves.

Amusingly, indirectly summarizing the current economic and market climate, Deutsche Bank writes that back int he day, “loose fiscal or monetary policy to extend a business cycle would have likely led to the perception that the authorities were prepared to generate inflation and erode the value of the dollar.” Which, of course, is the current situation, only it’s not just the US that is doing it, but everyone is. In any case, when this happened during various points in the past, gold would have flowed out of the country threatening the economic management model of the time. The chart below shows the price of gold to the USD alongside the length of each business cycle and suggests that business cycles were a lot shorter when the dollar was rigidly price fixed against gold. As the ties slowly loosened to gold – culminating with Nixon closing the gold window on August 15, 1971 and effectively ending the Bretton-Woods system – and devaluations occurred, business cycles started to get longer.

It’s worth noting that as the ties to gold were loosened, economic policy could become more flexible – think more and more debt – allowing the “opportunity” for more stimulus. Deutsche Bank shows this by highlighting the length of each US business cycle but this time with the annual US budget deficit (left) and total Government Debt to GDP (right) overlaid on top. Bottom line: with the US dollar becoming unanchored from gold in the 1970s, it allowed every successive administration to avoid recessions by piling up more debt and spending at an ever faster rate.

What may come as a surprise to several generations of Americans is that prior to the late 1960s, the US ran close to a balanced budget every year outside of war time and the Great Depression. Deficits temporarily ballooned and debt increased on these occasions and membership of the gold standard was often suspended allowing for more flexible policy for a brief period of time. However, the US quickly went back to balanced budgets after these events alongside a stable gold/USD parity which made it very hard to be overly stimulative.

Pressure on this system started to build as the post-WWII landscape emerged, leading to structural deficits slowly building up in the late 1960s. There was huge population growth in this era and at the same time we saw the birth of the welfare state and “great society” type movements. Across the globe, citizens were increasingly demanding more access to education, healthcare, a safety net for the poor and unemployed, better public services, and the increased provision of state pensions. This led to increased demands for governments to spend more and this was funded by deficit spending across the world, a trend that lasts to the current day. Very few countries have managed to balance their fiscal books over the last 50 years.

Of course, this new trend was not sustainable in a precious metal currency system and eventually the increases in US/global deficits put pressure on the Bretton Woods system. In 1971 President Nixon suspended the convertibility of dollars into gold and the US moved to the fiat currency regime that is still in existence today. At that point the vast majority of global currencies – that had been fixed to the USD in the Bretton Woods system – also effectively became fiat currencies.

As currency ties to gold broke around the globe, cycles started to get longer but debt started to increase – a pattern that has extended to the current day with the added kicker in this current cycle being the largest round of central bank balance sheet expansion in history in the US, and at a global level: i.e. the entire world is now all in on avoiding a recession, and the cost is the greatest accumulation of sovereign debt in history.

Incidentally, as we showed back in 2015, the end of the US gold standard in 1971 in addition to permitting ever longer economic cycles (at the expense of record debt), also marked the moment when the US middle class stopped growing, as the income of 90% of the US population ended its ascent, while unleashing a golden age for the US “top 1%”, whose asset holdings exploded in “value” at the time the USD was delinked from gold. Which, incidentally, is the solution to the nationalist problem in every developed nation – if you want the middle class to return, and income for the vast majority of the population to increase, all that has to happen is for the gold standard to return. Of course, since that means crippling the wealth of the top 1%, it will never happen.

Obviously the start of this new era (the 1970s), in which fiat currencies emerged as ties to gold were broken, saw great economic challenges with high inflation and the oil shocks ensuring that managing the business cycle was still very difficult. Nevertheless, as DB’s Jim Reid notes, it was interesting that the first full cycle of the post Bretton Woods era starting in 1975 ended up being the third longest on record at the time (out of 29), behind only the 1938- WWII rearmament cycle and 1961- Fed policy error cycle.

What about the Fed?

The next chart shows the Fed Funds rate over the last century with recessions marked. In the Post WWII period, the interesting thing is that there have been two long rate ‘super-cycles’. The first extended from the end of the War until the early 1980s and saw rates structurally head higher across multiple cycles. During this period there were regular recessions with only the 1960s cycle an extended one due to what is now widely believed to be a policy error from the Fed as they failed to hike rates fast enough to control inflation. Rates eventually peaked just before the start of the long cycle era and since then they’ve been on a near four decade reversal of the 1945-1982 trend. So in the former period the Fed was in a long hiking super cycle which would have helped contribute to multiple recessions in that period. The opposite was true post 1982 where the structural ability to cut rates must have elongated cycles that might have otherwise been prone to roll over. This, as Deutsche Bank notes, undoubtedly played a part in the move from short to long cycles.

All of this worked great… until the Lehman failure and the global financial crisis unleashed a deflationary shockwave across the globe.

After an economic golden age for the global economy between 1982 and 2008, the Global Financial Crisis was then a huge threat to the era of long business cycles as it exposed the debt fuelled super-cycle that this policy flexibility encouraged. Allowing a great global debt restructuring that may have naturally occurred as a consequence would have restrained the flexibility of governments and central bankers to manage the business cycle and we could have quickly moved to a world of shorter cycles again. Being at the zero rate bound for the first time in history in many countries
(including the US) compounded the risks. However, as Jim Reid observes “global debt has continued to increase post the GFC and central banks found new weapons – namely QE and negative rates – to ensure that the economies could continue to grow over a period where left to their own devices we may have experienced a more sober economic environment and shorter cycles.”

As such, the US now is on the brink of its longest business cycle on record, continuing the trend of long cycles seen over the last 35-40 years

How long will US business cycles be in the future?

With the last four super-long US cycles attributed to globalisation, demographics, downward wage pressures, positive global disinflation, fiat money, increased debt/deficits, and QE, then the answer will come from answers as to how sustainable these trends are.

We’ll skip demographics and globalization as these are slower-acting, tectonic shifts, and focus on topics that are as salient today as ever – especially with another debt ceiling fight looming in D.C. With regards to debt and deficits, if anything the US has moved into an era of higher structural deficits and higher government debt, according to DB. Figure 10 extends the earlier charts to show CBO forecasts for both alongside business cycle lengths historically. Here the conclusion is simple: if the US can maintain such consistent deficits then perhaps it can continue to have long business cycles. Most market participants would likely say that such an increase in debt is not sustainable longer term but it could of course be sustainable for this and the next business cycle.

Similarly, the era of fiat money won’t be under terminal threat until there is sustained inflation – and not just the hyperinflation recorded in asset prices which the US government and Fed, for some reason, continue to ignore. As such central banks will still have money printing and balance sheet expansion in their armoury. Linked into debt and deficits, going forward QE may be used to finance specific government spending more than it has over the last decade where it was used to buy financial assets – particularly government bonds. So this could extend business cycles in the future and is again only likely to be more troublesome for the business cycle length when inflation rises.

So to conclude, retreating globalisation and weakening demographics are more negative for business cycle length going forward. However, while we are still able to run large deficits, accumulate more debt, and conduct more money printing we can still manipulate the length of cycles relative to the past. Maybe inflation is the glue here. Once that starts to structurally increase, business cycle management becomes more challenging.

How does this cycle compare to the past

Now that we know how we got here, and to mark the occasion that in just a few hours this will be the longest US cycle on record, let’s take a look at how this cycle compares to previous US cycles through history. Where Deutsche Bank has data, it stretches back to the start of US business cycle tracking in 1854, covering 34 expansions. Where data is missing, the analysis uses yearly data and start the cycle from the beginning of the year in which the recovery started. The titles indicate the periods covered in the graphs.

First we look at nominal GDP. As can be seen from the annual data back to 1854 or the quarterly data starting in 1921, this current cycle has seen the lowest growth at all stages of all the 18 cycles that have lasted more than three years. In fact, that might have helped encourage its longevity as economic activity has not got overly ahead of itself. It took until around 2018 for the output gap from the GFC recession to close and as such we were still in ‘catch-up’ mode for most of it.

A similar picture emerges in real GDP terms. Using the full annual data series, this is the shallowest recovery of all the 11 that have extended past 4 years. In the quarterly data post 1949, this cycle has been the weakest of any of the 11 expansions at all points through their respective cycles. So perhaps the policy breaks have not been needed to be applied by the authorities in the same manner as in virtually all previous cycles.

Given that population growth in this cycle has been the slowest of all the 34 cycles covered, low nominal and real GDP growth shouldn’t be a surprise. However one could also make the argument that low growth makes recessions more likely as the margin for error is reduced. As such, the longevity of this cycle becomes even more impressive.

Next, moving to what may be the most critical metric for modern economists – inflation. The early cycles observed covered a period where inflation was structurally much lower. So in this respect, this current expansion looks less extreme on the downside than it does on the growth front. However the impressive element to this cycle is how steady inflation has been throughout. Indeed prices are only up 18.5% over the now 10-year expansion. This has allowed the Fed to maintain an accommodative policy stance for as long as they have and has helped extend the cycle beyond any other.

At the same time, the decline in unemployment doesn’t look particularly unusual in this cycle relative to the past but the key takeaway from this graph is that recessions tend to start with unemployment still trending down or at least flat  lining. It also proves the point that employment is a lagging indicator.

Looking at capital markets reveals an entirely different story.

In terms of equities, this cycle has always been at the upper end of those seen through the entire history back to 1854. As we go past the 1991 expansion – that was previously the longest on record – returns on the S&P 500 are similar to that remarkable cycle which ended with the 2000 stock market bubble bursting. In that cycle, the graph highlights that the equity market peaked in March 2000 before the eventual recession was deemed to have begun in March 2001.

As Deutsche Bank concludes, it’s an interesting paradox that this cycle has consistently been one of the weakest in  terms of economic growth but one of the strongest in terms of asset price growth. It also hints at the extraordinary lengths global authorities have gone to ensure this recovery continued. Liquidity and intervention has been enormous and this has flowed into assets, not the economy.

So as we celebrate the longest US expansion in history, and the fourth ultra long cycle in a row, the only question worth pondering is what the costs of what as of July 1 will be the longest cycle in history, will end up being?

via ZeroHedge News https://ift.tt/2LujCf4 Tyler Durden

Authored by Danny Sjursen via The American Conservative,

She is the only candidate who has made ending the wars a centerpiece of her campaign, which will likely lead to her undoing…

Democrats, liberals, progressives – call them what you will – don’t really do foreign policy. Sure, if cornered, they’ll spout a few choice talking points, and probably find a way to make them all about bashing President Donald Trump—ignoring the uncomfortable fact that their very own Barack Obama led and expanded America’s countless wars for eight long years. 

This was ever so apparent in the first two nights of Democratic primary debates this week. Foreign policy hardly registered for these candidates with one noteworthy exception: Hawaii Representative Tulsi Gabbard—herself an (anti-war) combat veteran and army officer.

Now primary debates are more show than substance; this has long been the case. Still, to watch the first night’s Democratic primary debates, it was possible to forget that the United States remains mired in several air and ground wars from West Africa to Central Asia. In a two-hour long debate, with 10 would-be nominees plus the moderators, the word Afghanistan was uttered just nine times—you know, once for every two years American troops have been killing and dying there. Iraq was uttered just twice—both times by Gabbard. Syria, where Americans have died and still fight, was mentioned not once. Yemen, the world’s worst humanitarian disaster, courtesy of a U.S.-supported Saudi terror campaign didn’t get mentioned a single time, either. 

Night two was mostly worse! Afghanistan was uttered just three times, and there was no question specifically related to the war. Biden did say, in passing, that he doesn’t think there should be “combat troops” in Afghanistan—but notice the qualifier “combat.” That’s a cop-out that allows him to keep advisers and “support” troops in the country indefinitely. These are the games most Democrats play. And by the way, all those supposedly non-combat troops, well, they can and do get killed too.

The only bright spot in the second debate was Senator Bernie Sanders’s single mention of the word Yemen—specifically ending U.S. support for that war and shifting war powers back where they belong—with Congress. Still, most of the candidates had just about nothing to say on this or other war-related topics. Their silence was instructive.

Ironically, then, two more American soldiers were killed in another meaningless firefight in the long meaningless war in Afghanistan on the day of the first Democratic presidential primary debate. Indeed, were it not for this horrendous event—the deaths of the 3,550th and 3,551st coalition troops in an 18-year-old war—Afghanistan might not have ever made it onto Rachel Maddow’s debate questions list.

I mourn each and every service-member’s death in that unwinnable war; to say nothing of the far more numerous Afghan civilian fatalities. Still, in a macabre sort of way, I was glad the topic came up, even under such dismal circumstances. After all, Maddow’s question on the first night was one of precious few posed on the subject of foreign policy at all. Moreover, it spurred the most interesting, engaging, and enlightening exchange of either evening—between Gabbard and Ohio Representative Tim Ryan.

Reminding the audience of the recent troop deaths in the country, Maddow asked Ryan, “Why isn’t [the Afghanistan war] over? Why can’t presidents of very different parties and very different temperaments get us out of there? And how could you?” Ryan had a ready, if wholly conventional and obtuse, answer:

“The lesson” of these many years of wars is clear, he opined; the United States must stay “engaged,” “completely engaged,” in fact, even if “no one likes” it and it’s “tedious.”

I heard this, vomited a bit into my mouth, and thought “spare me!”

Ryan’s platitudes didn’t answer the question, for starters, and hardly engaged with American goals, interests, exit strategies, or a basic cost-benefit analysis in the war. In the space of a single sentence, Ryan proved himself just another neoliberal militarist, you know, the “reluctant” Democratic imperialist type. He made it clear he’s Hilary Clinton, Joe Biden, and Chuck Schumer rolled into one, except instead of cynically voting for the 2003 Iraq war, he was defending an off-the-rails Afghanistan war in its 18th year.

Gabbard pounced, and delivered the finest foreign policy screed of the night. And more power to her. Interrupting Ryan, she poignantly asked:

Is that what you will tell the parents of those two soldiers who were just killed in Afghanistan?

Well, we just have to be engaged?

As a soldier, I will tell you that answer is unacceptable. We have to bring our troops home from Afghanistan…

We have spent so much money. Money that’s coming out of every one of our pockets…

We are no better off in Afghanistan today than we were when this war began. This is why it is so important to have a president — commander in chief who knows the cost of war and is ready to do the job on day one.

In a few tight sentences, Gabbard distilled decades’ worth of antiwar critique and summarized what I’ve been writing for years—only I’ve killed many trees composing more than 20,000 words on the topic. The brevity of her terse comment, coupled with her unique platform as a veteran, only added to its power. Bravo, Tulsi, bravo!

Ryan was visibly shaken and felt compelled to retort with a standard series of worn out tropes. And Gabbard was ready for each one, almost as though she’d heard them all before (and probably has). The U.S. military has to stay, Ryan pleaded, because: “if the United States isn’t engaged the Taliban will grow and they will have bigger, bolder terrorist acts.” Gabbard cut him right off. “The Taliban was there long before we came in. They’ll be there long [after] we leave,” she thundered.

But because we didn’t “squash them,” before 9/11 Ryan complained, “they started flying planes into our buildings.” This, of course, is the recycled and easily refuted safe haven myth—the notion that the Taliban would again host transnational terrorists the moment our paltry 14,500 troops head back to Milwaukee. It’s ridiculous. There’s no evidence to support this desperate claim and it fails to explain why the United States doesn’t station several thousand troops in the dozensof global locales with a more serious al-Qaeda or ISIS presence than Afghanistan does. Gabbard would have none of it. “The Taliban didn’t attack us on 9/11,” she reminded Ryan, “al-Qaeda did.” It’s an important distinction, lost on mainstream interventionist Democrats and Republicans alike.

Ryan couldn’t possibly open his mind to such complexity, nuance, and, ultimately, realism. He clearly worships at the temple of war inertia; his worldview hostage to the absurd notion that the U.S. military has little choice but to fight everywhere, anywhere, because, well, that’s what it’s always done. Which leads us to what should be an obvious conclusion: Ryan, and all who think like him, should be immediately disqualified by true progressives and libertarians alike. His time has past. Ryan and his ilk have left a scorched region and a shaken American republic for the rest of us.

Still, there was one more interesting query for the first night’s candidates. What is the greatest geopolitical threat to the United States today, asked Maddow. All 10 Democratic hopefuls took a crack at it, though almost none followed directions and kept their answers to a single word or phrase. For the most part, the answers were ridiculous, outdated, or elementary, spanning Russia, China, even Trump. But none of the debaters listed terrorism as the biggest threat—a huge sea change from answers that candidates undoubtedly would have given just four or eight years ago. 

Which begs the question: why, if terrorism isn’t the priority, do far too many of these presidential aspirants seem willing to continue America’s fruitless, forever fight for the Greater Middle East? It’s a mystery, partly explained by the overwhelming power of the America’s military-industrial-congressional-media complex. Good old President Dwight D. Eisenhower is rolling in his grave, I assure you.

Gabbard, shamefully, is the only one among an absurdly large field of candidates who has put foreign policy, specifically ending the forever wars, at the top of her presidential campaign agenda. Well, unlike just about all of her opponents, she didfight in those very conflicts. The pity is that with an electorate so utterly apathetic about war, her priorities, while noble, might just doom her campaign before it even really starts. That’s instructive, if pitiful.

I, too, served in a series of unwinnable, unnecessary, unethical wars. Like her, I’ve chosen to publicly dissent in not just strategic, but in moral, language. I join her in her rejection of U.S. militarism, imperialism, and the flimsy justifications for the Afghanistan war—America’s longest war in its history. 

As for the other candidates, when one of them (likely) wins, let’s hope they are prepared the question Tulsi so powerfully posed to Ryan: what will they tell the parents of the next soldier that dies in America’s hopeless Afghanistan war?

via ZeroHedge News https://ift.tt/2RHm0jy Tyler Durden

Hours after Israeli reports said Russian S-300 anti-air defense systems in Syria came online and were “operational,” the Israeli military allegedly launched a major aerial attack on Syria in the middle of the night Sunday. 

According to a breaking AFP report: 

Syria said Israeli jets attacked several military sites near the capital Damascus and the central city of Homs early Monday, killing several people.

State news agency SANA said that Syrian air defense had intercepted several of the incoming missiles that were fired from Lebanese airspace.

Syria reported its aerial defense systems were active during the assault, which further caused damage to multiple civilian homes in the Damascus suburb of Sahnaya, according to SANA. 

The major Syrian military airport at Mezzeh on the western edge of Damascus was also a reported target in the attack.  

Video from #Damascus allegedly showing #Israel Air Force jets after striking targets pic.twitter.com/5u4YJek6z7

— Anna Ahronheim (@AAhronheim) June 30, 2019

Though total casualties are still unknown, one well-known journalist from Damascus, Danny Makki, is reporting at least 4 civilians killed — including a baby — and over 20 injured. 

Some missiles landed in residential areas. pic.twitter.com/iexiOPO3zp

— H.K 🇸🇾 (@Ibra_Joudeh) June 30, 2019

Syrian state media published footage showing missile intercepts of inbound projectiles.

It is also as yet unknown if the S-300s were active during the air strikes, however, Israeli media reports suggested both the newly installed S-300s as well as Iranian troop presence was a prime cause behind the Israeli action, despite the Israeli Defense Forces (IDF) neither confirming nor denying the strikes:

The reported strikes came just hours after an Israeli satellite imagery analysis company said Syria’s entire S-300 air defense system appeared to be operational, indicating a greater threat to Israel’s ability to conduct airstrikes against Iranian and pro-Iranian forces in the country.

Until now, only three of the country’s four surface-to-air missile launchers had been seen fully erected at the Masyaf base in northwestern Syria.

Israel has threatened to destroy the S-300 system if it is used against its fighter jets, regardless of the potential blowback from Russia.

Journalist Danny Makki called the overnight air strikes “certainly one of the biggest Israeli attacks on Syria this year” – given that two provinces were targeted as well as multiple installations and a civilian neighborhood being hit. 

Really hard to portray these attacks on #Syria as purely #Israel vs #Iran when most of the people killed or wounded are Syrian soldiers or on some occasions civilians.

— Danny Makki (@Dannymakkisyria) June 30, 2019

developing…

via ZeroHedge News https://ift.tt/2XfDyt6 Tyler Durden

Australia is continuing down the path of the global low yield charge, about to approach its final percentage point of “interest rate ammunition”, according to Bloomberg. 

The 10 year yield in Australia hit an all time low of 1.26% last week, which is more than a full percentage point under where they started the year. This means that every Australian bond – all the way out to the longest maturity in 2047 – is yielding less than the bottom of the central bank’s 2% to 3% inflation target.

And the speed with which the market environment is changing in Australia is catching the attention of many. 

Richard Yetsenga, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney said: “On the screen a minute ago, Aussie 10-year bond yields at 1.33? I mean, is that a typo? Even six months ago they were like 100 points higher.”

Additionally, the market is now pricing in an even chance that the Reserve Bank of Australia will cut its policy rate to 0.5% over the next year. Governor Philip Lowe will cut the cash rate by 25 bps on Tuesday, to 1%, according to 18 of 26 economists surveyed.

Sally Auld, a senior interest-rate strategist at JPMorgan Chase & Co. in Sydney said: “There is a sense of inevitability about where we are heading. We’ve seen this play out in a number of other big developed economies over the last decade. Rates have come all the way down to something close to zero, and they stay there for a very long time.”

The cash rate at 0.5% means that bank earnings could slide 15%, hurting the largest component of the country’s equity markets. Companies like annuities provider Challenger Ltd. have already felt the brunt of the lower rates, falling about 30% this year and citing “lower for longer” rates as the problem. 

And Governor Lowe has telegraphed that he is open to further cuts, with Australia’s job market lagging full employment. Like the U.S., Australia is also concerned with “putting inflation on course”. Lowe says that QE right now is “really quite unlikely”, but with how things have been going, we wouldn’t be surprised to see that stance reversed fully within a matter of just months. 

Rates at 1% have been what has prompted other unorthodox steps across the globe from the Federal Reserve and the Bank of England. Lowe has said that Australia’s lower level is at about 0.25% to 0.5%. 

Paul Sheard, a senior fellow at Harvard University’s Kennedy School said: 

“The potent policy then becomes monetary policy supporting fiscal policy”. It’s a more pragmatic kind of approach in Australia when it comes to cooperation among policy makers.” 

While it is seen as a positive that a lower cash rate could flow quickly to households with floating rate mortgages, Australia finds itself again staving off a problem temporarily that will eventually and inevitably lead to a far worse, longer term problem. But as long as economists and central bankers fail to realize this, we can expect Australia, along with its central banking peers across the globe, to be doomed to repeat history – just an order of magnitude worse than the last crash.

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

Authored by Nick Cunningham via OilPrice.com,

Canada is desperately trying to build the much-delayed Trans Mountain Expansion, but even as it tries to advance the ball on one front, another pipeline has found itself in the crosshairs.

Enbridge’s Line 5 pipeline carries more than a half a million barrels of oil and products per day from Alberta, across the border into the U.S., and ultimately to refineries back in Canada at the major refining and petrochemical hub of Sarnia, Ontario.

The 540,000-bpd pipeline may be in trouble, however. The state of Michigan just launched a lawsuit, which could force Enbridge to shut the pipeline down. Michigan is concerned about the possibility of a leak from the aging pipeline, which crosses under the Straits of Mackinac. A leak could threaten drinking water and spoil the scenic Great Lakes.

Governor Gretchen Whitmer promised to stop the “flow of oil through the Great Lakes as soon as possible.”

Enbridge has been trying to build a replacement for the pipeline, which is nearly 70 years old. But the replacement proposal has been a huge point of contention. Michigan’s attorney general is hoping to shut it down. The risk the state most fears is an anchor strike.

“The location of the pipelines…combines great ecological sensitivity with exceptional vulnerability to anchor strikes,” Michigan AG Dana Nessel said. An anchor strike occurred in 2018 and was viewed as a near disaster.

“This situation with Line 5 differs from other bodies of water where pipelines exist because the currents in the Straits of Mackinac are complex, variable, and remarkably fast and strong.”

Enbridge argues that it inked a deal with the former Michigan governor last year, which would have allowed Enbridge to build a tunnel underwater to house the pipeline and allow the system to continue to operate. The new Democratic administration has tossed that agreement aside.

“We remain open to discussions with the Governor, and we hope we can reach an agreement outside of court,” Enbridge said in a statement.

“We believe the Straits tunnel is the best way to protect the community and the Great Lakes while safely meeting Michigan’s energy needs.”

The issue may seem like a local problem, but it would have regional, national and international implications. For one, refineries in Sarnia would struggle to replace the oil flows. According to Stratas Advisors, the refineries would be able to find alternative supplies from Line 78B, a pipeline from the U.S. Midwest, but there would be significant disruptions.

“If Enbridge Line 5 closes, Line 78B will be able to provide enough light crude for Sarnia refineries. There would be a shortage of light crude supply for Montreal, Kinatone and Nanticoke refineries,” in Eastern Canada, Stratas Advisors wrote.

“If contractual restrictions between Enbridge and non-Sarnia refineries lead to a shortage of light crude supply to Sarnia refineries, trucks and railroads would be used to transport the required light crude. Until the whole supply chain comes to an equilibrium, the refineries will run at low utilization.”

S&P Global Platts also said that rail could help pick up the slack if the pipeline is shut down.

If Line 5 has to shut down, it “would cause a huge disruption of light crude supply to Eastern Canada and US Mid-Continent refineries,” Statas Advisors said.

Meanwhile, the disruption upstream would also be significant. Canada’s oil producers suffered from steep discounts last year because of midstream bottlenecks. Some rail capacity has eased the constraint, but the inability to build new pipelines has hurt the industry. Ultimately, Alberta implemented mandatory production cuts, which helped rescue depressed Western Canada Select prices.

Now, the Canadian government is hoping to build its nationalized Trans Mountain Expansion pipeline, although that project is still riddled with uncertainty, even with the latest approval from Ottawa. First Nations and environmental groups have vowed to fight the project. Even if all goes according to plan, it would not come online for several years at the earliest.

At the same time, Enbridge is also running into trouble with another of its aging pipeline. It has proposed building a replacement for its Line 3 pipeline, which also carries oil from Alberta to the U.S. The project has run into roadblocks in Minnesota, forcing delays in construction.

If Line 5 is forced to shut down, taking 540,000 bpd of takeaway capacity offline, it would almost surely exacerbate midstream bottleneck, and would likely steepen discounts that Canadian oil producers face.

via ZeroHedge News https://ift.tt/2KOqGn9 Tyler Durden

The S&P may have just enjoyed its best June in 84 years but not because of rising corporate profits and earnings. Quite the contrary: according to Goldman, while the S&P 500 rose 7% from its trough on June 3, valuation expansion accounted for 90% of the rally in response to the Fed’s becoming “impatient” and signaling an easing cycle has begun. As Goldman’s chief equity strategist David Kostin writes, the realized 3-month correlation between S&P 500 returns and the bank’s MAP index, a measure of economic data surprises, reached a low of -0.2 last week versus a 10-year average of +0.1.

Meanwhile, weak economic data – which validated the Fed’s easing bias – have generally been “good news” for equity valuations but “bad news” for earnings expectations during the past three months.

Indeed, if investors are looking for some upside from corporate fundamentals, they probably won’t find them in the upcoming Q2 earnings season, as consensus bottom-up 2019 EPS estimates have resumed their downward trend following a brief reprieve during 1Q earnings season. Consensus has lowered its estimate of 2019 EPS by $1 to $166 (+2% growth year/year) during the past six weeks, with Goldman noting that since the start of 4Q 2018, 2019 EPS growth expectations have declined from +10% to +2%. As we reported yesterday, companies issuing negative guidance has jumped to 87, the second highest on record, while 1-month EPS revisions have been most negative in Energy and Info Tech

So with 2Q earnings season kicking off in earnest on July 15, consensus expects aggregate EPS to decline by 1% year/year , and if realized, this would be the first year/year decline in quarterly EPS since 2016.

To be sure, consensus also expected a 2% decline in EPS at the start of earnings season in 1Q, however, realized growth ultimately equaled +2%, with the number saved by Trump’s tax cuts, as effective tax rates were lower than originally anticipated.

Meanwhile, excluding Financials and Utilities, S&P 500 sales are forecast to grow by 5% in 2Q but to be more than offset by an 86 bp decline in net profit margins. Consensus expects all 8 sectors to see positive sales growth and margin contraction in 2Q. Communication Services (+4%) and Financials (+3%) are forecast to post the fastest EPS growth.

Despite the broad-based drop in EPS, the median S&P 500 company is still expected to post modest growth and see its EPS grow by 4% year/year in 2Q. The culprit, perhaps unexpectedly, is Info Tech which has an outsized weight in the index, accounting for 20% of earnings, and is forecast to see EPS fall by 10% year/year this quarter driven by AAPL (-10%) and semiconductors (-28%). As a result, aggregate EPS growth distorts the fundamental outlook for the median company. Notably, within Info Tech, Software & Services 2Q EPS growth is expected to be healthy (+7% year/year).

Looking at the broader macro picture, the slowdown in economic growth during 2Q is consistent with expectations for a decline in EPS growth. With economic growth the primary driver of S&P 500 sales and earnings growth., during 2Q 2019, the Goldman Current Activity Indicator (CAI) averaged just 1.4%, a pace of growth that pales in comparison with the 3.4% growth during 2Q 2018. Global growth has also been weak amid heightened uncertainty and ongoing trade war between the US and China – which while did not escalate this weekend, continue as before – with the GS global CAI averaging 2.9% during the quarter versus 4.2% in 2Q 2018.

Qualifying at the main drivers of downside profitability, Kostin expects profit margins will contract as input costs continue to weigh on profitability. In part due to the one-time boost from tax reform, net profit margins reached an all-time high in 2018. However, margins contracted in 1Q 2019 for the first time since 2016. The unemployment rate stands at a 50-year low (3.6%) and average hourly earnings have grown by more than 3% in each of the last 8 months.

In addition to a tighter labor market, capacity constraints have led to higher transportation and logistics costs, as companies have been unable to keep pace with their prices; an NABE survey shows that the net share of respondents reporting rising wages (57%) and materials costs (36%) is well above the net share reporting rising prices charged (18%). Historically, this pattern has been a precursor to EBIT margin declines, as consensus expects in 2019.

At the same time, tariffs represent a significant source of uncertainty for corporate profit margins, with Goldman pointing out that “tariffs pose a greater risk to company profit margins than to sales” and adding that “if the trade war escalates and a 25% tariff is imposed on all imports from China, current consensus S&P 500 EPS estimates could be lowered by as much as 6%.” And while such an outcome has been averted for now thanks to Saturday’s ceasefire between Trump and Xi, it may still return, in which case S&P 500 firms would need to raise prices by around 1% to offset the impact of tariffs.

Yet while Trump’s tariffs are the primary source of risk to Q2 and H2 earnings, Trump’s tax cuts are the the primary source of upside risk to 2Q and full-year 2019 EPS estimates in the form of an even lower effective tax rate. Consider this: the S&P 500 effective tax rate during 1Q equaled 19%, compared with an estimate of 21% at the start of earnings season, and was a significant contributor to better-than-expected results in the quarter.

However, as Goldman notes, consensus estimates for the effective tax rate in the remaining three quarters of 2019 have remained largely unchanged. Consensus forecasts a 21% effective tax rate through year-end, but if tax rates remains at 1Q levels, it would lift 2019 EPS estimates by roughly $3 (from $166 to $169 or roughly +150 bp additional growth).

It is also worth noting that Wall Street’s bout of pessimism is expected to be a brief one, as while consensus has lowered 2019 EPS growth estimates, they have not adjusted 2020 estimates, which stand at 12% compared with 11% at the start of the year.

Here Goldman, which remains bullish on the overall market (despite the random strategist publishing an occasional bearish note expecting a market crash within the next 12 months), expects that “the macro environment will support an EPS growth acceleration in late 2019 and 2020 relative to the first three quarters of this year.” However, even Goldman forecasts just 4% EPS growth in 2020 and expects negative revisions to 2020 EPS estimates. To wit: on average since 1985, consensus EPS estimates have typically been lowered by an average of 8% from when analyst estimates are first published two years prior to the estimate year. And with Wall Street always eager to delay the moment of cutting its overly optimistic forecasts until the last possible moment, negative revisions to forward year EPS typically accelerate after the 2Q earnings season as investors and analysts shift their focus to the following calendar year.

With all that in mind, Goldman warns that while the dovish pivot from the Fed lifted equity valuations in every S&P 500 sector (furthermore, with a China-US trade deal now once again a possibility as the two sides are once again negotiating, there is a clear risk the Fed may not cut at all as this Bloomberg article details) but Goldman expects that fundamentals, i.e., earnings, will become an increasingly important driver of returns going forward for the simple reason that “earnings drive stocks over the long term.”

What does this means in practical terms? According to Kostin, a long/short factor of S&P 500 stocks with the highest versus lowest trailing FY2 EPS revisions has posted an average annualized return of 3.6% since 1980. But since January, the strategy has traded sideways as a dovish Fed has lifted US equity valuations broadly.

Finally, last quarter, the gap between performance of EPS beats and misses on the day after reporting earnings surged to 600 bps, the highest since at least 2006, and Kostin expect this trend will continue in 2Q as investors shift their focus from broad equity valuations to prospects for earnings growth in 2020.

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

Despite nothing being achieved in Osaka apart from a resumption of more-of-the-same trade talks (and a fold by Trump), markets are decided ‘risk-on’ as they open this evening.

Treasuries are being dumped along with gold (because everything is awesome right?) and stocks and yuan are surging.

Dow is up over 250 points…

The biggest reaction for now is in Yuan, spiking to 8-week highs…

As a reminder, this is not news – but do not tell the algos…

“Stocks rally as China, US closer to a deal following G20”

Headline on Monday probably

— Hipster (@Hipster_Trader) June 28, 2019

S&P 3,000 here we come at tomorrow’s open!?

However, is good “trade” news bad news for stocks as odds of a July rate-cut drop?

In case you wondered, you are here…

Additionally, reported agreements between Russia and Saudi Arabia to extend the OPEC production cuts has spiked oil prices as they open this evening…

Oil producers from the OPEC+ alliance are moving toward extending their supply cuts for nine months into the first quarter of 2020, as they grapple with surging U.S. shale output and weakening growth in demand.

Since Russia and Saudi Arabia reached a deal on the margins of the Group of 20 summit on Saturday to roll over the curbs by six to nine months, other nations have voiced their support for an extension into next year.

“The longer the horizon, the stronger the certainty to the market,” OPEC Secretary-General Mohammad Barkindo said in Vienna on Sunday after meeting with Khalid Al-Falih, the Saudi oil minister. “It will be more certain to look beyond 2019. I think most of the forecasts that we are seeing now and most of the analysis are gradually shifting to 2020.”

Russian President Vladimir Putin – after meeting with Saudi Crown Prince Mohammed Bin Salman – opened the door to 2020 by mooting longer curbs.

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

Authored by Ted Dabrowski and John Klingner via Wirepoints.org,

Chicagoans are buried under so much pension debt it’s impossible to see how their city can avoid a fiscal collapse without major, structural reforms. The futility of paying down those debts becomes obvious when you try to figure out just who’s going to pay for it all.

The total amount of city, county and state retirement debt Chicagoans are on the hook for is $150 billion, based on Moody’s most recent pension data. Split that evenly across the city’s one million-plus households and you arrive at nearly $145,000 per household. 

That’s an outrageous amount, but it would be a clean solution if each and every Chicago household could simply absorb $145,000 in government retirement debt. The problem is, most can’t. 

One-fifth of Chicagoans live in poverty and nearly half of all Chicago households make less than $50,000 a year. It wouldn’t just be wrong to try and squeeze those Chicagoans further, but pointless. They don’t have the money. 

So if that won’t work, why not just put all the burden on Chicago’s “rich?” After all, Illinois lawmakers are pushing progressive tax schemes as the panacea for Illinois’ problems. 

If households earning $200,000 or more are the target, they’ll be on the hook for more than $2 million each in government retirement debts. That’s an outrageous burden, too. 

Saddling just a few households with all the debt will give those residents all the more reason to leave. And that will make the burden all the more unbearable for the Chicagoans who remain.

The process to target Chicago’s “rich” already started earlier this year. That’s when state lawmakers passed a progressive tax scheme which, if approved by voters in 2020, will hit Illinoisans earning more than $250,000 with tax increases as large as 60 percent. Chicago’s special interest groups want to hit the rich as well. They’re demanding a dedicated city income tax and a financial transaction tax that will impact the city’s wealthier residents.

Trying to find some middle ground on divvying up Chicagoans’ pension debts is also impossible. If all lower and middle income households earning up to $75,000 are protected, that leaves just 37 percent of Chicago households to pay the $150 billion bill. The burden on them would total $393,000 each. Still crazy.

Slice up Chicago’s debts anyway you like it, but the result is the same. There’s simply too much of it for Chicagoans to bear. Without structural pension reforms, expect the city to continue its path deeper into junk territory and an eventual insolvency. That will inflict enormous pain not just on taxpayers, but on the workers counting on the government for their retirement security.

Adding up the debt

For decades, official government reports have understated the true amount of pension debt Illinoisans are on the hook for. Government calculations have been criticized by the likes of Warren Buffet and Nobel Prize winners for using improper actuarial assumptions. For that reason, Wirepoints’ uses pension debts calculated by Moody’s Investors Service. The rating agency takes a more conservative approach to measuring debts than state officials do.

Chicago has four city-run pension funds that collectively face a $42 billion shortfall. The Chicago Public Schools’ pension fund is short another $24 billion. In all, there’s a $70 billion shortfall in the city-based funds alone.

Chicagoans are also burdened with an additional $11 billion in debt – their share of debts owed by various Cook County governments. 

And Chicagoans’ share of state retirement debts for pensions, retiree health and pension bonds adds another $69 billion.

In total, Chicago households are on the hook for $150 billion in combined retirement debts.

Chicago the outlier

Not only are those debts overly burdensome to Chicagoans, but the city’s debts alone make Chicago a major outlier nationally when it comes to retirement debt.

According to Joshua Rauh of the Hoover Institution, the city of Chicago’s pension debts are now 12 times the size of its annual revenues. No other major city faces such a burden.

In fact, according to JP Morgan, over 63 percent of the city’s budget should be going towards retirement payments. That’s the worst of any major city in the nation, by far.

Too much debt is the key reason Chicago’s credit ratings have collapsed. Moody’s already rates Chicago one notch into junk and the Chicago Public Schools five notches into junk. Detroit is the only major U.S. city rated worse than Chicago (See Appendix 2).

Impossible without reforms

The above numbers show the impossibility of stopping Chicago’s fiscal decline without serious, structural pension reforms.

Some pension proponents will find offense with our use of Moody’s debt numbers – they’ll say Moody’s assumptions are too pessimistic and overstate the problem.

But the debt burdens are still unworkable even if official government numbers are used. The average Chicago household is still on the hook for $90,000 in debt under the official numbers, while households making $200,000 or more would still face a burden of more than $1.2 million each.

Without structural changes, those numbers will only get worse.

For starters, lower discount rates and more conservative actuarial assumptions continue to show that pension debts are much larger than politicians say they are.

Second, as in-migration into Chicago slows and out-migration increases – a fair assumption given that Chicago has shrunk four years in a row – the debt burden on those who remain will rise.

And third, the risk of a recession is growing now that the nation’s economic expansion has lasted an unprecedented ten years. Any significant pull-back in the stock market would deal a major blowto Chicago’s deeply underfunded pension plans. 

Tax hikes won’t solve Chicago’s massive debt problem.

Only structural reforms, including changes to cost-of-living adjustments – will make the city affordable again for the ordinary Chicagoan. And that requires an amendment to the state’s constitutional protections.

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