Month: September 2017

Travis Kalanick’s hopes to someday return as Uber’s CEO have just been dashed. Japanese conglomerate Softbank has struck an agreement with Uber’s shareholders to block Travis Kalanick from ever being reinstated as the leader of the perennially cash-burning ride-hailing company, according to Bloomberg.

As the Wall Street Journal reported earlier this month, Softbank is seeking to invest as much as $10 billion in Uber which would leave it with a 22% stake in the company. As part of the deal, Softbank is seeking to purchase some of these shares, which would be transferred from both the company and private investors, at a discounted valuation of $45 billion.

The agreement is Benchmark Capital’s latest victory in its long-running battle against Kalanick for control of Uber. Kalanick, an Uber co-founder who still controls three board seats, two of which are currently vacant, for control of the world’s most valuable unicorn.

As Bloomberg reports, Kalanick has privately told people he’d like to continue helping Uber “in some capacity” (presumably, by returning as CEO). Of course, Kalanick has denied intentions of returning as CEO, but has said he’d be interested in an operation position where he’d be working alongside his successor, Dara Khosrowshahi.

Venture capital firm Benchmark, which led Kalanick’s ouster in June, has sought a guarantee in writing from SoftBank that it would reject reappointing Kalanick as chief executive officer and block his appointment as chairman of the board or head of one of its subcommittees, said the people.

 

There have been no public proposals like this so far, but Kalanick has privately expressed interest in helping the company in some capacity, said the people, who asked not to be identified because private negotiations are ongoing.

 

Kalanick still retains some power over Uber through his control of three board seats, though two of those remain unfilled.

To be sure, the Softbank deal hasn’t closed yet and the investment could still fall apart. However, if it goes through, it would probably be the largest private stock sale in history. Still, as we reported last month, this would be the first major downround for Uber, as Softbank and its partners are hoping to purchase their shares at a substantial discount to Uber’s valuation, a reflection of the company’s currently notoriously sorry – and cash-burning – state which has it currently valued at $68 billion.

While prospective investor in the deal, Chinese ride-hailing company Didi Chuxing, has reportedly walked away, SoftBank and private equity firms General Atlantic and Dragoneer  Investment Group are still in active talks with Uber. Together, the Softbank and its private-equity partners expect to invest at least $1 billion in Uber at a $69 billion valuation, while buying as much as $9 billion in shares from existing investors. As Bloomberg explains, the valuation of those shares will be determined by an auction process that’s expected to start at about $45 billion.

Under the terms of the deal currently being discussed, Softbank would end up with either two board seats, or one seat on the board accompanied by a second “observer” seat.

SoftBank has considered asking for two board seats as part of the deal, and has mulled one of its executives, Rajeev Misra, and Sprint Corp. Chief Executive Officer Marcelo Claure as candidates, the people said. (SoftBank owns most of Sprint.) Another proposal being discussed would give SoftBank one board seat and a board observer seat. Under either proposal, it’s unclear whether Uber would create new directors or shuffle its existing eleven board seats.

Meanwhile, Benchmark which recently sued Kalanick for fraud, wants terms barring Kalanick from regaining control of Uber as an essential component of any deal. It’s also asking investors to agree to unspecified governance reforms. If those conditions are met, and the deal goes through, Benchmark would sell some of its shares at the direction of Uber’s new CEO Dara Khosrowshahi.

According to Bloomberg, Softbank first expressed interest in a potential investment back in June. However, talks stalled in July after Kalanick was fired following an acrimonious struggle with Benchmark. 

The board is looking to appoint an independent chairman, a proposal all directors, including Kalanick and Khosrowshahi, support. Appointing an independent director was one of the recommendations from Eric Holder, a former US attorney general who conducted an internal investigation into Uber’s culture after several former female employees alleged that Kalanick cultivated a fratty, male-dominated culture was hostile toward women.

* * *

And in other negative news for Uber, the WSJ reported earlier that the company is shutting down its money-losing auto-leasing business after discovering earlier this year that it was losing 18 times more money than the company had previously believed. WSJ had reported last month that the company had decided to close the business.

Originally predicted to lose $500 per vehicle on average, Xchange’s managers recently informed Uber the losses were actually closer to $9,000 per car.

“We have decided to stop operating Xchange Leasing and move towards a less capital-intensive approach,” said a spokesman. The Wall Street Journal first reported on the decision to wind down the business last month.

Uber had created a separate entity called Xchange Leasing LLC to house its sub-prime auto leasing business. That entity will now be shuttered. which will affect some 500 jobs, representing roughly 3% of Uber’s 15,000-employee staff. It marks Uber’s first mass layoff in its eight-year history. However, WSJ noted some of Xchange’s employees could be moved to other divisions of the company.

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NFL franchise owners provoked quite a reaction on Sunday and Monday when they walked onto the field and locked arms with players – and, in some cases, kneeled (just not during the National Anthem) – in a demonstration of defiance to President Donald Trump, who late Friday night picked a fight with both the NBA and NFL by first disinviting the Golden State Warriors to the White House, then labeled any NFL player who kneels during the anthem a “son of a bitch” for “disrespecting our heritage.”

But however genuine these displays of solidarity may appear, the New York Times is reporting that the owners’ support is very much contingent on ratings and revenues, and that many will tolerate the protests only as long as they don’t impact the bottom line.

NFL owners are nothing if not businessmen, so until attendance declines precipitously, or it can be determined that the protests have directly led to a decline in television ratings, they are unlikely to clap down on the protests. Indeed, the league got a pat on the back on Monday when Ford and Nike, two big NFL sponsors, issued statements backing the players right to protest.

That could happen sooner than expected, as owners are already being forced to confront the fact that the public’s tolerance for players disrespecting the National Anthem is much lower than they might’ve expected. Case in point: Ratings for “Sunday Night Football” suffered this week, while the crowd at the Dallas Cowboys – “America’s team” – game against the Cardinals greeted the team with boos after owner Jerry Jones joined players in kneeling after the anthem.

As President Donald Trump tweeted last night, the league has plenty of rules governing acts of self-expression on the field. Why not one more?

The NFL has all sorts of rules and regulations. The only way out for them is to set a rule that you can't kneel during our National Anthem!

— Donald J. Trump (@realDonaldTrump) September 26, 2017

However, a crackdown also runs the risk of offending players. As the NYT notes, three-quarters of players in the NFL are African American. Meanwhile, only 3% of Nascar drivers – a sport that has so far not participated in the protests – are African-America.

Still, at least a few owners have already said they won’t continue the practice of linking arms with players before games. And, in an unusually cynical take by the NYT, the paper questions whether their initial display of defiance was “a fallback” to protect the brand.

“While it’s too early to know if the protests will continue, and in what form, Shahid Khan, the owner of the Jacksonville Jaguars and on Sunday the first owner to be seen linking arms with his players on the sidelines, has said he would not continue the practice in the coming weeks.”

 

“I’m not a crusader but this was a Rosa Parks moment for the Jaguars,” he said. “I do not plan any future sideline appearances.”

 

The owners’ decision to go with the players at least this time struck some as a fallback to protecting the league brand, embodied in its ubiquitous shield emblem with the American flag motif.

 

“The issue of protecting the shield,” said Andy Dolich, a former NFL team executive. “There’s a subliminal dollar sign in that shield, so it is fair to be cynical” about the owners’ motives.

For what it’s worth, league executives told the NYT they have little involvement in owners’ decisions. And while they acquiesced to players who insisted on protesting, the Times notes that the owners, who are stewards of a sports league worth $14 billion, the most valuable in the US, and didn’t ask for this moment in the spotlight.

And some fans say they're growing weary of the protests.

“At this point, I want to get away from politics and if they are going to continue protest, then I don’t need to spend my money there,” said Brandon Gill, a realtor from Jacksonville, Fla, who is considering giving up his Jaguars season tickets. “Frankly, I’m just tired of it all.”

And Gill isn't alone. At least one survey showed that viewers tuned out last year because of the protests. And preliminary data – as well as public demonstrations of contempt like Jersey burnings that some fans have posted to social media – will eventually force owners to confront the fact that maybe countenancing the protesting players simply isn't worth it.

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Authored by Charles Hugh Smith via OfTwoMinds blog,

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

One chart defines the 21st century economy and thus its socio-political system: the chart of soaring wealth/income inequality. This chart doesn't show a modest widening in the gap between the super-wealthy (top 1/10th of 1%) and everyone else: there is a veritable Grand Canyon between the super-wealthy and everyone else, a gap that is recent in origin.

Notice that the majority of all income growth now accrues to the the very apex of the wealth-power pyramid. This is not mere chance, it is the only possible output of our financial system. This is stunning indictment of our socio-political system, for this sort of fast-increasing concentration of income, wealth and power in the hands of the very few at the top can only occur in a financial-political system which is optimized to concentrate income, wealth and power at the top of the apex.

Well-meaning conventional economists have identified a number of structural causes of rising wealth/income inequality, dynamics that I've often discussed here over the past decade:

1. Global wage arbitrage resulting from the commodification of labor, a.k.a. globalization

2. A winner-takes-most power law distribution of the gains reaped from new technologies and markets

3. A widening mismatch between the skills of the workforce and the needs of a rapidly changing economy

4. The concentration of capital gains in assets such as high-end real estate, stocks and bonds that are owned almost exclusively by the top 10% of households

5. The long-term stagnation productivity

6. The secular decline in the percentage of the economy that flows to wages and salaries

While each of these is real, the elephant in the room few are willing to mention much less discuss is financialization, the siphoning off of most of the economy's gains by those few with the power to borrow and leverage vast sums of capital to buy income streams–a dynamic that greatly enriches the rentier class which has unique access to central bank and private-sector bank credit and leverage.

Apologists seek to explain away this soaring concentration of wealth as the inevitable result of some secular trend that we're powerless to rein in, as if the process that drives this concentration of wealth and power wasn't political and financial.

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

Policy tweaks such as tax reform are mere public relations ploys. The cancer eating away at our economy and society arises from the Federal Reserve and the structure of our financial system, and the the degradation of our representative democracy into a pay-to-play auction to the highest bidder.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Back in January 2017, the University of California system of schools approved their first in-state tuition hike in six years.  And while one might hope that the extra millions of dollars raised as a result of those hikes would go toward a better education for students, in reality, a large chuck will go to fund the exorbitant pensions of retired teachers. 

As the Los Angeles Times recently pointed out, there are over 5,400 retirees in the UC system drawing over $100,000 per year, a 60% surge since 2012.  Moreover, there are nearly 3 dozen former teachers drawing over $300,000 per year. 

Last year, more than 5,400 UC retirees received pensions over $100,000. Someone without a pension would need savings between $2 million and $3 million to guarantee a similar income in retirement.

 

The number of UC retirees collecting six-figure pensions has increased 60% since 2012, a Times analysis of university data shows. Nearly three dozen received pensions in excess of $300,000 last year, four times as many as in 2012. Among those joining the top echelon was former UC President Mark Yudof, who worked at the university for only seven years — including one year on paid sabbatical and another in which he taught one class per semester.

 

The average UC pension for people who retired after 30 years is $88,000, the data show.

 

In fact, the LA Times even provided this helpful chart detailing which former professors are sticking it to current students, and their parents, the most….apparently the prize goes to former UC President Mark Yudof who collects $357,000 per year after working for only 7 years in the university system.

 

Meanwhile, if just reviewing the list above isn’t enough to make you violently ill, consider how Yudof managed to secure his $357,000 in annual payments.  To summarize, he negotiated a sweetheart deal that capped his pension payout after 7 years, he worked 5 of those years, took a “sabbatical year” for “health reasons” in year 6, and taught 1 class a semester in year 7 before retiring with a pension worth millions.

The top 10 pension recipients in 2016 include nine scholars and scientists who spent decades at the university: doctors who taught at the medical schools and treated patients at the teaching hospitals, a Nobel Prize-winning cancer researcher and a physicist who oversaw America’s nuclear weapons stockpile.

 

The exception is Yudof, who receives a $357,000 pension after working only seven years.

 

Under the standard formula — 2.5% of the highest salary times the number of years worked — Yudof’s pension would be just over $45,000 per year, according to data provided by the university.

 

But Yudof negotiated a separate, more lucrative retirement deal for himself when he left his job as chancellor of the University of Texas to become UC president in 2008.

 

“That’s the way it works in the real world,” Yudof said in a recent interview with The Times.

 

The deal guaranteed him a $30,000 pension if he lasted a year. Two years would get him $60,000. It went up in similar increments until the seventh year, when it topped out at $350,000.

 

Yudof stepped down as president after five years, citing health reasons. Under the terms of his deal, his pension would have been $230,000. But he didn’t immediately leave the university payroll.

 

First, he collected his $546,000 president’s salary during a paid “sabbatical year” offered to former senior administrators so they can prepare to go back to teaching. The next year he continued to collect his salary while teaching one class per semester, bringing his tenure to seven years and securing the maximum $350,000 pension.

 

In 2016 he got the standard 2% cost-of-living raise, resulting in his $357,000 pension.

It’s almost as if he planned to scam the system from the moment he signed his contract…

 

Of course, with a $15 billion funding gap, the UC’s pension ponzi is only getting started with their plans to jam their soaring pension costs down the throats of students and their parents…

“I think this year’s higher tuition is just the beginning of bailouts by students and their parents,” said Lawrence McQuillan, author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis. “The students had nothing to do with creating this, but they are going to be the piggy bank to solve the problem in the long term.”

...but it’s ok because the kids will just take out more student loans which will all be socialized at some point anyway.

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Authored by Alex Christoforou via TheDuran.com,

Their crimes are well documented, but will congress have the guts to press forward?

As Robert Mueller’s investigation into Trump-Russia collusion turns into a witch-hunt in search of anything, or anyone that can be scapegoated to justify the year long circus originating from a Hillary Clinton-John Podesta concocted story to explain away their failed $2 billion election disaster, documented crimes were committed by Hillary Clinton, James Comey, and Loretta Lynch.

Perjury, obstruction of justice, secret airport tarmac meetings, leaking of government documents, and the destruction of 33,000 government emails… perhaps the GOP has finally mustered up the balls to bring in the real criminals to justice.

The Gateway Pundit reports…

In July, Republicans on the House Judiciary Committee requested a second special counsel separate from Robert Mueller to probe aspects of the 2016 election and actions by the Obama administration including Hillary Clinton.

 

In light of reports that Comey ended the FBI investigation into Hillary’s emails before interviewing seventeen key witnesses including Hillary herself, Republicans on the House Judiciary Committee renewed called for a second special counsel Tuesday.

Excerpt of the letter can be read below…

September 26, 2017

 

Dear Attorney General Sessions and Deputy Attorney General Rosenstein:

 

We write to renew this Committee’s recent call for a second special counsel, to investigate matters which may be outside the scope of Special Counsel Robert Mueller’s investigation.

 

Such a step is even more critical given the recent revelation that former FBI Director James Comey had prepared a statement ending the investigation into former Secretary of State Hillary Clinton, before interviewing at least 17 key witnesses, including the former Secretary herself. At least one former career FBI supervisor has characterized this action as “so far out of bounds it’s not even in the stadium,” and “clearly communicating to [FBI executive staff] where the investigation was going to go.”

 

Among those witnesses the FBI failed to interview prior to the Director’s preparation of his statement were Cheryl Mills and Heather Samuelson, both of whom were close Clinton aides with extensive knowledge of the facts surrounding the establishment of a private email server.  Last year, this Committee inquired repeatedly of the Justice Department about the facts surrounding Ms. Mills’ and Ms. Samuelson’s involvement.  Our inquiries were largely ignored.  Recently, we wrote to you to request responses to those and other unanswered questions pertaining to the Clinton investigation.  We have not received a response.  However, as the most recent Comey revelations make clear, ignoring this problem will not make it go away.

 

As we pointed out at the time, both Ms. Mills and Ms. Samuelson received immunity for their cooperation in the Clinton investigation, but were nevertheless permitted to sit in on the interview of Secretary Clinton.  That, coupled with the revelation that the Director had already drafted an exoneration statement, strongly suggests that the interview was a mere formality, and that the Director had already decided the case would be closed.

 

Why, indeed.  Perhaps it was because, just as the Comey revelation suggests, the decision had already been made – prior to the interview of Secretary Clinton, Ms. Mills, Ms. Samuelson, or any of the other 14 potential witnesses – that Secretary Clinton would not be charged with any crimes for her conduct.  President Obama had indicated as much, by stating publicly at the time that although Secretary Clinton showed “carelessness” in conducting government business on a private server, she had no intent to endanger national security.  Of course, Secretary Clinton’s supposed lack of “intent to harm national security” is a red herring, since the law merely requires the government to show “gross negligence.”

 

Moreover, we note that not only did the former Director end the investigation prematurely — and potentially at the direction, tacit or otherwise, of President Obama — but he did so while declining to record the interviews of former Secretary Clinton or any of her close associates, as provided for by DOJ policy.  The policy states:

 

This policy establishes a presumption that the Federal Bureau of Investigation (FBI), the Drug Enforcement Administration (DEA), the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), and the United States Marshals Service (USMS) will electronically record statements made by individuals in their custody. This policy also encourages agents and prosecutors to consider  electronic recording in investigative or other circumstances where the presumption does not apply.  The policy encourages agents and prosecutors to consult with each other in such circumstances.

 

Despite this, the DOJ and FBI declined to exercise their discretion to record the interview of former Secretary Clinton.  This is truly inexplicable, given that the case was of keen national interest and importance, and involved a former Secretary of State and candidate for President of the United States who was accused of violating the Espionage Act.  It only reinforces the sense that our nation’s top law enforcement officials conspired to sweep the Clinton “matter” under the rug, and that there is, truly, one system for the powerful and politically well-connected, and another for everyone else.

 

In this case, it appears that Director Comey and other senior Justice Department and government officials may have pre-judged the “matter” before all the facts were known, thereby ensuring former Secretary Clinton would not be charged for her criminal activity.  We implore you to name a second special counsel, to investigate this and other matters related to the 2016 election, including the conduct of the Justice Department regarding the investigation into Secretary Clinton’s private email server.

click here to read full text

 

#BREAKING: Judiciary GOP renews call for 2nd Special Counsel for issues outside scope of Mueller’s investigation https://t.co/42HxVKj2GD

— House Judiciary ? (@HouseJudiciary) September 26, 2017

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Today, the Federal Reserve released its triennial Survey of Consumer Finances (SCF) which collects information about family incomes, net worth, balance sheet components, credit use, and other financial outcomes.  A superficial flip through the first few pages of the 2016 SCF as most will do, reveals “broad-based gains in income and net worth since the previous time the survey was conducted, in 2013” as the Fed puts it. Unfortunately, reading between the lines reveals that while net worth and income did increase in the past three years, it was exclusively for the “top 10%” of Americans. The “bottom 90%” got virtually nothing of this so-called recovery.

First, here is the report’s summary, taken verbatim and meant to demonstrate just what a great job at “wealth creation” the Fed is doing:

• Between 2013 and 2016, median family income grew 10 percent, and mean family income grew 14 percent
• Families throughout the income distribution experienced gains in average real incomes between 2013 and 2016, reversing the trend from 2010 to 2013, when real incomes fell or remained stagnant for all but the top of the income distribution.
• Families without a high school diploma and nonwhite and Hispanic families experienced larger proportional gains in incomes than other families between 2013 and 2016, although more-educated families and white non-Hispanic families continue to have higher incomes than other families.

So far, so good. However, the next bullet is the first troubling admission that not all is well:

• Families at the top of the income distribution saw larger gains in income between 2013 and 2016 than other families, consistent with widening income inequality.

Considering that one of the longest-running themes on this website has been the destruction of the middle class by the Fed, and the unprecedented transfer of wealth from the lower and middle-classes to wealthiest as a result of trillions in global, coordinated QE, we decided to focus on the bolded bullet. Luckily, the Fed did most of the work for us, and as the report’s authors write in a sidebar titled “Recent Trends in the Distribution of Income and Wealth”, the Fed authors admit that “The distribution of income and wealth has grown increasingly unequal in recent years. The Survey of Consumer Finances (SCF) has played a crucial role in our understanding of these trends because the survey collects data on net worth in addition to income, and it pays particular attention to sampling affluent families.”

First, a look at the distribution of income by various wealth buckets, “indicates that the shares of income and wealth held by affluent families have reached historically high levels since the modern SCF began in 1989.”

In case this is unclear, this is the Fed admitting that the rich have never made more money than they do now.

As the following chart shows, the share of income received by the top 1% of families was 20.3% in 2013 and rose to 23.8% in 2016. The top 1% of families now receives nearly as large a share of total income as the next highest 9 percent of families combined (percentiles 91 through 99), who received 26.5 percent of all income. This share has remained fairly stable over the past quarter of a century. Correspondingly, the rising income share of the top 1 percent mirrors the declining income share of the bottom 90 percent of the distribution, which fell to 49.7 percent in 2016, the lowest on record.

But while income may be bad, wealth is worse. Much worse.

As the next chart below shows, the wealth share of the top 1% climbed from 36.3% in 2013 to 38.6% in 2016, a record high, and surpassing the wealth share of the next highest 9 percent of families
combined.

Meanwhile, as the super rich made more money and accumulated more wealth than ever, the merely “rich” have been left in the dust, and after rising over the second half of the 1990s and most of the 2000s, the wealth share of the “next highest 9%” of families has been falling since 2010, reaching 38.5% in 2016.

 As for America’s peasantry, which the Fed defines as the “bottom 90%” of the population, and what some others may have once called the middle-class, it has been falling over most of the past 25 years, dropping from 33.2% in 1989 to 22.8% in 2016.

Said otherwise, the share of overall wealth held by the “top 1%” of Americans is 38.6%, while that held by the bottom 90% is 22.8%, which means that the wealthiest 1% of the US population is now 70% richer than the bottom 90%.

All of this is thanks to the Fed and the biggest asset bubble that 3 QEs worth of liquidity injections could buy. At least it is the Fed itself that provides the data, so it can’t complain that someone didn’t use the right seasonal adjustment to calculate the “mysterious”, “transitory” data.

* * *

And just in case readers are still not convinced what a bang up job the Fed has done to create the greatest wealth redistribution in history, here is a chart showing the mean net worth value of families over the past 10 triennial surveys, broken down by quintile and, in the case of the top 20%, by decile.

Here is the punchline: in the period 2007-2016, or since the peak of the last financial bubble, 80% of America has seen its net worth decline, except of course for the top 20%. As the Fed points out, when calculated in 2016 dollars, the net worth of families in the 80%-90% bucket has increased by roughly $65,700. But it’s the “top 10%” where the bulk of the wealth creation has gone, and as the chart below shows, while 80% of America has seen its worth shrink since the peak of the last financial crisis, the wealthiest 10% have seen a $710,000 growth in their net worth.

And yes, this is why America is angry, and why the Fed is so happy that the nation is divided in an ever more rancorous left-right split, instead of shifting its focus to the real culprit behind the devastation of the American middle class: the Federal Reserve.

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Real estate prices in many of the top zip codes in America have doubled over the past 5 years. In some hotter markets in California, gains are in excess of 200%. The tech heavy NASDAQ is +121% over the same time period, helping buoy the richest amongst us to new heights.

According to Forbes’ Cost of Living Extremely Well Index, a basket of 40 luxury items, they’ve risen — uninterrupted — since 1982. Recession proof.

The inflation rate for the elite has been running hot since ’82, averaging 5%. Although it’s hard to get a hard reading on what the true inflation rate is for the wealthy, some argue it has been running in excess of 10% for the past decade.

Statistics released by the Federal Reserve revealed the top 1% now control a record 38.6% of America’s wealth. The bottom 90% of wage earners have been falling for 25 years — touching down at a 22.8% share in 2016, down from 33.2% in 1989.

Aside from wealth, the rich are increasing their earnings on an annual basis too, with reported incomes hitting a new high of 23.8% in 2016, up from 20.3% in 2013.

Warren Buffett believes the Dow will hit 1 million within 100 years, conservatively. All of these lofty projections and data points leave out the specter of pullbacks, an arrogant position given the historical likelihood of this being an impossibility.

One day, markets will dislocate, real estate prices careen lower, rich people flung from their windows directly into crematories, effectively leveling out these gross differences. Until then, however, let the good times roll.

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The macro-economic climate is “about as good as it is going to get,” according to a new economic outlook from PIMCO, with  Joachim Fels and Andrew Balls warning that "the last time a similar combination prevailed was in 2006 – and that didn’t end well."

Via PIMCO,

As Good As It Gets

It’s easy to get lulled into complacency by synchronized global growth, easy financial conditions and super-low economic and financial market volatility.

Yet, while the current macro environment and outlook appear better than many of the younger market participants can remember, the last time a similar combination prevailed was in 2006 – and that didn’t end well.

Eleven years on, we don’t think another major financial crisis is likely over our cyclical horizon spanning the next six to 12 months.

However, then as now, when the macroeconomic environment is as good as it gets and valuations are tight, it is time to emphasize caution, capital preservation and diversified sources of carry away from the crowded trades. Note: you just read our main high-level investment conclusion based on vigorous internal discussions at our September Cyclical Forum.

Here’s more on the debate and the analysis underpinning our forecasts and investment conclusions.

Feeding the bull?

Of course, the road to a conclusion that emphasizes caution wasn’t straightforward and was plastered with intense and controversial debates – a hallmark of a nearly four-decade-old forum process that brings together all PIMCO investment professionals every quarter.

Looking on the bright side, our baseline economic forecast is for a continuation of synchronized world real GDP growth at a decent 3% pace in 2018 (the same as this year), low near-term recession risks, a moderate pickup in underlying inflation in the advanced economies, mildly supportive fiscal policies and an only gradual removal of monetary accommodation. Also, political risks emanating from nationalist/populist movements look more contained for now, particularly in Europe, partly as a function of better economic growth. Moreover, as our Asia-Pacific Portfolio Committee colleagues argued at the forum, China may well be successful in continuing to suppress volatility well beyond the 19th National Party Congress in October.

So, if you want to stay or become a bull on risk assets, all of this seems like good macro fodder.

The ABCs of caution

However, once you start to look through the smooth macro surface at the underlying risks and uncertainties, there are a few problems that might pop up even over the short-term cyclical horizon and upset the eerie calm in financial markets.

Apart from the obvious geopolitical threat emanating from North Korea, the most important macro uncertainties – “the ABCs of caution” – are the aging U.S. economic expansion, the coming end of central bank balance sheet expansion, and China’s political and economic course following the party congress.

On aging, as the U.S. expansion matures and slack in the labor market keeps eroding, we expect GDP growth to slow to a below-consensus 2% or less and core CPI inflation to pick up to 2% in the course of 2018. Thus, the mix of nominal growth between real growth and inflation will become less favorable as disappearing slack makes it difficult to sustain the current pace of job and output growth. True, an acceleration of productivity growth would help, but does not seem to be in the offing as business investment outside energy remains moderate. A Federal Reserve that is fixated on the Phillips curve will likely raise the policy rate two or three times between now and the end of 2018 – less than the four hikes the Federal Open Market Committee (FOMC) currently foresees but more than the extremely shallow rate hike path that markets price in right now. Thus, the front end of the U.S. yield curve looks vulnerable.

 

Regarding central bank balance sheets, the market has so far taken in stride the Fed’s plans to begin the process of normalizing its balance sheet in October as well as the European Central Bank’s (ECB) hints at tapering its bond purchases next year. But don’t forget that there is virtually no historical precedent for major central banks actively reducing their balance sheets. Thus, the impact of the Fed’s balance sheet unwind on the term premium and other risk premiums is unknown, especially as it will coincide with a period of uncertainty about the future Fed chair and the composition of the Board of Governors. This is one reason for us to be slightly underweight duration and to expect a steeper yield curve.

 

As regards China, our forum debates centered on the implications of the more centralized and concentrated leadership that is likely to result from the party congress in October. One view, as stated above, is that the new/old leadership will focus on further suppressing economic and financial volatility through a combination of continued leverage expansion, financial repression including tight capital controls and imposition of supply discipline in commodities industries. If so, unlike in 2015–2016, China would not be an exporter of volatility to global financial markets. While this is a possible outcome, another distinct possibility is that the likely consolidation and concentration of power opens the door for significant and surprising policy changes, including major reforms affecting state-owned enterprises (SOE) and forced deleveraging, which would weigh heavily on growth and could lead to more tolerance for currency depreciation. This could potentially be signaled by a highly symbolic shift, such as the leadership dropping the growth target. Such changes, or the fear thereof, have potential to disrupt global markets. In addition, a more assertive China in foreign affairs under a “paramount leader” President Xi Jinping raises the risk of an escalating trade conflict in case the U.S. administration decides to get tough on trade policy.

PIMCO concludes:

"…in an environment in which the macro climate is about as good as it is going to get and where valuations are tight, we will emphasize capital preservation in our portfolios."

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via http://ift.tt/2xx6Y8H Tyler Durden