Tag: news

Fed’s Kaplan: Three Or Four More Rate Hikes Before Stopping To Assess

Dallas Fed President Robert Kaplan said that with the current fed funds rate at 1.75-2.00%, the Fed should continue raising interest rates until they hit their neutral level, which he said is about “three or four quarter-point rate increases away.”

“At that point, I would be inclined to step back and assess the outlook for the economy and look at a range of other factors—including the levels and shape of the Treasury yield curve—before deciding what further actions, if any, might be appropriate.” Even so, he admits that the shape of the yield curve, which yesterday dipped to a new post-crisis low of 22bps, “suggests to me we are ‘late’ in the economic cycle” although he mitigated the risk, saying “I do not discount the significance of an inverted yield curve.”

The Dallas Fed projects full-year GDP growth of about 3%, and notes that “2018 will be a strong year for economic growth in the U.S. Reasons include a strong consumer sector, improved prospects for business investment due to tax incentives, solid global growth and substantial fiscal stimulus due to recent tax legislation and budget agreements.”

However, echoing the analysis of his former employer Goldman, Kaplan cautions that “while 2018 will be strong, economic growth is likely to moderate in 2019 and 2020 as the impact of fiscal stimulus wanes and monetary policy approaches a more neutral stance. Their view has been that potential GDP growth in the U.S. is in the range of 1.75 to 2 percent and actual real GDP growth will likely reach this level by 2020 or 2021.”

Kaplan also expects unemployment rate to fall to 3.7% by year-end, and  expects “headline personal consumption expenditures (PCE) inflation will remain in the neighborhood of the Federal Reserve’s 2 percent target during the remainder of 2018.”

“While our economists are hopeful that a strong labor market might continue to draw in new entrants who are currently out of the workforce, it is our base-case view that the current rate of labor force growth is unlikely to continue.”

What are the key challenges facing the Fed according to Kaplan? He lays it out in the concluding section “where we go from here” in which he notes the following: “the challenge for the Fed is to raise the federal funds rate in a gradual manner calibrated to extend this expansion, but not so gradually as to get behind the curve so that we have to play catch-up and raise rates quickly. Having to raise rates quickly would likely increase the risk of recession.“

The full section is below.

When I joined the Fed in September of 2015, the federal funds rate was 0.0 to 0.25 percent. This rate had not been adjusted since late 2008. The Fed’s balance sheet stood at approximately $4.5 trillion.

Since that time, the Fed has been able to gradually remove accommodation and implement a plan to reduce the size of its balance sheet. Over this period, the unemployment rate has moved down substantially and inflation is now running at approximately 2 percent.

At this juncture, the challenge for the Fed is to raise the federal funds rate in a gradual manner calibrated to extend this expansion, but not so gradually as to get behind the curve so that we have to play catch-up and raise rates quickly. Having to raise rates quickly would likely increase the risk of recession.

As I judge the pace at which we should be raising the federal funds rate, I will be carefully watching the U.S. Treasury yield curve. Currently the one-year Treasury rate is 2.44 percent, the two-year is 2.61 percent and the 10-year is 2.87 percent.[21] My own view is that the short end of the Treasury curve is responding to Federal Reserve policy expectations. The longer end of the curve is telling me that, while there is substantial global liquidity and a search for safe assets, expectations for future growth are sluggish—and this is consistent with an expectation that U.S. growth will trend back down to potential. Overall, the shape of the curve suggests to me we are “late” in the economic cycle. I do not discount the significance of an inverted yield curve—I believe it is worth paying attention to given the high historical correlation between inversions and recession.

I will also be closely monitoring global financial and economic developments and their potential impact on domestic financial and economic conditions. As global financial markets and economies have become increasingly interconnected, the potential for spillovers to the U.S. is greater than in the past. That is, global economic and financial instability has the potential to transmit to domestic financial markets, potentially leading to a tightening of financial conditions which, if prolonged, could lead to a slowing in U.S. economic activity.

Based on these various factors, as well as the current strength of the U.S. economy and my outlook for economic conditions over the medium term, I believe it will be appropriate for the Fed to continue to gradually move toward a neutral monetary policy stance. I believe that this gradual approach to removing monetary policy accommodation will give us the best chance of managing against imbalances and further extending the current economic expansion in the U.S.

Source: Where We Stand: Assessment of Economic Conditions and Implications for Monetary Policy

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Hedge Funds Rocked By Relentless Short Squeeze

Yesterday we presented Nomura’s observations on the reasons why despite the market’s ascent back to new all time highs, the bank had witnessed a “multi-month performance disaster for US equity funds.” According to Nomura’s x-asset strategist Charlie McElligott, the reason behind the underperformance of equity funds was three-fold and involved sharp moves across various factor strategies:

  • A “Beta Grab” (HF L/S beta to SPX jumps to 89th %ile from 65th %ile the prior week)
  • A re-adding of exposure to “Momentum Longs” (L/S beta to Momentum Longs leaps to 32nd %ile from the recent puke down to 10th %ile)
  • All of this despite SPX sector-performance last week showing “pure de-risking”: Telcos / Staples / REITS / Utes / Healthcare as the five best sector returns, while the bottom-six sectors were Industrials / Financials / Tech / Consumer Discretionary / Materials / Energy

Today, in its latest quarterly hedge fund monitor report which is a compilation and analysis of the latest batch of hedge fund 13Fs, Goldman’s Ben Snider confirms as much, writing that “a difficult summer has reduced the YTD return for the average equity hedge fund to -1%” largely as a result of underperformance of some of the most popular hedge funds stocks. As a result, Goldman’s basket of the most popular hedge fund positions – where FaceBook is at the very top – has lagged the S&P 500 by 118 bp so far this year (6.7% vs. 7.9%).

And speaking of Facebook…

The plunge of Facebook (FB), entered 3Q as the most popular hedge fund stock. Before its disappointing earnings results, 230 hedge funds (28%) in our sample owned FB, making it the most popular position. The average portfolio weight for FB among those funds was 4%. Among the 642 funds with between 10 and 200 distinct equity positions, 98 held FB as a top 10 portfolio position, ranking it as the top stock in our Hedge Fund VIP list.

Visually, this is how a hedge fund hotel burns down:

In other words, for yet another year, one could have bought the SPY, avoided the “2 and 20”, and outperformed the vast majority of hedge funds.

What caused this dramatic underperformance of Wall Street’s “best and brightest”?

According to Goldman, the large performance swings in the broad market and the most popular stocks “created a difficult investing environment.” Which then begs the question: why are hedge fund managers paid tens of millions if they can’t navigate “performance swings” and why do they all gravitate to the same handful of “most popular stocks”?

It certainly is not to build conviction: Goldman found that one contributor to underwhelming fund performance has been declining hedge fund net exposure. Net long exposure calculated based on 13-F filings and publicly-available short interest data registered 55% at the start of 3Q, slightly lower than in 2Q.

Data from Goldman’s Prime Services division showed a similar picture, with net leverage declining steadily during recent months while the S&P 500 recovered to within 1% of its record high.

But whereas lack of conviction is to be expected in a market that has grown increasingly decoupled between the US and the rest of the world, merely reducing one’s exposure would simply lead to more muted gains. To explain the underperformance there has to be a different reason: and sure enough, Goldman highlights just that, echoing a theme was have discussed constantly in recent weeks, namely the challenge hedge fund face as a result of the sharp outperformance of the most concentrated short positions.

Because at the same time that the most popular longs among hedge funds underperformed the S&P, a basket of the 50 Russell 3000 stocks with market caps greater than $1 billion and the largest outstanding short interest as a share of float has outperformed the S&P 500 by 14 percentage points YTD (+21% vs. +7%), Goldman found adding that in recent months, the concentrated shorts have outperformed primarily in favorite hedge fund sectors including Info Tech.

Which is a delightful confirmation of what we said back in May, when in addition to listing the top 50 hedge fund longs, we also listed the top 50 shorts and said “for those who are convinced that it’s only a matter of time before a massive squeeze sends the most shorted names soaring, here is the list of the 50 stocks representing the largest short positions among hedge funds.”

Fast forward three months later when the relentless short squeeze continues to crush hedge fund performance.

So is it too late now to piggyback on this trade, and hope for further “squeeze” higher?

Goldman’s answer is that whereas across the broad market, short interest as a share of float sits close to its 10-year median, but Consumer Staples short interest has rarely been higher.

As a result, the performance of retail stocks has been a good indicator of what happens once a short squeeze gets going: because although the sector faces pressure from rising interest rates and declining margins, the performance of retail stocks during the past year highlights the potential energy contained by stocks with extreme levels of short interest, and why in this market doing the logical thing is guaranteed to lead to acute pain.

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Turkey: Lira Bulls & Bears Battle It Out On Twitter

Authored by Mike Shedlock via MishTalk,

Is there a bullish case for the Lira? One person thinks so. Most think otherwise.

Lira Plunge Resumes

Interest Rates top 20%

There was a rumor Germany would come to the aid of Turkey. That rumor seemingly died today.

Robin Brooks Thinks Lira is Undervalued

Current Account Surplus

Switched Position

Yesterday’s Story

Yes, But Liquidity in Short Supply

Bigger Crisis Possible

Rapid Loan Growth

Questions Abound

Setser commented “I find the balance sheet of Turkey’s banks fascinating.”

Framing Turkey’s Vulnerabilities

Brad Setser frames Turkey’s Vulnerabilities: Some Rhyme with the Asian Crisis, but Not a Repeat

There are a number of different ways of framing the cause of Turkey’s recent currency crisis.

I think the emphasis should be on Turkey’s banks, and their large stock of external debt. The banks are the main reason why Turkey’s currency crisis could morph into a funding crisis, one that leaves Turkey without sufficient reserves to avoid a major default.

While Asia offers the best parallels, the analogy to Asia is also just a bit off. Turkey has, rather miraculously, been able to use external foreign currency funding to support a domestic boom in lira lending to households… something Asian banks never did, to my knowledge.

The financial mystery in some sense isn’t how the banks’ lent foreign currency to domestic firms, it is how they used their external foreign currency borrowing to support domestic lira lending.

Turkey’s banks do hold a decent amount of regulatory capital. And they hold that capital in lira. Fair enough. A lot of folks think U.S. and European banks would be a lot healthier if they funded their lending with one dollar (or euro) of equity and six dollars (or euros) of deposits rather than funding their lending with a dollar of equity and close to twenty dollars of borrowed money. Equity isn’t “set aside” per se, it is invested alongside other sources of funding.

But by holding all of their equity in lira even though a large part of their funding and lending was in dollars, the banking system’s capital ratio falls as the lira falls

Turkey’s banks borrowed foreign currency in part to have dollars to swap into lira in the cross-currency swap market. A borrowed dollar or euro swapped into lira is effectively lira funding, not dollar funding—it just shows up as foreign currency borrowing in the external debt data. As far as financial alchemy goes, cross-currency swaps are pretty plain-vanilla.

It was also the fact that the swaps generally had a shorter-maturity than the underlying foreign currency borrowing. Five year bonds were issued to raise dollars. But then the dollars were swapped for lira on a 3 month contract.

The result is that Turkey’s banks have a maturity mismatch on their lira book. They will start taking losses quickly if domestic interest rates rise too high, as they have longer-dated lira loans and shorter-dated lira funding.

The banks also had the option of meeting their reserve requirement in gold. As a result, Turkey found a way to make gold deposits effectively available to support household lending (by letting the gold substitute for other forms of required reserves).

The net effect is that the banks have an extremely interesting—but rather complicated—foreign currency balance sheet, with an unusual mix of vulnerabilities.

So what’s my bottom line?

Simple—from a balance sheet point of view, the risk of a run on the banks’ foreign currency funding poses far larger vulnerabilities than the government’s funding need. The government, excluding the state banks, has almost $100 billion in external debt, but less than $10 billion coming due in the next year. The banks have just over $150 billion in external debt, but over $100 billion coming due over the next year.

The rise in Turkey external debt in 2017—which corresponded to a rise in Turkey’s current account deficit—now looks to be the straw that broke the camel’s back.

Bears Have It

There is much more in Setser’s post. For those interest in FX, It’s worth a read in entirety.

Setser concludes, and I agree, “I would bet that the dynamics in Turkey get worse before they get better—in most crises, creditors want to reduce their exposure, not just stop adding to it. The underlying risk of a severe crisis, one marked by systemic defaults not just an epic depreciation, remains.”

The bears have the far bigger case with liquidity issues, Trump sanctions, and timing considerations.

Old Story, New Complicated Method

The story is an old one “complicated borrow short and lend long derivations eventually blow up, especially with foreign financing.”

On July 10, I commented Spotlight Turkey: Hyperinflation and Mass-Migration Crisis Inevitable.

On July 14, I commented Hyperinflation Avoidance Advice for Turkish Citizens as Fitch Cuts Ratings.

On July 10, the Lira closed at 4.876. It is now 6.080. That a whopping 20% decline in just over a month, but it’s nowhere near hyperinflation material.

Hyperinflation is a political event, not a monetary one, and Erdogan is on that path.

The primary bull case is not the one Robin Brooks suggested. Rather, it is a potential for a huge Lira rally if Turkey heeds Trump’s demand and unconditionally releases US Christian pastor Andrew Brunson, absurdly held by Turkey on charges of terrorism.

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A New Report Details Pro-Trump Censorship of Liberty University’s Student Paper

|||YURI GRIPAS/REUTERS/NewscomA rift between the Liberty University president and an on-campus newspaper indicates that campus free speech battles are not solely an issue for liberal colleges. Jerry Falwell, Jr., the president of one of the largest Christian universities in America, is a very vocal supporter of Republicans and conservatives and that support has crossed over to his college’s identity. Earlier in the month, Falwell invoked his students to criticize Attorney General Jeff Sessions for not supporting President Trump enough, citing their low attendance at a 2016 event as proof that they did not back Sessions. Now World Magazine alleges that Falwell played a direct role in censoring the political views of Liberty’s Champion, the on-campus paper. The alleged censorship mostly applied to criticisms of Trump.

In one allegation, Falwell reportedly directed staffers in 2016 to state the presidential candidate for which they were voting. At another point, Falwell told another editor to not run former Sports Editor Joel Schmieg’s column disavowing Trump’s “locker room talk” controversy. Schmieg then attempted to share his thoughts on Facebook, but later resigned when a faculty adviser communicated to him that he should refrain from repeating the action in the future. According to World Magazine, Schmieg said, “I didn’t feel comfortable being told what I couldn’t write about by President Falwell.”

The other allegations follow a similar model of faculty members not only revising stories that were critical of Trump, but of staff, including Falwell himself, advising students not to cover certain events on campus. In April, Champion staff accused Falwell of telling them to not cover a controversial “Red Letter Revival.” The event was comprised of progressive evangelical Christians who sought to pray against a culture of “toxic evangelicalism.” The event featured a handful of Liberty student speakers. When former Assistant News Editor Erin Covey reached out to Falwell requesting a statement, he reportedly emailed her saying, “Let’s not run any articles about the event.” Covey later told Religious News Service, “I do think that currently the level of oversight we have does make it difficult to pursue the accurate journalism that we’re taught in classes.”

About a week after the event, Bruce Kirk, dean of the School of Communication and Digital Content, informed the students that they would be interviewed for staff positions for the following year, a first in Champion history. In a conference call with Falwell, Kirk, and the staff, Kirk advised the students to put “journalism aside for a second” to remind them that someone else “decides what you do and what you don’t say or do,” according to the World Magazine report. After the passing of another week, Kirk informed former Editor-in-Chief Jack Panyard that the paper would be doing away with his position, reorganizing its structure, and that Panyard would not be part of the operations any longer. Because of this, Panyard also lost the $3,000-per-semester scholarship that came with his position.

Champion staff are now reportedly required to go through a multi-stage approval process for their stories that requires input from the faculty adviser, a panel of faculty members, and Falwell.

This is not the first time Liberty students have found themselves at odds with the university. In 2015, Sen. Ted Cruz (R–Texas) announced his presidential bid at the school. As Reason reported, a number of students took issue with the setting as Cruz announced his campaign during a mandatory morning convocation for students. One student complained that the setting made it seem as though Cruz had the unanimous support of the nearly 10,000 people in the room. It also appeared that Falwell encouraged the students to stand in support, though he later asserted in a statement that students were “free to cheer or boo as they see fit.”

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Ready To Flip? Michael Cohen Exploring Possible Plea Deal With Prosecutors

Michael Cohen, Trump’s former personal attorney who we learned on Sunday is under federal investigation for bank fraud totaling “well over $20 million”, is discussing a possible guilty plea with Manhattan federal prosecutors in connection with tax fraud and banking related matters, according to NBC. While no deal has been reached, NBC’s sources say the potential deal could be reached as early as today.

A plea by Cohen would have significant implications for Trump, who has blasted Cohen ever since his former fixer and his attorney, old Clinton hand Lanny Davis, began signaling this summer that Cohen might cooperate with special counsel Robert Mueller’s investigation.

The Cohen probe is being led by the office of the U.S. Attorney for the Southern District of New York in Manhattan, but any cooperation agreement would likely extend to other federal investigations. As a reminder, in July Cohen, who once bragged he’d take a bullet for Trump, hinted that may have changed. “I put family and country first,” he told ABC.

In addition to bank and tax fraud questions arising from Cohen’s taxi business, federal prosecutors are looking into whether the hush-money payments Cohen arranged with women who claimed they had sexual encounters with Trump amount to violations of campaign finance law.

FBI agents raided Cohen’s office and hotel room in April and seized documents and electronics. According to people with knowledge of the search warrant, agents were looking for information related to a $130,000 transaction between Cohen and adult film star Stormy Daniels, who allegedly had an affair with Trump more than a decade ago, as well as information about a reported payment of $150,000 to former Playboy model Karen McDougal, who also says she had an affair with Trump, and information about the “Access Hollywood” tape in which Trump was heard making vulgar boasts about women.

The FBI has also monitored his phone calls with a pen register, meaning that the incoming and outgoing phone numbers were recorded but not the content of the calls.

In July, Davis released a phone conversation that Cohen secretly recorded in which Trump mentions “cash” in relation to a possible payment involving McDougal.

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86% Of Model 3s Produced to Meet Tesla’s 5,000/Week Goal Needed Rework

Internal documents revealed by Business insider, disclose that Tesla had to re-work over 4,300 of the much discussed 5,000 Model 3 vehicles it built in June, and later touted as a production target milestone. The milestone was closely watched and of keen interest to Wall Street to see whether Tesla can scale its business model.

The same report also gives those closely following the Tesla saga additional color what the term “factory gated” means. One would guess is that Musk can’t put most of these 5,000 vehicles – about 20% of which were built in Tesla’s GA4 assembly tent – on the road, when more than 86% of them need to be reworked. Internal documents revealed that these reworks came during the week of June 23 and that each one took about 37 minutes to complete.

As we noted previously when we discussed Tesla’s 5,000 Model 3 accomplishment, today’s report would confirm that the company sacrificed quality in order to boost quantity. As a result, instead of 5,000 new vehicles out on the streets, most were likely “factory gated”. In other words, they needed to be fixed.

This comes after the company claimed in its most recent shareholder letter that “The layout and processes of GA4 [the tent] are similar to those of the Model S and X assembly line, while quality and cost of production are roughly equal to those of GA3.”

Perhaps, in addition to explaining the “factory gated” term, this can also possibly explain why thousands of Model 3 vehicles were sitting out in fields across various parts of California – a question that we raised back in July when we wrote this report.

Tesla’s extended PR machine over at electrek tried to explain these stockpiled vehicles as follows:

There’s literally zero news here. We already knew that the number of Tesla vehicles in transit would increase significantly with the production rate. That will be reflected by much higher inventory at the end of the quarter.

It’s no surprise considering Tesla roughly doubled its overall production rate over a quarter.

When it was making 2,000 cars per week, Tesla was able to use parking lots around the factory as loading areas to ship out the cars.

It had to expand to other lots as the production rate increased and it recently spiked to 7,000 vehicles per week with the recent 5,000 Model 3’s in a week milestone.

Therefore, it’s normal that Tesla has new parking lots for vehicles in transit.

What is also troubling is that the company’s “first pass yield”, or the number of vehicles that made their way through the manufacturing process without needing rework, was anemic. 

The normal range for the auto industry is between 65% and 80%, according to experts cited in the BI article. Using the numbers provided, Tesla’s first pass yield was less than 14%. Obviously, the extra use of resources and cost of labor at the time of production were likely not only well above the industry average, but could have been pushed to extremes relative to the company’s previous figures and estimates.

Tesla, of course, went on record by noting that reworks can also include minor issues.

“Our goal is to produce a perfect car for every customer. In order to ensure the highest quality, we review every vehicle for even the smallest refinement before it leaves the factory. Dedicated inspection teams track every car throughout every shop in the assembly line and every vehicle is then subjected to an additional quality control process towards the end of line. And all of this happens before a vehicle leaves the factory and is delivered to a customer,” the spokesperson said.

The report continued, noting that most reworks were because of failed manual tasks and cosmetic issues.

In any case, these surprisingly inefficient numbers provide yet another glimpse into the “production hell” for a company that was supposed to have top-of-the-line autonomous manufacturing that was going to challenge best practices in the industry and possibly create a new standard.  That notion now seems laughable. 

However, most grandiose expectations of the “alien dreadnaught” performing with any type of efficiency had already been slammed back to reality over the last 18 months where numerous production issues were reported and a meaningful rework of Tesla’s production facility and procedure needed to be put into place.

If the company can only produce vehicles up to their quality standards at a rate of just 14%, maybe it’s time to think about reworking the production facility again – or putting up another tent.

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Trump Admin Proposes Replacement For Obama-Era Climate Policy

The Trump administration on Tuesday proposed replacing the Obama administration’s Clean Power Plan – the centerpiece of former President Obama’s climate policy aimed at combatting climate change, with the “Affordable Clean Energy” (ACE) Rule, reports Reuters. 

The Obama-era legislation was halted by the Supreme Court in February, 2016 after several energy-producing states sued, relegating the decision to the US Court of Appeals in DC where it currently sits in limbo. 

The Trump Environmental Protection Agency (EPA) proposal would grant states the ability to write their own regulatory policies governing power plant emissions, including the ability to request an opt-out of current federal regulations. 

Pursuant to President Trump’s Executive Order 13873, which directed Federal agencies to review burdensome regulations, the EPA undertook a review of the CPP. Many believed the CPP exceeded EPA’s authority under the Clean Air Act, which is why 27 states, 24 trade associations, 37 rural electric co-ops, and three labor unions challenged the rule. Additionally, the Supreme Court issued an unprecedented stay of the rule. –EPA

The EPA has opened the proposal up for a public comment period, while a final EPA rule is expected later this year. 

The move comes amid Trump’s “war on coal” – a bid to boost domestic fossil fuels production. Meanwhile, the President is scheduled to hold a rally Tuesday night in West Virginia, a top coal-producing state. 

Obama’s 2015 power plan sought to reduce power plant emissions by 32% below 2005 levels by 2030 but never took effect after the Supreme Court halted the measure in response to 2016 legal action brought by several energy-producing states which claimed the EPA had exceeded its legal reach.

“The ACE Rule would restore the rule of law and empower states to reduce greenhouse gas emissions and provide modern, reliable, and affordable energy for all Americans,” said EPA Acting Administrator Andrew Wheeler. “Today’s proposal provides the states and regulated community the certainty they need to continue environmental progress while fulfilling President Trump’s goal of energy dominance.”

“EPA has an important role when it comes to addressing the CO2 from our nation’s power plants,” said Assistant Administrator for the Office of Air and Radiation Bill Wehrum. “The ACE rule would fulfill this role in a manner consistent with the structure of the Clean Air Act while being equally respectful of its bounds.”

Per the EPA: 

The proposal will work to reduce GHG emissions through four main actions:

1. ACE defines the “best system of emission reduction” (BSER) for existing power plants as on-site, heat-rate efficiency improvements;

2. ACE provides states with a list of “candidate technologies” that can be used to establish standards of performance and be incorporated into their state plans;

3. ACE updates the New Source Review (NSR) permitting program to further encourage efficiency improvements at existing power plants; and

4. ACE aligns regulations under CAA section 111(d) to give states adequate time and flexibility to develop their state plans.

The proposed ACE Rule is informed by more than 270,000 public comments that EPA received as part of its December 2017 Advance Notice of Proposed Rulemaking (ANPRM).  

EPA’s regulatory impact analysis (RIA) for this proposal includes a variety of scenarios. These scenarios are illustrative because the statute gives states the flexibility needed to consider unit-specific factors – including a particular unit’s remaining useful life – when it comes to standards of performance. Key findings include the following:
 
• EPA projects that replacing the CPP with the proposal could provide $400 million in annual net benefits.
• The ACE Rule would reduce the compliance burden by up to $400 million per year when compared to CPP.
• All four scenarios find that the proposal will reduce CO2 emissions from their current level.
• EPA estimates that the ACE Rule could reduce 2030 CO2 emissions by up to 1.5% from projected levels without the CPP –  the equivalent of taking 5.3 million cars off the road. Further, these illustrative scenarios suggest that when states have fully implemented the proposal, U.S. power sector CO2 emissions could be 33% to 34% below 2005 levels, higher than the projected CO2 emissions reductions from the CPP. 

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UNC’s Century-Old Confederate Monument Takes a Tumble

A controversial Confederate monument was torn down last night by protesters at the University of North Carolina’s Chapel Hill campus.

The Silent Sam statue went up in 1913 to memorialize UNC students who fought and died for the south in the Civil War. In recent months, many activists called for its removal, arguing it was nothing more than a symbol of white supremacy.

Last night, on the eve of the first day of classes, roughly 250 protesters gathered in support of Maya Little, a UNC grad student who covered the statue with red ink and her own blood earlier this year. Little is facing criminal charges and potential expulsion.

Before the statue came down, protesters covered it with gray banners that read, “For a world without white supremacy,” the Charlotte News & Observer reports. Behind the banners, demonstrators attached ropes to the monument, which were used to bring the statue down.

The scene on campus was at times chaotic, as some protesters tossed smoke bombs. Police arrested one person for “concealing one’s face during a public rally and resisting arrest,” UNC spokesperson Kate Luck tells CNN.

UNC Chancellor Carol Folt criticized the protesters’ “unlawful and dangerous” actions, though she recognized the “divisive” nature of the statue. “The police are investigating the vandalism and assessing the full extent of the damage,” Folt said in a statement posted on the school’s website.

North Carolina Gov. Roy Cooper, a Democrat who has said Confederate monuments should be removed from public places, expressed similar sentiments. “The Governor understands that many people are frustrated by the pace of change and he shares their frustration, but violent destruction of public property has no place in our communities,” Cooper’s office said in a tweeted statement.

Silent Sam was first erected using donations from the United Daughters of the Confederacy. But as more people started calling for it to be taken down, the school was forced to spend at least $390,000 in security for the monument in the past year alone, according to the News & Observer.

School officials said that state law precluded them from removing the statue. As The New York Times reports:

Under that law, similar in its language and structure to other statutes shielding Confederate-themed displays in the South, a “monument, memorial or work of art owned by the state” may not be “removed, relocated or altered in any way” without the consent of a state historical commission.

University officials resisted calls, including one from the governor, that they invoke a loophole in the law, which allows for “an object of remembrance” to be removed without the commission’s approval if it is deemed “a threat to public safety because of an unsafe or dangerous condition.”

Had school officials moved quicker, it’s possible they could have avoided what transpired last night.

Bonus link: Reason‘s Ronald Bailey argues that most Confederate monuments belong at historical sites or museums, not on public land.

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An excellent way to protect your US Dollar holdings

Last week we saw how quickly a currency crisis can destroy someone’s savings.

In just one week, the value of the Turkish Lira plummeted over 30% after the US imposed sanctions against Turkey.

So anyone holding all of their savings in Turkish Lira got hammered.

This was an unfortunate reminder of the importance of a Plan B – an insurance plan to make sure your wealth and your family are safe no matter what happens around the world.

So often, people concentrate their risk in a single country or jurisdiction… their job is there, their home, their savings and investments…

And if something goes wrong in that one country, you’re completely exposed.

That’s why I routinely write about the steps you can take to implement a solid Plan B – things like a second residency or citizenship, an offshore bank account and various, offshore tax structures.

Today I want to discuss another, simple step you can take to fortify your Plan B: diversifying currencies.

Last week, we saw the Turkish Lira lose one-third of its value in a matter of days.

Turkey is considered a ‘developing market’, so its currency is a lot more volatile than larger, wealthier nations of like the US, China, and the eurozone.

But even the largest economies in the world can see major swings in their currencies.

In the summer and early fall of 2016, for example, the British pound lost nearly 20% of its value after the Brexit vote.

And back in 1992, the British pound lost 10% of its value in a week when speculators bet that the Bank of England couldn’t maintain its exchange rate target.

So, wild fluctuations are possible with -any- currency. Even the major ones.

The lesson from Turkey is clear: if you’re concentrated in a single currency, it’s possible for your savings to lose a LOT of value if there’s a sudden catastrophe.

One long-standing alternative to paper currencies is to own gold and silver– which have continued to have value for thousands of years.

(For more on how you should hold gold, you can read on here…)

But you can also choose to hold a portion of your savings in different currencies.

Consider the Hong Kong Dollar, for example.

The Hong Kong dollar has been pegged to the US dollar since 1983, and remains within a very tight range of between 7.75 and 7.85 Hong Kong dollars per US dollar.

So as the US dollar moves up and down against other currencies, so does the Hong Kong dollar.

Essentially the two currencies are completely interchangeable.

But here’s the bonus: the Hong Kong Monetary Authority is incredibly well capitalized.

In other words, Hong Kong’s central bank has vast cash reserves that it’s able to deploy in case of crisis.

In fact it’s one of the ONLY central banks in the world to have such a substantial reserve fund.

And if that weren’t enough, the Hong Kong government (which is separate from the central bank) also has its own substantial cash reserves. It too consistently runs a budget surplus.

So think about it like this– because of the pegged exchange rate, holding Hong Kong dollars is VERY similar to holding US dollars.

Hong Kong dollars have all of the upside and stability of owning US dollars. But none of the downside.

With US dollars, the government is broke with a $21+ trillion debt and trillion dollar budget deficits. Social Security is totally underfunded. The highway infrastructure fund is insolvent. The central bank is barely solvent.

So if you hold US dollars, you are assuming all of those long-term risks.

Holding Hong Kong dollars eliminates those risks; your ‘counterparty’ is now the Hong Kong Monetary Authority and HK government, both of which are in fantastic financial condition.

In investing terms, holding Hong Kong dollars is like having a free ‘put option’ on the US dollar, because if the US dollar ever ran into problems, Hong Kong would likely de-peg its currency and let it appreciate freely against the USD.

Now, every few years there always seems to be a bunch of fear and worry about the Hong Kong dollar.

Back in the 1990s people panicked that the Chinese takeover would put an end to Hong Kong’s financial stability.

Then the flue pandemic in 2009 caused a big decline in the Hong Kong dollar as well.

Today there are a lot of investors worried about the Hong Kong dollar once again, primarily due to problems in China.

Those concerns are always overblown.

With a cash reserve of $440 billion, the Hong Kong Monetary Authority has so much ammunition to defend its currency they could literally purchase every single Hong Kong dollar in circulation, and still have billions left over.

This is one of the healthiest central banks and governments in the world.

And that makes it a very sensible option to consider in your own Plan B.

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Higher Minimum Wages Blamed for Closure of Iconic NYC Coffee Shop Where Alexandria Ocasio-Cortez Worked

Before she was the rising star of the progressive left, Alexandria Ocasio-Cortez worked shifts at the iconic Coffee Shop in Union Square, Manhattan.

That espresso-sized biographical nugget tells you a lot about Ocasio-Cortez. It grounds her as a real woman of the people, for one. She’s held a low-paying service sector job. She had to commute from the working class, minority community of the Bronx to fill the coffee cups of well-off New Yorkers living in Manhattan. Union Square might not be the Upper East Side, but the contrast with Ocasio-Cortez’ neighborhood is still pretty stark.

But it also tells you something about the trajectory of progressivism. On Monday, Ocasio-Cortez paid what is probably her final visit to her former employer—because the Coffee Shop is closing later this year—and posted a sweet, nostalgic note about it on Twitter:

What Ocasio-Cortez failed to note is that the Coffee Shop is shutting its doors for the last time, at least in part, because of New York City’s rising minimum wage.

“The times have changed in our industry,” Coffee Shop owner Charles Milite told the New York Post last month. “The rents are very high and now the minimum wage is going up and we have a huge number of employees.”

In other words, one of the very progressive policies that Ocasio-Cortez is riding towards a seat in Congress—she has called for a $15 federal minimum wage, up from $7.25 currently—has had very real consequences for people she probably knows fairly well. Unlike Ocasio-Cortez, it’s a safe bet that most of the roughly 150 people who work at the Coffee Shop won’t land a job in public office when they lose their current jobs in October.

Will that make the progressive darling rethink her stance on the minimum wage? There’s no indication of that from Monday’s tweet.

This is not the first time Ocasio-Cortez has missed an opportunity to acknowledge that expensive government mandates can have real world consequences. The Daily Show‘s Trevor Noah, for example, pressed Ocasio-Cortez (lightly) about whether her $15 federal minimum wage proposal would stagnate economic growth.

No, she said, claiming that Seattle had seen no such stagnation after implementing the same minimum wage. She also bizarrely claimed that 200 million Americans get by on less than $20,000 per year—a “fact” that’s pretty difficult to swallow given that the entire American labor force is 162 million.

But the Seattle argument is more interesting, because there’s a fair bit of evidence that the minimum wage has caused job losses in that city. Consider what researchers at the University of Washington’s School of Public Policy and Governance found: Namely, that the number of hours worked in low-wage jobs in Seattle has declined by around 9 percent since the start of 2016, “while hourly wages in such jobs increased by around 3 percent.” The net outcome? In 2016, the “higher” minimum wage actually lowered low-wage workers’ earnings by an average of $125 a month.

This sort of trade-off should be expected. Higher minimum wages will force some businesses to cut staff, while others might close entirely. If you still have a job after that, sure, you’ll make more money. If you don’t, well, finding a job just got more difficult.

But the point isn’t to argue with Ocasio-Cortez about the consequences of Seattle’s minimum wage hike (her defenders will point to other studies, like one commissioned by city officials and conducted by researchers at Berkeley, which show no ill-effects whatsoever). The point is that even if businesses in Seattle or New York City could absorb the economic hit of a $15 minimum wage, what would happen to businesses in places that aren’t modern metropolises with high costs of living and relatively higher wages? Does a $15 federal minimum wage make sense in western Pennsylvania, in eastern Kentucky, or in central California?

If Ocasio-Cortez can’t look at the loss of an iconic New York City business—a place where she used to work, no less—and see a potential problem with her worldview, there is little hope she that will ever come to understand the potential problems created by one-size-fits-all employment policies.

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