Month: November 2014

The short answer, of course, is “nothing” – Congress, or the presidency, have been irrelevant ever since the Fed fully took over the US some time in late 2008. Since then, it has been the role of the central printer of the US, working on behalf of the US banking syndicate, to “get to work”, and cover up the fact that Congress, its make up, or its decisions, are now inconsequential. Still, there are those whose job is to overanalyze everything, and those, whose ideological persuasion, is to believe that what there is a difference between the “left” and the “right.”

One such place is The Hill, which writes that “the midterm-election horserace is into its final furlong — and that means most of the attention of the political world is focused, understandably, on who’s up and who’s down; who will win and who will lose. But if Republicans succeed in their quest to secure a Senate majority on Tuesday, what will really change on Capitol Hill? The answer is “plenty” – both in terms of policy and politics.”

We’ll agree to disagree, but since someone has to pay attention to the proceedings in the most farcical and polarized, if only for public consumption purposes, Congress in history may as well present what The Hill thinks will happen.

Here are the five areas to watch according to The Hill.

1. Will President Obama’s big achievements be hollowed out?

Republicans say that if they gain control of Congress they will start chipping away at two of the Obama administration’s biggest victories: financial reform and healthcare.

The GOP could well decide against attempting another full repeal of the Affordable Care Act. But its members would probably try to eliminate the much-discussed medical device tax. They might also look at nixing the employer mandate.

The Dodd-Frank financial law is high on the hitlist of GOP lawmakers. They want to ease capital requirements for large insurance companies, create both a board of directors and a new inspector-general position for the Consumer Financial Protection Bureau, and streamline a process for banks deemed too big to fail.

More generally, Republicans have made it clear that Obama’s regulatory agenda is a prime target.

With control over the budget and appropriations process, Republicans could cut off funding that is needed to implement or enforce regulations — including the EPA’s carbon-pollution standards for power plants, which form a big piece of the president’s climate agenda.

The GOP will also probably ramp up efforts to push through the Keystone XL pipeline and expand natural-gas exports.

2. Senate confirmations: The battlefield tilts

A GOP-controlled Senate will make it even tougher for Obama to confirm nominees, a process that hasn’t exactly been plain sailing even with Democrats in charge.

Although Supreme Court Justice Ruth Bader Ginsburg has said she is staying put, it remains plausible that Obama could be faced with a third chance to put his stamp on the court. Republicans would find it much easier to block his choice if they held the majority in the Senate.

Obama will also nominate a replacement for retiring Attorney General Eric Holder, and the confirmation process will likely be fraught whomever he chooses.

Obama also isn’t like to face any shortage of executive branch, ambassador and federal judicial nominations in his final two years in office. They will all need Senate confirmation.

3. Obama to stock up on veto pens

Obama has had to pick up his veto pen on just two occasions since he took office in 2009, largely because Democrats have controlled at least one chamber of Congress throughout that time.

He will need to check he has a plentiful supply of ink if Republicans take the Senate majority. He can expect to spend his final two years using his veto to protect earlier legislative victories, rather than seriously attempting to rack up new ones.

There is some chance of bipartisan progress on issue such as immigration reform and global trade deals. But it also seems likely that Obama will need to rely on executive action if he wants to pursue many of his priorities.

4. More Benghazi, more anti-ISIS action

If Republicans take over the Senate, Sen. John McCain (R-Ariz.) will take the gavel at the Armed Services Committee. He is almost certain to turn the spotlight back onto the Obama administration’s missteps in Benghazi — especially the ones that Republicans say were committed by Hillary Clinton, who was secretary of State at the time.

Congressional Republican make little secret of the fact that they believe the controversy could hurt Clinton’s chances of winning the White House in 2016. Senate control would ensure they could keep it high up on the news agenda.

Republicans also are likely to push for a more aggressive U.S. response to the militants of the Islamic State in Iraq and Syria, or ISIS. They have long argued that the Obama administration isn’t being aggressive enough in that fight.

While their push probably won’t come in the form of asking for more U.S. troops in Iraq and Syria, Republicans insist that the United States ought to do more to quell terrorist threats in the region.

Republicans are faced also with a slew of expiring bills but none more important to national security than an NSA surveillance reauthorization.

It will be up to the GOP to push a bill across the finish line, just as 2016 presidential contenders ramp up their campaigns. Many national security experts have argued that letting the current law expire would be disastrous.

5. 2016: The future starts now

Whoever wins and loses on Tuesday night, much of the political world will turn its focus to 2016 as soon as dawn breaks on Wednesday.

If the GOP controls both chambers in the new Congress, its leaders will take every step over the following two years with an acute appreciation of how their moves might affect the 2016 race for the White House.

They will have to walk a fine line: They will want to make Democrats take tough votes while also helping those within their own ranks who might seek the Oval Office. GOP Sens. Rand Paul (Ky.), Ted Cruz (Texas), Marco Rubio (Fla.) and Rob Portman (Ohio) have all had their names bandied about as 2016 hopefuls.

There will also be the concerns of those senators seeking reelection in 2016 to consider. Some centrist Republicans may seek to forge new relationships with Democrats in order to advance legislation they deem important to their reelection hopes.

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And while we appreciate The Hill’s enthusiasm, we are far more interested in the take of the one company that in most people’s opinions, comes closest to actually running not only the Fed, but the US itself: Goldman Sachs. Here is what 4 of Goldman’s strategists and analysts think will happen after Tuesday’s takeover of the Senate by the GOP.

Alec Phillips, GS US political economist

“A Republican Senate majority would likely lead to an incremental uptick in legislative activity and increased risk around fiscal deadlines.”

Aleksandar Timcenko, GS strategist

“Since 1950, S&P 500 performance following midterm elections has averaged 17% – substantially better than average returns of 9% per year.”

Matthew Borsch, GS US healthcare analyst

“Gridlock or compromise on healthcare policy is possible should Republicans win the Senate, with the former better for hospitals and provider firms and the latter for managed care and medical devices.”

Noah Poponak, GS US defense analyst

“Neither outcome for the Senate makes a particular defense spending trajectory more likely, but sequestration puts a floor under downside risk for the sector.””

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Oddly enough, virtually nobody, when asked what would change if party X takes over party Y in the [House|Senate|Presidency], has replied “nothing.” Which is precisely why it is the right answer.

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Though Foremost has played a pivotal role in McConnell’s life, bestowing the senator with most of his personal wealth and generating thousands in donations to his campaign committees, the drug bust went unnoticed in Kentucky, where every bit of McConnell-related news has generated fodder for the campaign trail. That’s because, like many international shipping companies, Chao’s firm is shrouded from public view, concealing its identity and limiting its legal liability through an array of tax shelters and foreign registrations. Registered through a limited liability company in the Marshall Islands, the Ping May flies the Liberian flag.

 

From the Nation article: Mitch McConnell’s Freighted Ties to a Shadowy Shipping Company

Well this is interesting. Particularly with the Senate Minority Leader (and major Republican establishment crony) fighting for his life in the Kentucky Senate race.

From the Nation:

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Two weeks ago, this happened to the world’s allegedly most liquid On The Run bond on no news, which subsequently sent the entire market plunging before James Bullard was forced to hint at QE4 and send the market into a short-selling spasm (and a Bank of Japan hyperinflationary Hail Mary) that has since seen it hit record highs.

Now, the “stability” of the world’s (formerly) most liquid market has shifted to what used to be the most liquid FX pair, the EURUSD (as well as the EURJPY), which moments ago, on no new whatsoever – again – imploded, plunging to the weakest level since August 2012, on what appears to have been a massive 1.25 stop hunt.

One of these days, the V-shaped recovery that every BTFDer has grown to love and expect in every of these broken markets, be it equity, bond or FX, will not come. What happens then is unknown.

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While the Fed and the BOJ were by far the biggest news of the past week, explicitly admitting that the world simply can not exist without one central bank passing the monetization torch to someone else, a surprising, and scare for its shareholders, development took place when REIT American Realty Capital Properties, with a then-market cap of over $10 billion, announced, under the cover of the Fed ending QE3, that it had overstated its adjusted funds from operation, a cash flow key metric used by REITs, from the first- and second-quarters of 2014.As the WSJ reminds us, while the amount of money involved, some $23 million, was “relatively small”, the irregularities resulted in the resignation of the company’s chief financial officer, Brian Block, and chief accounting officer, Lisa McAlister.The result: a crash in the stock that wiped out nearly 30% or nearly $4 billion in market cap.

A bigger question of course is why did a multi-billion dollar company feel compelled to lie about what on the surface is peanutes, and what other lies plague the company’s cash flow and income statements, not to mention its balance sheets. That, and also because there is never just one lack of cashflow cockroach, one wonders which other REITs have been systematically overstating their financial health.

We may learn soon, because as Reuters reports the Federal Bureau of Investigation is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, the sources said. Further details of the probe could not be learned.

American Realty Capital Properties said on Wednesday it would have to restate earnings after it discovered employees “intentionally made” accounting mistakes that caused it to understate net losses during the first half of 2014. Its chief accounting officer and chief financial officer resigned on Tuesday.

 

Andy Merrill, a spokesman for American Realty Capital, had no immediate comment when contacted by Reuters.

 

A criminal probe raises the stakes for the company, which has seen its shares fall almost 30 percent since the disclosure of the accounting issues on Wednesday, wiping out around $4 billion of its market value. The U.S. Securities and Exchange Commission is also investigating the company, according to the Wall Street Journal.

And once the FBI is ready done with ARCP, there are a whole lot of other “successful” real estate companies that are probably comparably rife with fraud. Because what ARCP has done is precisely the same as all those other “successful” roll ups have engaged in over the past few years : American Realty Capital Properties, which went public in 2011, is one in a web of investment companies and brokerages that have been rapidly built up over the past seven years by real estate investor Nicholas Schorsch.

Schorsch served as the chief executive of the company until Oct. 1, when he was succeeded by President David Kay.

 

Since then, Schorsch has turned his focus to RCS Capital, an affiliated investment management firm that he founded in 2012 and where he serves as executive chairman.

 

Schorsch, who began building a portfolio of commercial real estate properties in the mid 1990s and is considered a pioneer in non-traded REITs, has been expanding RCS into a broad retail brokerage platform that would serve as a one-stop-shop for alternative investments. Its legion of brokers hit 9,700 just a little over a year after Schorsch began building it through a series of acquisitions.

 

On the same day that Schorsch stepped down as CEO, American Realty Capital Properties said it was selling its private fund management business Cole Capital to RCS Capital for $700 million.

 

Over the past year and a half, RCS has also bought a number of independent broker-dealers and investment advisors as well, including Cetera Financial Group, VSR Financial and J.P. Turner.

Some did raise red flags…

Schorsch’s fast-paced deal making has recently drawn some criticism, however.

 

The hedge fund Marcato Capital Management, which at the time held 2.4 percent of American Realty Capital’s outstanding shares, said in a letter in June that the company was improperly diluting its stock with new issuances and engaging in too many acquisitions in too short a time.

… which ironically is precisely the same that Bill Ackman-darling Valeant has been doing as well. One wonders when that particular house of cards will implode under its own (hollow) cash-free, non-GAAP weight? Whenever it doe, one can be sure that the FBI will be on the scene… just after the fraud is revealed for all to see.

But the biggest question is when precisely will the FBI conduct a criminal probe in an accounting scandal before it becomes public and before thousands of shareholders are wiped out? Of course, that would mean admitting that the whole premise of “earnings” and “cash flow” is as credible and realistic as the “fundamental” case for the S&P at just why of 2050, or 19x “earnings.”

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Even Edvard Munch would be unable to express his ‘horror’ at Obama’s outlook into the Midterms…

Source: Sunday Funnies

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Submitted by Chris Martenson via Peak Prosperity,

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On average, people in advanced and emerging economies are considerably happier with their life situation than those in developing economies even though people in emerging economies are considerably more satisfied with their lives today than they were in 2007. However, as Pew Global Research survey shows, socialist utopias Venezuela and Argentina appear to be populated by a greater percentage of ‘satisfied’ people than ‘American Dream’-ers in the USA. Perhaps the socialism-isation of ‘fair’ America is the right path to happiness?

Emerging Markets getting happier… and Developed getting less satisfied…

Leaving Venezuela and Argentinians more satisifed with life than Americans…

Source: Pew Global Research

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Via Natixis' Patrick Artus,

In reality, central banks control only the prices of the assets they buy directly

When a central bank buys an asset directly (often government bonds), it drives up the price of this asset, the demand for which increases.

 

But the prices of the other asset classes increase only if the economic agents that have sold the first assets to the central bank use the money received to buy these other asset classes.

 

This transmission of increases in asset prices to all asset classes is therefore unstable, since it depends on the behaviour of investors and savers. Since 2012, we have seen that central banks’ purchases first led asset sellers to buy risky assets (equities, corporate bonds), whose prices rose. But in the recent period, the rise in risk aversion has turned them away from risky assets, whose prices have fallen, and they have invested the money received from the central bank in risk-free assets.

 

There is therefore no stable monetary policy "risk channel"; the only asset prices that are controlled by central banks in the longer run are those of the assets that central banks buy directly. This could in the future push central banks to buy riskier assets if they want to change their prices in a stable manner.

Central banks’ asset purchases have a direct impact on the prices of these assets

When a central bank buys financial assets, it increases demand for these assets, which directly drives up their prices.

This occurred with purchases of Treasuries and ABS in the United States (Charts 1A and B) and with government bonds in the United Kingdom and Japan (Charts 2A and B), and with the announcement of covered bond purchases in the euro zone (Chart 3).

But the impact of the central bank’s asset purchases on other asset classes is uncertain

The central bank buys assets (especially government bonds, Charts 1A, 2A and B above).

It pays by creating money (Chart 4).

The economic agents that sell assets to the central bank use this money to buy other assets. But they have a free choice: a quantitative easing policy will drive up the prices of the assets that economic agents choose to buy, not the prices of the others.

We also saw from 2011-2012 until the spring of 2014:

• A tightening of credit spreads (Charts 5A and B, 6A and B);
• A rise in the stock market (Charts 7A and B, 8A and B).

But investors’ risk aversion has risen since the spring of 2014, (Charts 9A and B): they no longer buy risky assets and the prices of these assets have corrected downwards, whereas long-term interest rates on risk-free government bonds have fallen sharply (Chart 3 above, Charts 10A and B).

The transmission of the rise in the prices of the assets the central bank buys directly to a rise in the prices of other assets is therefore unstable, since it depends on investors’ attitude and their risk aversion.

Conclusion: The risk channel is not robust

The "risk channel" is the mechanism through which the central bank’s monetary creation drives down risk premia.

 

We have seen that this mechanism is unstable: it functions only if economic agents use the money created by the central bank, in exchange for purchases of risk-free assets, to buy risky assets.

 

If their risk aversion rises, this mechanism disappears – and so does the risk channel. In that case, the only remaining possibility for the central bank is to buy risky assets directly if it wants to drive down their prices.

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From Raoul Pal, author of the Global Macro Investor and creator Of RealVisionTV

At The Margin

A few things are also appearing on my radar screen – future visions if you like – that I want to share with you. These are not conclusive, but rather a stream of unfiltered thoughts, which will develop over time.

I virtually never use geopolitics to assess asset markets. I have learned the hard way over time that it is the way to the poor house. Economies run financial markets, not wars.

But I do note that at the margin, the world’s geopolitics is changing. Gone are the fluffy days of Putin shaking hands with George Bush agreeing to keep the world supplied with oil, gone are the days of China helping US firms make profits using their cheap labour, gone are open-for-business days of Europe, gone is the Japanese military neutrality, gone are the Saudis as an unshakeable ally, gone is Israel also a steadfast ally, etc.

What is happening is something deeply concerning. Globalisation is turning in on itself and it is each man for himself.

This was always going to be the outcome of an imbalanced, debt-drowning world. Everyone wants a cheap currency and since that doesn’t work then everyone wants to find some way to get the upper hand on their own terms.

I have had recent conversations with a long-term strategy group within the Pentagon about economic threats to the US and the risk of global collapse, and the potential for it to turn into a military outcome. It seems that the Department of Defence’s deep thinkers are mulling over the kinds of issues we all are – is the inevitable outcome a military one?

They don’t know either but they give it a probability and thus need to understand it and plan for it.

My issue has been for a long time that the true threat to the world is not the Muslim nations we so like to beat as a scapegoat (gotta have an enemy, right?) but China.

The Pentagon’s think-tank also agrees.

If China has an economic collapse, which again is a high probability event, then what are the odds of massive civil unrest? And would a military conflict put the people back on the side of the government (i.e. how the Nazis came to power)?

I agree. I think this is the risk somewhere down the road.

I also, along with this defence strategy group, think that there is a risk that the Western powers meddling in the time of bad economic crisis will form strong alliances between let’s say Russia and China.

In direct opposition to the government, many people inside the Pentagon are saying, “Please don’t fuck with Russia, they are not threatening us militarily but securing their own borders, we cannot control the outcomes, and most of them are bad, probably not militarily but economically, and economic instability causes outcomes we can’t forecast – even seizing the assets of powerful Russians has unintended consequences”.

Here, here. The law of unintended circumstances is a bitch.

Everyone is also looking carefully at the risk of Catalonia now having a referendum that is deemed to be unconstitutional, and then trying to enforce it in the streets.

Europe is trying to hold itself together yet the member states themselves are in danger of splitting up. How does that manifest itself? What are the risks? We just don’t know.

I think the trend of each nation for itself, a move away from globalisation either in terms of global trade, or in terms of global finance and a move towards military build-ups, is well under way. I don’t know how far it will go but I do know that I am uncomfortable with it, and that it poses some considerable risk to the stable economic system that so many have enjoyed since the late 1980s.

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For some further observations on the role of globalization and what its unwind would mean..

… Gordon T. Long’s take on the “Globalization Trap” is a worthwhile read.

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