Month: February 2018

L.A.’s New Trash Cartels Are Exactly the Dumpster Fire Critics Warned About

Dumpster fireLast year Los Angeles City Council gave a handful of companies control of trash and recycling pick-up for all businesses and apartment buildings in the massive metropolis. Now these same council members are acting shocked that eliminating market competition has led to price-gouging and poor customer service.

The City of Los Angeles has a citywide dumpster fire on its hands. In just the first six months of the new system, the city has received close to 30,000 service complaints. Some customers’ trash bills have doubled or tripled. Citizens have launched a signature-gathering campaign to try to force a citywide vote to kill parts of the program.

This program, called RecycLA, was sold to city leaders as a way to shift more trash to recycling and away from landfills to achieve a 90 percent diversion rate by 2025.

What the program actually did, though, is deliberately eliminate all competition for trash hauling. The program divides the city into 11 massive districts. Every commercial or apartment building in a district is served by a single trash hauler, some of whom control multiple districts. The landlords and residents have no choice: If they want their trash picked up, they must do business with whoever gets the city contract.

To land these contracts, the trash companies must meet a whole host of demands, including new natural-gas-powered trucks, city-determined “living wages” for employees, and labor peace agreements with local unions. The city also gets millions of dollars in franchise fees. All of this was clearly, obviously going to drive up the price of trash hauling in Los Angeles.

Now City Council members are just aghast that a cartel crafted to make environmentalists and union leaders happy ended up putting the screws to citizens. The Los Angeles Times notes that they seem rather surprised at how things have turned out:

Councilman Mitch O’Farrell, who represents neighborhoods from Echo Park to Hollywood, said he had received assurances that RecycLA would improve the “customer experience” for landlords, business owners and condominium complexes.

“I feel I was sold a bill of goods,” he said before Tuesday’s meeting.

There is an entire field of study, called “economics,” that could have shown O’Farrell that this was going to happen. The city deliberately reduced the supply of trash companies, but the demand for their services did not change. This allowed companies both to jack up prices and to provide lackluster services without having to worry about the customers turning to competitors.

Reason‘s Los Angeles office is among the many places struggling with their new trash companies. It charges an extra fee to haul our trash because we keep our dumpster locked up. (Our previous hauler had no problems getting access.) We’ve had to call and complain about missed pick-ups. We even had to send the company pictures of our dumpster to prove no one had picked up our trash.

Los Angeles city leaders were forewarned about all of this. I analyzed this plan way back in July 2014, after it was approved but before it was implemented. I warned back then it was going to drive up trash rates, and I wasn’t the only one.

City Council members now are saying they may trash the contracts of some of these hauling companies if they don’t step up their game, improve service, and cut back on the fees. But the RecycLA program had extremely expensive, front-loaded demands for trash companies to participate. It took years for all of this to actually be implemented, and in the process a bunch of small haulers were put out of business entirely. It’s not like the city can just simply hand over responsibility to cover thousands of commercial and residential customers with a snap of a finger.

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“Risks Is More Severe Than We Previously Expected”: S&P Downgrades Wells Fargo, Full Report

Just days after the Fed slammed Wells Fargo stock by announcing an unprecedented enforcement action in which it prohibited the bank from “growing”, effectively making it into a quasi-utility until it fixes its lacking internal control system and replaces much of its board, moments ago S&P added insult to injury by downgrading the largest US mortgage lender from A to A-, due to “Prolonged Regulatory And Governance Issues” with a Stable Outlook.

The full S&P report is below:

Wells Fargo & Co. Downgraded To ‘A-/A-2’ From ‘A/A-1’ On Prolonged Regulatory And Governance Issues; Outlook Is Stable

  • On Feb. 2, Wells Fargo & Co. (“Wells”) became subject to a consent order from the Federal Reserve that caps the company’s asset growth until it further enhances its governance and compliance and risk management to the standards required by the regulator.
  • This unprecedented asset cap on a large bank underscores the continued elevated regulatory risks for Wells, and the ongoing ramifications of its retail sales practices issues, as well as the complexities of improving compliance and operational risk controls throughout its very large organization.
  • We are lowering our ratings on Wells by one notch to ‘A-/A-2’, recognizing that the duration and severity of these regulatory, governance, and reputational issues are not commensurate with the previously peer-leading ratings on Wells.
  • Our stable outlook assumes that the company will meet the requirements of the regulatory consent order while maintaining solid market shares in its major businesses as well as a strong financial profile.

NEW YORK (S&P Global Ratings) Feb. 7, 2018–, S&P Global Ratings today lowered its long-term issuer credit rating on Wells Fargo & Co. to ‘A-‘ from ‘A’ and its short-term issuer credit rating to ‘A-2’ from ‘A-1’. At the same time, we lowered our long-term issuer credit rating on Wells Fargo Bank N.A. to ‘A+’ from ‘AA-‘ and our short-term issuer credit rating to ‘A-1’ from ‘A-1+’. The outlooks on both entities are stable.  

We also lowered the group credit profile to ‘a’ from ‘a+’.

The downgrade follows news that Wells has entered into a cease-and-desist consent order with the Federal Reserve that restricts the company’s asset growth to its total asset size at the end of 2017 until it sufficiently improves its governance and controls.

Following this punitive regulatory action, our downgrade reflects our view that regulatory risk for Wells is more severe than we previously expected and the process for improving its governance and operational risk policies may take longer than we previously expected.

At the same time, the company may be subject to prolonged reputational issues. The company also announced that it will replace four additional members of its Board of Directors, signaling that the Board continues to be in transition.

Our stable outlook reflects our expectations that Wells will continue to build on progress it has made in strengthening its management structure and controls and meet the provisions of the Fed consent order, including a third-party confirmation of the company’s implementation of its improvement plans by Sept. 30, 2018. We also expect that its competitive positions in key businesses will not be significantly hurt by the regulatory growth restrictions and that it will maintain its good earnings generation and stable asset quality over the next two years. We expect that capital ratios will remain substantially above the company’s longer-term target CET1 ratio of 10%, and that S&P Global’s risk-adjusted capital ratio will remain at the higher end of our 7-10% range that we consider adequate.

We could lower the ratings if Wells does not meet the requirements under the Fed’s regulatory consent order, if the asset cap is not lifted in a reasonable timeframe, or if Wells’ market shares erode significantly–developments we do not currently expect. We might also take negative rating actions if the retail sales practices issue (and other operational control issues) becomes even more material to the company’s overall credit profile. This could occur if we expect substantial additional fines that are large relative to earnings, or if sizable additional operational controls, compliance, or governance weaknesses surface. We could also lower the ratings if customer flows in key businesses show pronounced negative trends for a sustained period, if nonperforming assets or credit losses rise significantly, or if capital ratios decline materially as the result of more aggressive dividend or share-buyback policies.

We could raise the rating if Wells resolves the deficiencies that the Fed identified in its risk management, governance, and compliance practices. In addition, we would expect uncertainties about further regulatory and legal actions to be meaningfully reduced.  Additionally, Wells would need to regain its peer-leading business stability, and maintain above-peers’ risk-adjusted earnings generation, combined with solid capital ratios and good asset quality.

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More Perfect Season 2: Advocacy Masquerading as Explanation

The second season of More Perfect, NPR’s hit podcast about the Supreme Court, covered a lot of topics of interest to libertarians: gun control, campaign finance regulation, federal regulatory power, police brutality, and more. But the show’s political slant has only intensified in the new season, leaving a bitter taste in the liberty-minded listener’s mouth.

More Perfect‘s appeal has always come from the producers’ ability to break the dry contents of a ConLaw casebook into approachable, This American Life–style documentary narratives. Even among those familiar with the cases the show covers, our knowledge of the human stories behind the litigation generally doesn’t extend beyond what ended up in the Court’s opinion, so the show has value even to legally savvy listeners.

But the second season runs headlong into a trap that the first mostly avoided. Time and again, its analysis is colored by the producers’ quiet-but-obvious progressive political agenda. It would be difficult to make a show like this without some guiding perspective, but in passing editorial judgment on the Supreme Court’s creation of new legal rules and standards, the show ultimately lacks a legal philosophy beyond whether the decisions it describes advance the policy preferences its hosts prefer. That spoils many an otherwise enjoyable episode.

This underlying flaw was most clearly displayed when the show departed from its regular narrative format. The season’s eighth episode, “The Hate Debate,” featured a campaign-style debate between Elie Mystal, the show’s legal editor, and Ken White, the lawyer behind the popular blog Popehat, over legal prohibitions on so-called “hate speech.” Mystal readily admits that he, unlike White, is not an expert in First Amendment law, and in the debate he’s obviously outgunned in terms of detailed knowledge of precedent and principle. But there’s a greater disconnect at work too, one that reflects the big flaw in More Perfect‘s second-season approach.

Throughout the debate, White argues for permissive free speech jurisprudence on the grounds that conscientious lawyers tend to favor: that it protects citizens from arbitrary coercion, that it lends itself to neutral application by judges, that it disentangles constitutional rights from politics. Mystal, meanwhile, shows little concern for what kinds of rules make for good law. “Can you just explain to me a standard that allows me to stop Klansmen?” he asks exasperatedly. “Because that’s the one that I want.”

When More Perfect doesn’t outright invite the audience to support the standards that achieve their political desires, the producers use a sort of intellectual asymmetric warfare to push the right opinion. An episode called “The Gun Show” covers the history of gun control and the case of District of Columbia v. Heller, which established a Second Amendment right to individual ownership of firearms. That episode does feature Robert Levy, Alan Gura, and Clark Neily, the three libertarian attorneys who argued the case. But inexplicably, they’re never given the opportunity to offer a substantive defense of their victorious legal theory. Instead, that task is left to their oddball client, former security guard Dick Heller. It’s a clever bit of deck-stacking that does a pretty good job of making the constitutional debate over the Second Amendment look like one between reasonable adults and a lunatic fringe.

Both Mystal’s “just give me the standard which will do what I want” attitude and the producers’ proclivity to stack the intellectual deck are on display in the season finale, “One Nation, Under Money.” The episode tracks the Supreme Court’s dramatic expansion of Congress’ power “to regulate commerce with foreign nations and among the several states” to encompass virtually all economic activity, and it comes down squarely in favor of the change. In the first half , host Jad Abumrad discusses 1941’s Wickard v. Filburn, in which the Court upheld a federal fine imposed on a farmer who exceeded his Depression-era wheat quota but did not sell the excess. In a decision that opened the door to the modern federal regulatory state, the Supreme Court held that the Commerce Clause extended Congress’ power to almost any private activity that affects an interstate market in the aggregate. The power to regulate “interstate commerce” now included the power to fine someone for an activity that involved no commerce at all.

Abumrad admits that the logic here strains even his own credulity about the proper scope of federal power. The decision “still drives conservatives and libertarians bonkers,” Abumrad says, “and I am neither one of those things, but I get it.” For a moment, it looks like the regulation-skeptical position might get a moment in the limelight.

But then the episode turns to the use of the commerce power to outlaw racial discrimination in private businesses that cater to the public, and any hint of skepticism goes out the window.

There are a number of libertarian lawyers, professors, or historians who could have ably challenged the prevailing interpretation of the clause’s scope in a manner totally untainted by racial animosity. Indeed, Neily and Levy, two of the attorneys featured in “The Gun Show,” have written books arguing for a more limited interpretation of the Commerce Clause.

But neither Levy nor Neily appears in the episode. Instead, More Perfect turns to Ollie McClung, Jr., a septuagenarian Alabama restaurateur whose father owned the segregated barbeque joint that lost a Supreme Court challenge to Congress’ power to outlaw segregation using the Commerce Clause. McClung’s comments suggest that his rather unsophisticated views on constitutional law are, to put it mildly, not absolutely untainted by retrograde racial attitudes. The episode ends with Commerce Clause skepticism all but dismissed as a fig leaf for segregationism. Once tied to preventing racial discrimination, none of expansive Commerce Clause jurisprudence’s pernicious effects—even the federal marijuana prohibition that progressives themselves often decry—get mentioned.

Constitutional law is a game of standards, and good constitutional law is about neutral standards. In telling the stories of landmark cases, the show necessarily ends up covering the times when standards change. When constitutional lawyers judge what makes a good decision, they look to theories of interpretation and judicial philosophies. But editorially, More Perfect ends up inviting its listeners to judge new legal standards only by the political outcomes they achieve. When a new rule expands protection for minorities or creates greater authority to regulate business, the producers fawn over it as a stroke of legal genius and they bring on intellectual firepower to endorse them. When rulings expand gun rights, restrict affirmative action, or deregulate campaign finance, the show portrays them with skepticism or outright hostility, leaving their defense largely to underinformed and underqualified guests while musing about the dangers of using courts to hijack the democratic process.

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EURUSD Tumbles After ECB Accuses US Of Manipulating Currency

In a shocking moment of frankness, and perhaps desperation, European Central Bank Governing Council member Ewald Nowotny commented in an interview with Wiener Zeitung this morning that: (via Google Translate)

Q. Is US President Donald Trump with his idiosyncratic style of government and his tweets a danger or an uncertain factor for the international financial and economic world?

Ewald Nowotny: Yes, definitely. What surprises us very much are two things.

On the one hand, that the U.S. Treasury purposely pushes down the dollar and wants to keep it low;

and on the other hand, that there has been no one in the vicinity of Donald Trump, where there are a number of sensible people, who has had a positive influence on the President and his politics.

Nowotny’s standing as a senior member of The ECB suggests this is worth paying attention to and EURUSD has extended its early losses – now down to near 3-week lows…

 

Pushing the Dollar Index back above Mnuchin Masscare highs…

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Vol-Selling Fund Disintegrates, Down 80% In 2 Days

Yesterday, we introduced readers to the $550 Million LJM Partners: a Chicago-based vol-selling fund, which we learned late on Tuesday had lost over half of its NAV some time on Monday, following the biggest VIX spike in history.

This was a disappointing development to investors in its most popular, LJM Moderately Aggressive Strategy which until last week had AUM of $366MM, and had significantly outperformed the market since inception.

And, as we warned on numerous occasions, just like XIV, this particular vol-selling strategy was set for an abrupt crash.

This was revealed in the company’s letter to clients, in which founder and chairman Tony Caine had this to say to clients. Note: any letter whose first paragraph ends in “we have suffered significant losses”, can not be good.

As many of you may be aware, the market losses and volatility spike on Monday, February 5th were unprecedented. The VIX Index spiked 20 points, from 17.3 to 37.3, and was the largest one-day spike in the Index’s history. LJM strategies have suffered significant losses.  
 
At this time, the portfolio management team is trying to hedge with as many futures as possible to attempt to insulate portfolios from further losses.

The letter concluded hopefully:

“Our plan is to go to a defensive position depending on liquidity of options markets. Our goal is to preserve as much capital as possible. Our ability to do so depends on market conditions and liquidity.”

LJM’s full letter below:

Fast forward another day, when we can safely say that LJM’s plan to “to go a defensive position” was met with disaster, because as the latest NAV update shows, two days after the VIXplosion, the fund has lost 80% of its “assets” in just two days, assuming one wants to call volatility an asset which ironically LJM did considering its motto is “make volatility your asset.” And to think they all along they meant liability.

Finally, those curious what was going through the head of the LJM “strategist” whose only trade “idea” was to short vol, he answers in the interview below:

CTA PROFILE – Anish Parvataneni from John Lothian Productions on Vimeo.

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Mark Spitznagel Exposes Modern Portfolio Management’s “Volatility Tax”

Authored by Mark Spitznagel via Universa Investments LP,

There are few statements in the pantheon of investment management clichés that ring truer than these words of Benjamin Graham:

“The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.”

This is the same basic message as my favorite cliché that “defense wins championships.” (I have annoyed my hockey-player son to no end with that one.) Indeed, we have built an entire investment business around this principle. One doesn’t prioritize risk management over long-term compound returns; the two priorities are very much one-in-the-same.

What we’ve learned in this Safe Haven Investing series so far is that the shape of the risk mitigation strategy’s payoff profile relative to systemic moves such as in the S&P 500 (SPX) is the most important determining feature of that strategy’s effectiveness at achieving that priority—more important even than, for instance, the average stand-alone return of that payoff. And the optimal shape has been a highly nonlinear, convex one. The counterintuitive nature of this is due to the similarly counterintuitive nature of what I call the “volatility tax”.

The volatility tax is the hidden tax on an investment portfolio caused by the negative compounding of large investment losses.

Much in the same way most tax changes take the form of a political sleight of hand (typically shifting taxes between one group and another), the volatility tax also comes down to stealth, mathematical trickery.

Here’s how this “tax” is levied: Steep portfolio losses (or “crashes”) crush the long-run compound annual growth rate (CAGR) of that portfolio. It just takes too long to recover from a much lower starting point. An extreme example is losing 50% one year and then making 100% the next, with an (arithmetic) average annual return over that two-year period of +25%. That’s pretty impressive, until you consider that you’re right back where you started by the end of those two years. The volatility tax transformed what looked like an impressive return into a not-so-impressive 0% compound (or geometric) return.

Put simply, the geometric average return of an asset is a function of the difference between its arithmetic average return and a measure of its volatility. As that volatility is reduced, the geometric average return is increased, as we are subtracting a lower volatility number. The greater the spread between the geometric and arithmetic average returns, the greater the volatility tax being levied. (It is 25% in the previous example.)

To put this in a historical context, in the past 20 years if you had owned only the SPX and had managed to avoid every annual loss worse than -15% (there were just two of them), your geometric average return would have gone from 7.2% to 11.08%, and your arithmetic average return would have gone from 8.81% to 11.77%. (The spread between the geometric and arithmetic averages thus closed by almost 1%—the volatility tax savings). Your cumulative 20-year return would have gone from 302% to 377% on volatility tax savings alone (keeping the arithmetic average return at 8.81%); you can see just how steep that 1% volatility tax was!

Note that the above level of volatility tax savings and outperformance approximates the performance of the 97% SPX + 3% insurance prototype portfolio from Part One, where annual SPX returns worse than -15% were essentially erased with a break-even stand-alone insurance payoff (so that the portfolio’s arithmetic average return was approximately unchanged).

Minimizing this negative compounding, or paying less volatility tax, results in higher sustained CAGRs and is the very name of the game in successful investing. It is the key to the kingdom, and explains in a nutshell Warren Buffett’s cardinal rule, “Don’t lose money.” Moreover, as the U.S. pension system can attest to directly, the large drawdowns, not the average returns, are what tend to dominate long-term portfolio value, and thus the system’s solvency over the long run.

It seems there should be something we can do to mitigate these high volatility taxes. (The entire hedge fund industry was essentially built around this very premise.) This would require a risk mitigation plan that can lower portfolio losses in a way that consequently raises long-run portfolio CAGRs. Unfortunately, the reality is that very little has been successful at accomplishing this lofty goal.

The investment industry’s dogma of diversification— owning a broad range of assets across stocks, bonds, hedge funds, etc., that hopefully won’t all drop together— has not been, as billed, “the only free lunch in finance.” Many assets see their correlations deviously spike in a crash, and thus they provide less of a loss cushion than is expected; and even when diversification has lowered portfolio losses, it typically has also lowered portfolio compound returns—all in the name of higher Sharpe ratios (which, with extreme irony, required investors to apply leverage to their portfolios in order to somehow make risk mitigation increase their returns).

The other solution of timing the market by avoiding risk during high valuation periods such as today has generally provided some long-term volatility tax savings (and higher compound returns) historically; but it is simply impossible to stomach this strategy in today’s buoyant and bubbly market. All too often, it results in the opposite strategy: buying high and selling low.

All is not lost. This is a call to action, to better understand what your exposures really are and think about the value proposition of risk mitigation or, when relying on diversification, the lack thereof. We can make progress just by being better aware of this hidden and destructive tax and the hefty costs it extracts from investment portfolios, especially in environments like the current one.

It all sounds a little fatalistic, but after all, nothing is so certain as death and taxes, which certainly includes the volatility tax.

*  *  *

Full letter below:

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WTI/RBOB Sink After US Crude Production Explodes To Record High

WTI/RBOB held on to gains after last night’s surprise crude draw from API, but quickly tumbled after DOE reported a 1.9mm crude build (2nd week in a row) and significant gasoline and distillate builds. However, US crude production’s massive spike to 10.25m b/d was the big headline.

 

API

  • Crude -1.05mm (+3.15mm exp)
  • Cushing -633k
  • Gasoline-227k
  • Distillates +4.552m

DOE

  • Crude +1.895mm (+3.15mm exp)
  • Cushing -711k
  • Gasoline +3.414mm
  • Distillates +3.926mm

Last week’s surprise (huge) crude build from DOE was dismissed by API overnight but DOE ruined that party and showed the second weekly crude build in a row. Gasoline and Distillates stocks resumed their rise…

As Bloomberg’s David Marino notes, Total U.S. inventories grew the most since early September. It’s actually even a bigger deal than the headline number suggests: if not for a 6.4 million draw from propane/propylene and “other” oils, we’d be looking at a 10 million barrel build.

But all eyes were once again on US crude production as it smashed above 10m b/d.

As Bloomberg’s Julian Lee notes, that huge jump in crude production is not the result of a sudden burst of drilling. More likely it is the correction we expected after the earlier release of monthly data for November that showed production was already above 10 million barrels a day three months ago.

U.S. crude output hits a record high of 10.25 million bpd, surpassing both the monthly high set in Nov 1970, and Saudi Arabia’s latest production.

 

The reaction in WTI/RBOB was swift…

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The Market Narrative… And Why It’s Wrong

Authored by Steven Englander via Rafiki Capital Management,

When you have a market move such as Monday’s, it always signals that the story the market is buying has changed abruptly. In practical terms, it becomes much easier to tell the market-down-10% story and much harder to tell any market-up-10% story.

The shifts in market thinking:

1)      Maybe underlying growth is not as strong as we thought

2)      Productivity is not coming to the rescue and costs are rising

3)      The Fed is not as friendly as it used to be

4)      The business cycle may not last as long as we thought

Equities hit their peak January 26, the day of the disappointing GDP release. The Bloomberg consensus forecast was 3.0% seasonally adjusted annual rate (SAAR), but many had been looking at econometric forecasts coming out Reserve Banks pointing to growth well over 3%. With employment growth steady, a GDP acceleration into the 3’s would mean productivity growth at or above 1.5% SAAR for a third quarter in a row, a rare event in recent years. In fact, nonfarm productivity growth fell 0.1% SAAR, and unit labor costs rose sharply. At the same time inflation expectations, the GDP deflator, and wages were showing marked increases. This led to discussions of four 2018 hikes by Dallas Fed President Kaplan and the rest is history. 

Think about whether asset markets are happier with inflation persistently below target and Fed stimulus a constant presence — or with inflation at target and the Fed ‘even-handed’, and which will be the more volatile asset market environment.

Take this together and you have a market that has shifted from a benign narrative of accelerating output/productivity growth raising profits, slowing cost growth and extending the cycle to a new narrative driven by rising inflation/cost pressures and a Fed that is no longer friendly.

Consider the dividend discount model for equity pricing. Slower output/productivity growth and higher costs hit the secular trend in profits, advances the date of the expected expansion end, and raises the discount rate applied to this softer profits path. The approach to target inflation also means that the Fed put is no longer in play, so anticipated volatility rises.

Combine this with breaches of technical levels, choppy price signals, stops being hit and panic — and you have Monday.   

Why is this pessimistic narrative wrong?

1)      The growth/productivity narrative is being dismissed too quickly. We are likely to see Q4’s lost GDP show up in Q1, or in Q4 revisions. When net exports make such a pronounced negative contribution, the statistical regularity is that the following quarter’s GDP is significantly higher (I think there are arcane GDP accounting reasons for this).  In addition, nonresidential investment has been making a strong contribution, suggesting business optimism that counters the Q4 headline GDP disappointment, and business optimism remains very strong. So the output/productivity growth story may be there – the problem is that we may not know for some months.

2)      The wage fear is overstated. January’s average hourly earnings number was pushed up by a sharp drop in the workweek. As well, the acceleration that spooked investors in overall AHE did not show at all in the data for production and nonsupervisory workers, which are flat and below 2.5% y/y. These are people who punch time clocks and where wages are best measured.  You would expect broad wage inflation to show. There are a couple of other indications that employment of low wage workers was weak in January. Overall, I would want  to see more confirmation before an inflation epidemic is declared.

3)      Not every inflation pickup is a hockey stick. Even in the 1960-80s, the heyday of the conventional Phillips curve, labor market tightness took a long time to show up in inflation. The technical reason is that there are long lags embedded in each step of the inflation process, so a gradual tightening of labor markets produces an even more gradual upward move inflation. So the Fed does not have to panic.

4)      The great unknown is how closely the Fed is targeting 2% and whether bygones are bygones or they intend to make up some of the sub-2% shortfall with a period of 2%+ inflation. This comes up in virtually every discussion of Fed policy. It would be equities positive, USD negative and probably lead to steepening of the yield curve.

5)      The economy may be more robust than we think – insofar as the fear is that the business cycle may end prematurely, as we saw in 1994, there may be more robustness to Fed tightening than we think. Throughout the expansion the economy has been viewed as a fragile flower thsat can not deal with any shocks. The economy’s reaction to additional Fed tightening could be indifference.

Investors have lurched from pricing in an increasingly benign economic and profits outlook to one in which there are far more headwinds. These fears are likely overplayed, but there is no immediate data that would show that the benign story is correct. Real-time economic volatility masks underlying trends, but it doesn’t mean that the trends are not there. Any sign that the supply side is working, either for exogenous reasons or because of tax reform, and the positive scenario is back.  

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“Big Mistake”: Trump Slams Market For Going Down On “Good News”

Seemingly furious with the inability to tweet about the market’s relentless meltup anymore after the biggest point drop in Dow Jones history, Trump decided to take a passive-aggressive route this morning and the president who less than two years ago called the market the biggest bubble of all time, tweeted the only thing he could in the current context, namely stating that the stock market is now dropping on good news, contrary to what it used to do in the past. Trump’s conclusion: this is a big mistake.

“In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”

While it was not explicit just which “good news” Trump had in mind, the problem is that “good news” at this juncture means higher rates, something the 10Y at 2.80% confirms.

The irony here is two-fold.

First, Trump’s fiscal stimulus plan will make the “good news” even better, further reducing slack, and forcing the Fed to remove even more accommodation by rising rates, which – of course – will send the market reeling, as the S&P is where it is not due to the state of the economy but thanks to $15+ trillion in central bank liquidity, something which Trump clearly was aware of in Sept. 2016 when he told Reuters that “The only thing that is strong is the artificial stock market.” Oh, and he also told the WaPo in April 2016 that  “I think we’re sitting on an economic bubble. A financial bubble.”

He was right.

Second, and more important, is that Trump is already aware of all this: in September 2016 it was Trump himself who said that “The only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down”, once again adding for good measure that “we are in a big, fat, ugly bubble.”

And now that Trump finds himself trapped for having taking so much credit for the market’s surge since the election, one wonders if Trump will then admit that the inverse is true: that stocks surge on bad news – i.e. more QE and lower rates as deflation returns… and just how will Trump reconcile that particular non-sequitur in the coming weeks.

The biggest problem for Trump, however, is that he now “owns” the market: which was great for Trump on the way up, but any crash and it will be Trump’s fault, precisely as the real culprit behind the bubble, the Federal Reserve, wanted all along.

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