Month: June 2018

Recent developments in separate cases against former Trump officials Paul Manafort and Mike Flynn have left many scratching their heads.

On Friday, Politico reported that the Associated Press may have tipped off the FBI to a storage locker that the bureau then raided, according to an FBI agent who gave an unexpected testimony at a federal court hearing in Alexandria, Virginia.

A meeting last year where Associated Press reporters discussed with federal officials the news outlet’s investigation of former Trump campaign chairman Paul Manafort’s finances may have led the FBI to a storage locker the bureau raided, an FBI agent testified Friday. –Politico

Congressional investigators have inquired into the April 2017 meeting between AP and officials from both the DOJ Criminal Division and the FBI. 

Manafort’s attorneys have sought to suppress the materials obtained through the searches as part of a broader attempt to discredit the Mueller investigation.

In response to an earlier question about how the FBI became aware that Manafort had a secret storage locker used for all of his business-related files, FBI agent Jeff Pfeiffer said “Either through my investigative efforts or through a meeting that occurred with reporters of The Associated Press.” 

Present at the meeting with the Associated Press was Mueller investigator Andrew Weissmann – who is also a top prosecutor in the Criminal Division’s Fraud section.

It was Weissman’s presence in the meeting with Associated Press reporters that first generated interest from congressional Republicans. In a January letter to Deputy Attorney General Rod Rosenstein, House Intelligence Committee Chairman Devin Nunes indicated he was interested in obtaining “records related to the details of an April 2017 meeting between DOJ Attorney Andrew Weissmann … and the media.” The disclosure of the meeting in Nunes’ letter led to speculation among Trump allies that Weissmann had aided the reporters’ stories. –Politico

AP’s director of media relations, Lauren Easton, confirmed that AP journalists met with DOJ officials “in an effort to get information on stories they were reporting, as reporters do,” and claimed that the journalists asked the DOJ about the storage locker but never identified its location.

Following the FBI’s meeting with AP, Manafort assistant Alex Trusko eventually helped federal officials obtain access to the locker and consented to its search. While Manafort’s attorneys have argued that Trusko lacked the authority to grant access, he was listed as the “occupant” on the locker’s lease, and he had a key to it. 

Flynn gets another reprieve

Meanwhile, special counsel Mueller has asked for yet another delay in the sentencing of former national security adviser Michael Flynn, according to court documents filed on Friday – the third such request. 

Mueller’s team asked for two more months before scheduling his sentencing – with a request to file another status report by August 24. 

“Due to the status of the Special Counsel’s investigation, the parties do not believe that this matter is ready to be scheduled for a sentencing hearing at this time,” reads a joint status report filed on Friday in a D.C. federal court. 

Flynn worked on the Trump campaign during the 2016 election and was briefly Trump’s national security adviser before being fired for misleading Mike Pence about his contacts with Russian officials. While an incoming national security director communicating with Russia would be absolutely expected – Flynn’s statements to White House officials and the FBI led to his firing and subsequent prosecution by the special counsel. 

McCabe didn’t think they had a case

In May, an unredacted House Intel Committee report revealed that former Deputy FBI Director Andrew McCabe told Congressional investigators that the FBI had virtually no case against former National Security Advisor Mike Flynn, and “The two people who interviewed [Flynn] didn’t think he was lying[.]” 

“[N]ot [a] great beginning of a false statement case.” McCabe told the Committee. 

The same House Intel report revealed that James Comey contradicted himself in a Fox News interview when he denied telling lawmakers those agents thought Flynn was telling the truth, when in fact he did. Meanwhile, there has been an unconfirmed rumor that McCabe instructed agents to alter their “302” forms from the Flynn interview, effectively changing their written accounts. 

Senate Judiciary Committee Chairman Chuck Grassley (R-IA) has been zeroing in on the Flynn interview – demanding the 302 forms, as well as a sit-down with Special Agent Joe Pientka – who Grassley revealed as the second FBI agent in the Flynn interview aside from Peter Strzok. 

Grassley demanded a transcribed interview with Pientka – who would be able to testify as to whether or not McCabe had him alter his 302 form, which would send things nuclear.

Thus far, the DOJ has told Grassley to pound sand…

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Authored by Robert Bridge via The Strategic Culture Foundation,

On what plane of reality is it possible that two of the world’s most morally bankrupt corporations, Bayer and Monsanto, can be permitted to join forces in what promises to be the next stage in the takeover of the world’s agricultural and medicinal supplies?

Warning, plot spoiler: There is no Mr. Hyde side in this horror story of epic proportions; it’s all Dr. Jekyll. Like a script from a David Lynch creeper, Bayer AG of poison gas fame has finalized its $66 billion (£50bn) purchase of Monsanto, the agrochemical corporation that should be pleading the Fifth in the dock on Guantanamo Bay instead of enjoying what amounts to corporate asylum and immunity from crimes against humanity. Such are the special privileges that come from being an above-the-law transnational corporation.

Unsurprisingly, the first thing Bayer did after taking on Monsanto, saddled as it is with the extra baggage of ethic improprieties, was to initiate a rebrand campaign. Like a Hollywood villain falling into a crucible of molten steel only to turn up later in some altered state, Monsanto has been subsumed under the Orwellian-sounding ‘Bayer Crop Science’ division, whose motto is: “Science for a better life.”

Yet Bayer itself provides little protective cover for Monsanto considering its own patchy history of corporate malfeasance. Far beyond its widely known business of peddling pain relief for headaches, the German-based company played a significant role in the introduction of poison gas on the battlefields of World War I. 

Despite a Hague Convention ban on the use of chemical weapons since 1907, Bayer CEO Carl Duisberg, who sat on a special commission set up by the German Ministry of War, knew a business opportunity when he saw one.

Duisberg witnessed early tests of poison gas and had nothing but glowing reports on the horrific new weapon:

“The enemy won’t even know when an area has been sprayed with it and will remain quietly in place until the consequences occur.”

Bayer, which built a department specifically for the research and development of gas agents, went on to develop increasingly lethal chemical weapons, such as phosgene and mustard gas. “This phosgene is the meanest weapon I know,” Duisberg remarked with a stunning disregard for life, as if he were speaking about the latest bug spray. “I strongly recommend that we not let the opportunity of this war pass without also testing gas grenades.”

Duisberg got his demonic wish. The opportunity to use the battlefield as a testing ground and soldiers as guinea pigs came in the spring of 1915 as Bayer supplied some 700 tons of chemical weapons to the war front. On April 22, 1915, it has been estimated that around 170 tons of chlorine gas were used for the first time on a battlefield in Ypres, Belgium against French troops. Up to 1,000 soldiers perished in the attack, and many more thousands injured.

In total, an estimated 60,000 people died as a result of the chemical warfare started by Germany in the First World War and supplied by the Leverkusen-based company.

According to Axel Koehler-Schnura from the Coalition against BAYER Dangers:

 “The name BAYER particularly stands for the development and production of poison gas. Nevertheless the company has not come to terms with its involvement in the atrocities of the First World War. BAYER has not even distanced itself from Carl Duisberg’s crimes.”

The criminal-like behavior has continued right up until modern times. Mike Papantonio, a US attorney and television presenter discussed one of the more heinous acts committed by this chemical company on Thomas Hartmann’s program, The Big Picture: “They produced a clotting agent for hemophiliacs, in the 1980s, called Factor VIII. This blood-clotting agent was tainted with HIV, and then, after the government told them they couldn’t sell it here, they shipped it all over the world, infecting people all over the world. That’s just part of the Bayer story.”

Papantonio, citing Bayer’s 2014 annual report, said the company is facing 32 different liability lawsuits around the world. For the 2018 Bayer liability report, click here.

Before flushing your Bayer products down the toilet, you may want to put aside an aspirin or two because the story gets worse.

One of the direct consequences of the ‘Baysanto’ monster will be a major hike in prices for farmers, already suffering a direct hit to their livelihood from unsustainable prices.

“Farmers have already experienced a 300% price increase in recent years, on everything from seeds to fertilizer, all of which are controlled by Monsanto,” Papantonio told Hartmann. “And every forecaster is predicting that these prices are going to climb even higher because of this merger.”

Yet it’s hard to imagine the situation getting any worse for the American farmer, who is now facing the highest suicide rate of any profession in the country. The suicide rate for Americans engaged in the field of farming, fishing and forestry is 84.5 per 100,000 people – more than five times that of the broader population.

This tragic trend echoes that of India, where about a decade ago millions of Indian farmers began switching from farming with traditional farming techniques to using Monsanto’s genetically modified seeds instead. In the past, following a millennia-old tradition, farmers saved seeds from one harvest and replanted them the following year. Those days of wisely following the rhythms and patterns of the natural world are almost over. Today, Monsanto GMO seeds are bred to contain ‘terminator technology’, with the resulting crops ‘programmed’ not to produce seeds of their own. In other words, the seed company is literally playing God with nature and our lives. Thus, hundreds of thousands of Indian farmers are forced to buy a new batch of seeds – together with Monsanto pesticide Round Up – each year and at a very prohibitive cost.

But should the world have expected anything different from the very same company that was involved in the production of Agent Orange for military use during the Vietnam War (1961-1971)? More than 4.8 million Vietnamese suffered adverse effects from the defoliant, which was sprayed over vast tracts of agricultural land during the war, destroying the fertility of the land and Vietnam’s food supply. About 400,000 Vietnamese died as a result of the US military’s use of Agent Orange, while millions more suffered from hunger, crippling disabilities and birth defects.

This is the company that we have allowed, together with Bayer, to control about one-quarter of the world’s food supply. This begs the question: Who is more nuts? Bayer and Monsanto, or We the People?

It’s important to mention that the Bayer – Monsanto convergence is not occurring in a corporate vacuum. It is all part of a race on the part of the global agrochemical companies to stake off the world’s food supplies. ChemChina has bought out Switzerland’s Syngenta for $43 billion, for example, while Dow and DuPont have forged their own $130 billion empire.

However, none of those companies carry the same bloodstained reputations as Bayer and Monsanto, a match made in hell that threatens all life on earth.

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With the “smart” money (as defined by Don Hays) exiting the stock market in droves, yield curves collapsing (now with extra help from a “Twisting” ECB), extreme speculative positioning in bonds, and a dramatically diverging economic reality from market market narratives, the possibility of a crash – Fed triggered or not – is rising. Do ‘they’ know something the “dumb money” does not?

And with everyone still the same side of the rates boat…

… while Bank of America is warning that the current market feels ominously similar to that right before the 1998 Asia Crisis and LTCM blow up…

… the question is – what’s the cheapest way to hedge against a crash scenario?

Bank of America’s Jason Galazidis has some answers for traders looking for some protection. The screen below shows that the hedges, ranked by the average, which are most underpricing historical drawdowns are Gold calls, EUR 10y receivers and TLT (US 20y+ Treasury) calls:

EUR 10y receivers and TLT calls screen as the best value hedges after Gold calls. Interestingly, USD 10y receivers screen materially richer owing to increased demand on heightened US trade tensions.

HSCEI puts are the second best screening equity hedge after RDXUSD (Russia) puts despite the HSCEI being the worst performing equity index in our screen (YTD peak vs. current levels).

EU Credit payers have richened remarkably over the last few months, particularly in IG, following the extreme widening in EU-periphery bond spreads in May. Our credit derivatives strategists note that the richening of downside tails in credit (payer skew) reached 8y extremes driven by heavy hedging demand.

As a reference, the table below shows the largest drops (or gains in the case of GLD, gold, Euro and US 10Y and TLT as designated with **) within 3 month in each asset class between ‘06 and ‘17, ranked in the same order as the assets in the chart above. The table shows that gold not only has a high vol delta but is consistently one of the best performing assets during crisis times.

And so – once again – the precious metal regains ‘most-favored-nation’ status as the world’s emerging markets collapse and economic reality washes ashore on the banks of the river-of-excess-debt.

Since the middle of January, gold’s implied vol has been notably, systemically lower than stocks:

And US equity vol has “normalized”, catching back up to Europe over the past month:

Cross asset risk is once more in benign territory relative to history as vols and credit spreads are all in their 1st quartile, although recently cross asset risk rose across the board led by credit spreads, while commodity volatility has emerged as a notable exception after declining MoM – largely thanks to the recent surge in the price of oil – and is now the 2nd least elevated risk metric vs. its own history.

Meanwhile, another indicator that further vol breakouts are coming is the 12M cross-asset-class correlation, which has continued its climb since the Feb-18 equity-led sell-off, and is now at 5y highs.

Historically there have been 3 distinct cross asset correlation regimes since 1995. Interestingly, we see a broadly upward trend since Oct-03, well before the Lehman bankruptcy in Sep-08. This is related to the liquidity driven crush in asset risk-premia that helped drive investment leverage higher.  Long-term correlation established a new regime since 3Q13, similar to the ’03 to ‘08 correlation environment.

Which brings us to the punchline chart: these are the two-month-forward historical stress peaks observed during turbulent market shocks in 2008, 2009 and 2011, and compared to current levels. This is BofA’s way of hinting where vol is most underpriced assuming, of course, that a crash should occur in 2 months:

The chart illustrates why it is useful to consider the relative pricing of options across asset classes to hedge against tail events: option markets often underestimate the severity of market shocks, and to different degrees. In 2008, currency, equity and sovereign risk vols were the most optimistic ahead of the Lehman crisis and the most surprised after (rose to the highest levels).

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Authored by Carey Wedler via Steemit.com,

On Thursday, the U.S. Senate approved a bill to legalize hemp, an industrial crop that has been banned for decades.

In April, Senators Mitch McConnell (R-KY), Rand Paul (R-KY), Ron Wyden (D-OR), and Jeff Merkley (D-OR) submitted a separate bill to legalize hemp, and those provisions were then incorporated into the broader farm bill. The Senate Committee on Agriculture, Nutrition and Forestry approved that version before the upper house of Congress voted to approve it this week by a margin of 86-11. The bill would legalize the cultivation, processing, and sale of hemp.

“Consumers across America buy hundreds of millions in retail products every year that contain hemp,” McConnell said Thursday.

“But due to outdated federal regulations that do not sufficiently distinguish this industrial crop from its illicit cousin, American farmers have been mostly unable to meet that demand themselves. It’s left consumers with little choice but to buy imported hemp products from foreign-produced hemp.”

According to Wyden:

“Legalizing hemp nationwide ends decades of bad policymaking and opens up untold economic opportunity for farmers in Oregon and across the country.”

Hemp is a versatile crop that can be used in everything from construction material to clothing, and it has long been a staple in the United States and around the world. In fact, in the 17th century, the government encouraged people to grow it.

Though hemp was eventually banned amid the widespread attack on cannabis in the 1930s, ironically, it then had to be imported to sustain the war effort during World War II.

Farmers across the country have expressed relief and excitement that hemp has come this close to legalization.

“It’s super big,” Dani Billings, who owns LoCo farms in Longmont Colorado, said, as reported by an NBC affiliate station in Colorado . “We have people who understand agriculture, that understand this is for farming and it’s not to get people high.”

Bruce Perlowin, CEO of NC-based Hemp Inc., which worked with veterans, said in a press release:

“With Veteran Village Kins Community B-Corporations set up in 8 states so far, the legalization of industrial hemp will now allow these future veteran villages to be built and to flourish – creating more support for our veterans than anyone can possibly imagine.”

The bill still must be approved by the House, which has expressed opposition to hemp legalization, though McConnell is expected to campaign heavily in favor of the bill in the lower house of Congress. A list of concerns about the bill handed down from the White House reportedly did not include any objections to hemp legalization, meaning that if the bill makes it through the House, it’s likely President Trump will sign it into law.

Some states have passed legislation in recent years legalizing hemp, but the latest legislation would make it national policy.

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Rep. Louie Gohmert (R-TX) says that agents working for Deputy Attorney General Rod Rosenstein have been spying on his office, Gohmert told WMAL’s “Morning on the Mall” Friday.

“I don’t doubt for a minute that he has people who have been looking into my background. I’ve been told as much by some other folks,” said the Congressman, who added that he did not believe such an operation was overseen by Rod Rosenstein personally. 

“There’s always deniability,” he said.

Gohmert recounted a fiery exchange with Rosenstein during Congressional testimony last week in which the Congressman grilled the Deputy AG over not having read a FISA warrant renewal he signed. 

“If I were a FISA judge,” Gohmert told WMAL, “now that we have him on record refusing to say that you even read it – I would never accept an application signed by you again, because you don’t even know what you were signing” 

Gohmert also expressed frustration over the DOJ’s efforts to stall Congressional investigations. 

“He think that if they drag their feet long enough like Eric Holder did with fast and furious, we won’t do anything about it,” suggesting that Rosenstein would seek to run out the statute of limitations on various allegations. 

Awans

Gohmert has been tirelessly pushing for the DOJ to investigate the Pakistani IT family which had unprecedented access to top secret information via computers and other electronic devices belonging to House Democrats. 

Gohmert gave a rousing speech in early June, imploring the DOJ to act on the Awan case, noting that there are “dozens and dozens” of potential felonies involved.

“The FBI has had opportunities to have those invoices presented to them, and each time, they have instructed, ‘Don’t bring any of those documents; we don’t want to see any of that, we just want to talk to [him],’” Gohmert said. Instead, the FBI has insisted that there’s “no evidence of anything other than this false statement.”

“They have instructed, ‘We don’t want to see the documents that proved those cases.’ They’re readily available, for any federal officer that wants to see them, but [the FBI] don’t want to see them, so they can keep reporting to the new U.S. attorney that there’s no evidence, nothing there,” Gohmert said.

And for his efforts to get to the bottom of two massive D.C. scandals, Rep. Louie Gohmert now says he’s being spied on. 

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Authored by Nicholas Colas via DataTrekResearch,

Prior to starting DataTrek with Jessica, I spent +30 years in the equity business, first in fund operations, then stock research, hedge funds, and finally writing market strategy for a brokerage firm. That time span represents an entire cycle for “Wall Street” as a business, from starting up a handful of mutual funds that charged 8% loads in 1984 to trading stocks at 0.2% commissions for ETFs that charge 0.04%. It has truly been the proverbial “Long strange trip”.

There are many causes for this downward slide, and each carries a well-worn narrative. A few standouts:

• Declining asset management fees: Passive investing has seriously dented the popularity of active management, which has admittedly struggled to consistently outperform in the last 20 years of equity market volatility.

• Lower sell side research margins: Wall Street analysts were hurt by Reg FD and AC, which seriously limited their ability to get a non-public (but once legal) investment edge and deliver that to clients for a premium price.

• Lower hedge fund profitability: Low barriers to entry allowed too many hedge fund startups, compressing fees for even truly talented managers.

• Lower equity trading profits: Decimalization, market fragmentation, higher technology costs and long stretches of central bank-driven volatility suppression have killed desk profitability.

Now, equities are an optimist’s game, and there’s no shortage of hopeful narratives that argue we’re at a bottom for many of these trends. The Fed is cutting back on its balance sheet, so volatility will return and lift trading profitability. The next bear market will see investors come back to active management. Asset allocators are more selective now, so the best hedge funds will regain pricing power.

We prefer to consider the decline of the US equity business writ large (both buyside and sellside) through a different lens: long term US equity returns.These, after all, are what pay for the money management, trading, and research services Wall Street has to offer. It is a lot easier to justify higher fees if returns are strong. And essentially impossible to pass along most costs when they are not.

Here are the trailing 20-year compounded average returns for the S&P 500 every 5 years since 1980, underlying data courtesy of NYU Professor Aswath Damodaran:

• 1980: 8.3% 20-year trailing nominal returns
• 1985: 8.6%
• 1990: 11.1%
• 1995: 14.5%
• 2000: 15.5%
• 2005: 11.9%
• 2010: 9.1%
• 2015: 8.1%
• 2017: 7.1%

This data puts trends in the health of the US equity business in a different light than the narratives we outlined earlier. Equity owners – the ones that actually pay for services like money management, research and trading – have scaled their expenses based on their realized returns. For example:

• The year 1999 at 17.7% 20-year trailing returns was the peak back to 1928, the start of this data series. Ask any old Wall Street professional and they will tell you that was exactly the peak of the US equity business.

• As of the end of 2017, 20-year trailing returns are just 7.1%, lower even than 1961 – 1980. And the same pros will tell you things are, well, very difficult.

This admittedly non-consensus framework also allows us to take a stab at forecasting the future health of the US equity business. Everyone from Vanguard’s research group to Cliff Asness thinks the Shiller PE (current price divided by 10-year average earnings) is a good heuristic to estimate future returns, so let’s go with that:

• Current Shiller PE: 32
• Average real future 10 year returns when the Shiller PE is between 25 and 46 (i.e. like now): 0.5% (see link to a paper with the data below)
• Assuming 2% inflation, that puts expected future returns at 2.5%

The bottom line here: if this lackluster future return forecast comes to pass, the US equity business will continue to see fee/commission compression for years to come. Asset owners have no choice but to continue to cut their expenses, which are (inconveniently) also the Street’s revenues. That applies equally to the buyside (more passive investing, lower asset management fees) and the sell side (less ability to pay for research and trading).

We will finish on an upbeat note: the current and most likely future environment for the US equity business is ripe for further wide-scale disruption. Asset owners have ripped most of the obvious costs out of the existing system, but if returns are really going to be 2.5% then there will need to be further innovation to incorporate that reality. In that respect, Wall Street is no different from any other American industry. Growth and success will belong to the disruptors rather than incumbents.

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Even Eva Peron would be crying…

The last 24 hours have not been great for Argentina.

First – despite endless jawboning about The IMF bailout and how it will secure the nation’s future and enable reforms, the currency collapsed to a new record low on Friday…

Second – the central bank decided to step in with their newly minted IMF funds and blew over a billion dollars to buy pesos, managing a very modest bounce (but ARS still closed down 3% on the day)

Third – IMF officials spoke with Argentina’s union leaders, warning of the social impact of the ongoing disruptions.

IMF spokesman Raphael Anspach confirmed Werner and Cardarelli’s participation in the call, which “reiterated the main elements of the IMF support to the government’s economic plans, including the measures aimed at supporting the most vulnerable in Argentine society.”

And union officials told the media that The IMF was not worried about the ongoing collapse:

“They are betting on a virtuous behavior by private investors, with the economy falling in the third and fourth quarters of 2018, but rebounding 1.5% in the first quarter of 2019”

“They were not worried about the flight of capital”

Fourth, and finally, and perhaps worst of all – Argentina is now out of The World Cup

A nation mourns.

Currently Argentina fans crying 😂😂 pic.twitter.com/gqAV4LVzTK

— Milky BacWoodz (@loufoq_) June 30, 2018

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Authored by Daniel Nevins via FFWiley.com,

Here are six things you might like to know about the Congressional Budget Office’s 2018 Long-Term Budget Outlook, which was released on Tuesday.

1. The CBO’s baseline scenario shows federal debt held by the public rocketing upward at a trajectory not seen since 2009, but this time on a sustained basis and breaching 150% of GDP by 2048. Here’s the chart:

2. In case GDP percentages are too abstract for you, we can translate into something more meaningful. Using the CBO’s own population and inflation figures, we convert the projections to dollar amounts per capita (in constant 2018 $), and then with figures from usdebtclock.org, we estimate dollar amounts per taxpayer. Here’s the adjusted chart:

3. But the baseline scenario is two tads optimistic. First, it assumes the elimination of scores of tax breaks that in real life Congress extends every year-end, routinely, as if mailing the annual holiday cards. Second, the baseline-scenario economy runs more smoothly than Justify—labor productivity growth rises by over half a percent from the 1% pace of the last 12 years, and the average unemployment rate over the next 30 years drops to an all-time record low of 4.6%. (The lowest 30-year average on record is 5.1% from 1948 to 1977, and that result was weighed down by conscription during the Korean and Vietnam Wars.) Here’s a chart showing just how optimistic the CBO is with regard to the unemployment rate:

4. If we construct an alternative scenario to allow the usual legislative “fixes,” while adding a moderate recession to the otherwise pristine economic outlook, we find that debt increases almost 50% faster than shown in the baseline. (You can find our analysis here.) For example, instead of breaching $200K per taxpayer in 2034 as in the chart above, debt breaches $200K per taxpayer as early as 2028. This won’t surprise our regular readers, since we’ve been producing our alternative debt scenario for six years now. But this time we have company—our scenario shows nearly the same 2028 estimates as the “business as usual” and “recession” scenarios produced recently by Goldman Sachs and summarized in this report by ZeroHedge (recommended).
5. The CBO is increasingly warning of a potential fiscal crisis, as shown in the next chart. We extrapolated the chart’s upward trend (layering a projection on a projection) and reached a conclusion that in 2047 the CBO will rename its annual budget report The Coming Fiscal Crisis, and by 2059 it’ll be distributed by the Office of Financial Crises (OFC).

6. As a reminder of what “debt held by the public” means, all figures mentioned above exclude the roughly $5 trillion that the government owes the Social Security and Medicare trust funds and various employee retirement funds (intragovernmental debt). Congress justifies excluding these liabilities by pointing out that it can eliminate them with the stroke of a pen—it would only need to enact legislation saying it doesn’t really have to pay these amounts. Of course, politicians remind us all the time that they’re desperate to take away our Social Security and Medicare benefits—especially when they’re on the campaign trail—so their justification is totally consistent.

Another Fun Fact

If we add intragovernmental debt to our alternative scenario to project “gross” debt, it shows debt per taxpayer breaching $200K twice as quickly—in 2023—at which time the debt-to-GDP ratio would be 120%. That figure ties into research we conducted a few years ago using hundreds of years of datamaintained by Harvard’s Kenneth Rogoff and Carmen Reinhart, along with about twenty other data sources. We found that no country has ever reduced its debt-to-GDP ratio from over 120% to under 90% without either 1) haircutting its creditors in a restructuring or outright default, 2) achieving a budget surplus over the debt reduction period, and not just a primary surplus but an honest to-goodness surplus of the type America has only seen twice in the last 57 years or 3) both.

In other words, the popular belief that public debt can be “inflated away” fails to explain how debt problems were resolved through history. Generally, financial repression was more powerful than inflation (without repression, inflation drives up interest costs, sometimes worsening debt ratios), but neither has solved a severe debt problem without a more important role being played by payment adjustments, fierce fiscal discipline or both. (For details of every episode of gross debt exceeding America’s current total of about 105% of GDP, see our book Economics for Independent Thinkers.)

A Final Fun Fact

When the CBO evaluated its forecasting accuracy in 2015, it found that its projections for government revenues for five years into the future were 5.3% higher than actual outcomes, on average, over 28 years of forecasting. It attributed the big forecasting errors mostly to “the difficulty of predicting when economic downturns will occur,” while noting that the largest errors occurred at business-cycle peaks.

In other words, like everyone else, the CBO becomes overly optimistic as economic expansions age. (We’re all human, right?) Having discovered this bias, you might have expected to see upward adjustments to the unemployment rate projections, the unemployment rate being one of the biggest revenue drivers and a budget-killer in recessions. But after checking the full forecasting history for the unemployment rate, we found that:

• The projected 30-year average of 4.6% (shown in the chart above) is the lowest ever

• The projected endpoint of 4.7% (for years 2037 to 2048) is also the lowest ever

• Both of those figures are significantly below corresponding figures from 2015 (5.3% for both the average and the endpoint), when the CBO revealed its optimistic forecasting bias.

So much for learning from your mistakes. When it comes to unemployment, this is the most optimistic outlook ever, and yet it still results in federal debt exploding higher.

Conclusions

Argentina, here we come?

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Mexico – where over 100 politicians have been killed in the past year – will hold its general election on July 1, electing a new president, 128 members of the Senate and 500 members of Congress, while local elections will also be taking place in 30 of 32 Mexican states. Recent polling overwhelmingly suggests that the Latin American country will be the latest domino to fall to the global anti-establishment wave, and will elect its first “leftist populist” – some say socialist president – in a generation with potentially far-reaching consequences for the country’s oil industry, trade policy, crime fighting and relations with the United States.

Here are the main highlights of what to look for tomorrow courtesy of RanSquawk:

• Presidential race is widely expected to be won by Andrés Manuel López Obrador of the MORENA party
• Key battle grounds expected to be in the Lower House and Senate
• Relief rally in MXN expected should a “pragmatist” tone be struck, otherwise probabilities for a “post-election sell off [are] high” according to Wall Street analysts

The Preliminary election result program (PREP) begins reporting vote counting at 2100EST/0200BST, with updates every 20 minutes, and preliminary results expected about midnight EST. Conteo Rápido will be providing estimates throughout the day of voting, based on a sample of 7,700 houses. Legally recognised results are not confirmed until the 4th July when the official computing takes place.

VOTING SYSTEM

Presidential candidates in Mexico follow a “relative majority” system for seats, wherein the winning candidate is the one who polls more than other candidates within the voting (Note: doesn’t necessarily implicate a majority). Two systems are used for congressional elections, where 300 members of congress in single-member constituencies are elected through a “first past the post” voting system, with the remaining 200 elected through proportion representation. Senate members are also elected through 2 different systems, with 96 members of 32 3-seat constituencies based on state elections, and the remaining 32 are elected through proportional representation.

COALITIONS & CANDIDATES

Andrés Manuel López Obrador – Juntos Haremos Historia (MORENA, PT & PES) – Andrés Manuel López Obrador (AMLO) has run on a populist platform of economic reform that has been underlined by a desire to freeze prices of gasoline in Mexico for 3 years, as well as a reduction of external investment in the energy sector. He has also suggested an increased level of social spending that will be funded by increased debt issuance.

NOTE: AMLO is also known to be a “flip-flopper” on policy, with regular policy stance changes throughout his campaign. The coalition formed exemplifies this, as it is comprised with the PES party that has stated the alliance is “strictly electoral” and they are likely to vote differently to AMLO’s MORENA party in the future as “[their] convictions are different from [MORENA’s]”.

AMLO ran for president in 2006 and 2012 but lost both elections, first to Felipe Calderon, then to Enrique Pena Nieto on both occasions by slim margins. This year, Lopez Obrador hopes to ride the wave of anti-government anger over corruption, rising violence and tepid economic growth.

José Antonio Meade – Todos por México (PRI, PVEM & Nueva Alianza) – Meade will be the candidate of the most economically favourable coalition Todos por México, with centrists PRI the most popular party within the coalition. Meade will be replacing the incumbent President Nieto, and the party has been judged to be a market positive as it offers fiscal continuity to a growing economy.

Ricardo Anaya – Por México al Frente (PAN, PRD & MC) – Anaya will head the Por México al Frente coalition and is the current President of the PAN party. The right leaning PAN party is an advocate for privatisation and advocates free enterprise and thus free trade agreements (market positive for the NAFTA deal).

KEY ISSUES (via Reuters):

 

POLLING

Considering the widely expected victory for AMLO in the Presidential race, with most polls suggesting the left-wing candidate will have a double-digit lead over his competitors, the main battle ground will be the Lower House and Senate. ABN AMRO and Barclays have both set their expectations >80% for the Lower house to be led by Juntos Haremos Historia.

The senate race will be the most disputed, with both ABN AMRO and Barclays expecting AMLO’s coalition not attaining a simple majority, with Barclays saying: “this chamber would become the main institutional balance against potential radical changes. For example, the Senate needs to approve the indebtedness ceiling, all the laws and appointments.”

At the moment, MORENA leads the Senate race in 20 out of 32 states and is in second place in five states. Should they win in 24 states, come in second place in 4, and AMLO wins with 45% of total votes, they will have 70 seats in senate out of a possible 128. Whilst this will be the least market friendly possibility as it will allow for a more conciliatory sitting in the senate with a simple majority. ING have stated that the 2/3rd majority required to pass reform with resistance is an unlikely possibility, however, with the MORENA government likely having to rely on defections and other left-leaning parties to pass legislation.

MARKET IMPLICATIONS

ING have suggested that if AMLO takes control of both the presidential seat and majorities in both houses by a large margin, the current sell off being seen in Mexican assets could deepen. This is associated with fears on lowering checks on increased spending. Whilst this may provide a short-term boost to growth this will likely be mitigated by potentially increased interest rates after a faltering budget picture post-increased social spending with debt issuance, as according to Christopher Dhanraj of BlackRock. Alongside this he has highlighted negative potential effects for inflation.

A dampener may have been put on these worries, however, with AMLO’s recent commentary suggesting that spending will be maintained at current levels, as well as supporting a free-floating MXN and work towards a NAFTA deal.

Significant concerns have been expressed about possible barriers to entry in the Mexican energy sector with suggestions that private investment could be halted, and subsidies increased in gasoline (as well as food). This has the intention of freezing gasoline prices for “3 years” post-election, but has found opposition from Mexico’s Energy Minister, whom has said that a better method must be found to avoid price spikes.

Due to this, short-term focus has been placed on AMLO’s commentary post-election with Barclays expecting a “pragmatic” AMLO initially so as to “to avoid facing unnecessary pressure from markets”. Should this possibility materialise SocGen expect a “relief rally” to ensue for the MXN on the short term, otherwise ING state that probabilities for a “post-election sell off [are] high”.

NAFTA is often stated as the main medium/long-term focus, with Aberdeen Asset Management’s Stanners expecting USD/MXN to go past 22.0000 should Trump pull-out of NAFTA, but with the potential for a move toward 17.0000 should the AMLO Government have a more moderate tilt and manage a successful NAFTA renegotiation.

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