Sen. Ted Cruz (R–Texas) and his wife were heckled by protesters as he dined last night at a restaurant in Washington, D.C. If the protesters’ goal was to force Cruz to find somewhere else to eat, then they were successful, though their actions accomplished little else.
A pair of videos posted to Twitter by the group Smash Racism DC shows the protesters loudly chanting “We believe survivors!” In one of the videos, a woman identifying herself as a Cruz constituent and a survivor of sexual assault asks the senator about Supreme Court nominee Brett Kavanaugh, who faces allegations of sexual assault. Cruz, a member of the Senate Judiciary Committee, has previously expressed his support for the judge’s nomination.
Responding to the woman’s questions, Cruz simply says: “God bless you, ma’am.” In the other video, Cruz politely asks some of the protesters to move out of the way so he and his wife Heidi can leave the restaurant. He says again: “God bless you.”
Near the end of the latter video, the protesters are heard being told to “leave the premises.” They comply, but not before levying additional verbal attacks on Cruz and Kavanaugh.
If this story sounds familiar, it’s because somewhat similar things have happened before. In June, protesters heckled Homeland Security Secretary Kirstjen Nielsen while she ate at a Mexican restaurant. Later than month, the owner of a Virginia eatery asked White House Press Secretary Sarah Huckabee Sanders to leave the premises. And in July, White House Senior Adviser Stephen Miller was so upset after a bartender followed him out of a restaurant cursing at him that he threw away $80 worth of sushi, according to The Washington Post.
If business owners want to refuse service to officials they dislike, that should be their right (as Reason‘s Robby Soave argued in June). And citizens certainly have the right to call out politicians while they eat. Whether they should is another question. Not every possible protest makes sense. It’s not clear what protesters gained by forcing Ted Cruz and his wife to end dinner early. Their actions were praised by a handful of left-wing figures on Twitter, and that praise was then drownedout by outragedconservatives. The hecklers got the attention they wanted, but it’s unlikely that their actions actually changed anything.
Rep. Beto O’Rourke (D–Texas), who is challenging Cruz for his Senate seat, took the high road this morning and condemned the protesters’ tactic:
Not right that Senator Cruz and his wife Heidi were surrounded and forced to leave a restaurant last night because of protesters. The Cruz family should be treated with respect.
Thursday is shaping up to be the Trump presidency’s “Gunfight at O.K. Corral.”
That day, the fates of Supreme Court nominee Brett Kavanaugh and Deputy Attorney General Rod Rosenstein, and much else, may be decided.
The New York Times report that Rosenstein, sarcastically or seriously in May 2017, talked of wearing a wire into the Oval Office to entrap the president, suggests that his survival into the new year is improbable.
Whether Thursday is the day President Donald Trump drops the hammer is unknown.
But if he does, the recapture by Trump of a Justice Department he believes he lost as his term began may be at hand. Comparisons to President Nixon’s Saturday Night Massacre may not be overdone.
The Times report that Rosenstein also talked of invoking the 25th Amendment to remove Trump suggests that Sen. Lindsey Graham had more than a small point on “Fox News Sunday”:
“There’s a bureaucratic coup going on at the Department of Justice and the FBI, and somebody needs to look at it.”
Indeed, they do. And it is inexplicable that a special prosecutor has not been named. For while the matter assigned to special counsel Robert Mueller, to investigate any Trump collusion with Russia in hacking the emails of the Clinton campaign and DNC, is serious, a far graver matter has gotten far less attention.
To wit, did an anti-Trump cabal inside the Department of Justice and the FBI conspire to block Trump’s election, and having failed, plot to bring down his presidency in a “deep state” coup d’etat?
Rosenstein’s discussion of wearing a wire into the Oval Office lends credence to that charge, but there is much more to it.
The story begins with the hiring by the Clinton campaign, though its law firm cutout, in June 2016, of the dirt-divers of Fusion GPS.
Fusion swiftly hired retired British spy and Trump hater Christopher Steele, who contacted his old sources in the Russian intel community for dirt to help sink a U.S. presidential candidate.
What his Russian friends provided was passed on by Steele to his paymaster at GPS, his contact in the Justice Department, No. 3 man Bruce Ohr, and to the FBI, which was also paying the British spy.
The FBI then used the dirt Steele unearthed, much of it false, to persuade a FISA court to issue a warrant to wiretap Trump aide Carter Page. The warrant was renewed three times, the last with the approval of Trump’s own deputy attorney general, Rosenstein.
Regrettably, Trump, at the request of two allies — the Brits almost surely one of them — has put a hold on his recent decision to declassify all relevant documents inside the Justice Department and FBI.
Yet, as The Wall Street Journal wrote Monday, “As for the allies, sometimes U.S. democratic accountability has to take precedence over the potential embarrassment of British intelligence.”
Thursday’s meeting between Trump and Rosenstein will coincide with the Judiciary Committee’s hearing into the charge by Dr. Christine Blasey Ford that, as a 15-year-old, she was sexually assaulted by 17-year-old Brett Kavanaugh, Trump’s nominee to the Supreme Court.
This weekend brought fresh charges, from a Yale classmate of Kavanaugh, Deborah Ramirez, that at a drunken party in their freshman year, Kavanaugh exposed himself.
Kavanaugh has fired off a letter to Sens. Chuck Grassley and Dianne Feinstein, chairman and ranking member of the Judiciary Committee, calling the accusations “smears, pure and simple.”
Kavanaugh continued:
“I will not be intimidated into withdrawing from this process. The coordinated effort to destroy my good name will not drive me out. The vile threats of violence against my family will not drive me out. The last-minute character assassination will not succeed.”
What is at stake in Thursday’s appearance by Kavanaugh and Ford is huge. A successful defense of his good name could mean Kavanaugh’s swift elevation to the high court, a historic victory for the GOP’s judicial philosophy, and the culmination of a decades-long campaign dating back to the Earl Warren era of the Supreme Court.
As for the judge himself, the issue is not just his behavior as a teenager and university student, but his credibility and honor as a man.
He has asked friends and allies to trust and believe him when he says that he is a victim of a character assassination steeped that is rooted in ideology and lies.
Thus far, no credible individual has come forward to corroborate the charges against him when he was at Georgetown Prep or at Yale. And almost all who knew him testify to his character.
* * *
We are often told that the moment we are in has historic significance and will be long remembered. Yet, how many can still recall what the “resister” in the Trump White House or Cabinet wrote in his or her anonymous op-ed in The New York Times?
How Kavanaugh conducts himself Thursday, however, and whether he is elevated to the court, could decide the fate of constitutional conservatism and the Republican Congress in 2018.
In a stunning vote of “no confidence” in the US monopoly over global payment infrastructure, one month ago Germany’s foreign minister Heiko Maas called for the creation of a new payments system independent of the US that would allow Brussels to be independent in its financial operations from Washington and as a means of rescuing the nuclear deal between Iran and the west.
Writing in the German daily Handelsblatt, Maas said “Europe should not allow the US to act over our heads and at our expense. For that reason it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building up an independent Swift system,” he wrote.
Maas said it was vital for Europe to stick with the Iran deal. “Every day the agreement continues to exist is better than the highly explosive crisis that otherwise threatens the Middle East,” he said, with the unspoken message was even clearer: Europe no longer wants to be a vassal state to US monopoly over global payments, and will now aggressively pursue its own “SWIFT” network that is not subservient to Washington’s every whim.
Many discounted the proposal as being far too aggressive: after all, a direct assault on SWIFT, and Washington, would be seen by the rest of the world as clear mutiny against a US-dominated global regime, and could potentially spark a crisis of confidence in the reserve status of the dollar, resulting in unpredictable, and dire, consequences.
However, despite the diplomatic consequences, Europe was intent on creating some loophole to the US ability to weaponize the global currency of account at will, something observed most recently as part of Trump’s latest sanctions on Iran, and as a result, late on Monday, the European Union said that it would establish a special payment channel to allow European and other companies to legally continue financial transactions with Iran while avoiding exposure to U.S. sanctions.
The move, as the WSJ notes, “is a direct rebuke of President Trump’s policy on Iran and his decision to withdraw from the nuclear deal in May,” and sets the stage for a confrontation between the U.S. and Europe over the treatment of Iran, the payment for Iran oil, and potentially, jeopardizing the reserve currency status of the dollar itself.
While keeping SWIFT as is, for now, the EU’s foreign-policy head Federica Mogherini side by side with Iran’s Foreign Minister Javad Zarif announced a “special purpose vehicle” jointly, in English and Farsi, after a meeting at the U.N. of the parties still committed to the deal—Iran, EU, U.K., France, Germany, Russia and China. In fact, everyone but the US.
EU foreign policy chief Federica Mogherini (r), speaking alongside Iranian Foreign Minister Mohammad Javad Zarif
According to Mogherini, the plan to create the SPV “will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran, and this will allow European companies to continue trade with Iran” despite Trump’s opposition.
As Bloomberg’s Leonid Bershidsky explains, with Iran sanctions back, it is clear to the Europeans (as well as the Chinese and Russians) that any future transactions with Iran must go through entities insulated from the American financial system.
In a July 2018 report, Axel Hellman of the European Leadership Network think tank and Esfandyar Batmanghelidj of the Iranian company Bourse & Bazaar proposed “a new banking architecture” in response to the U.S. sanctions, relying on the existing system of “gateway banks,” such as the Hamburg-based Europaeisch-Iranische Handelsbank, and the European branches of private Iranian bank. “A further third category of gateway banks can be envisioned,” they wrote, “which would comprise of special purpose vehicles established by European governments, or as part of public-private partnerships in order to facilitate Iran trade and investment.”
The new plan focuses on this third option.
Mogherini further indicated that Germany, France and the U.K. would set up a multinational state-backed financial intermediary that would deal with companies interested in Iran transactions and with Iranian counter-parties. Such transactions, presumably in euros and pounds sterling, would not be transparent to American authorities. European companies dealing with the state-owned intermediary technically might not even be in violation of the U.S. sanctions as currently written.
And, in a potentially massive development, the system would be likely be open to Russia and China as well as it would enable the world’s economies to trade with each other, fully independent of SWIFT.
Europe would thus provide an infrastructure for legal, secure sanctions-busting — and a guarantee that the transactions would not be reported to American regulators.
That said, Washington would not be without recourse, although at that point, all the U.S. could do is sanction the participating countries’ central banks or SWIFT for facilitating the transactions (if the special purpose vehicle uses SWIFT, rather than ad hoc messaging).
That, Hellman and Batmanghelidj wrote, would be self-defeating: “There are two possible outcomes if these institutions proceed to work with Iran despite U.S. secondary sanctions. Either U.S. authorities fail to take enforcement action given the massive consequences for the operations and integrity of the American financial system, serving to “defang” the enforcement threats and reduce the risk of European self-sanctioning on the basis of fear, or U.S. authorities take such an enforcement action, a step that would only serve to accelerate European efforts to create a defensible banking architecture that goes beyond the Iran issue alone.”
Europe, naturally, needs a “neutral” pretext to implement this SPV, and that would be Brussels’ desire to continue transacting with Iran:
“We are not backing down [on the Iran nuclear agreement],” said a European diplomat. He said the speeches of European leaders at a Security Council meeting Mr. Trump is hosting on Wednesday on nonproliferation, including Iran, will reflect the Monday night statement.
Additionally, as basis for the potentially revolutionary development, the participants of the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action or JCPOA, “underlined their determination to protect the freedom of their economic operators to pursue legitimate business with Iran.”
While the details of the SPV mechanism — which would be set up in future meetings with technical experts — were still to be determined, with the United States and the dollar dominating so much of global trade the statement said the new mechanism would “facilitate payments related to Iran’s exports (including oil) and imports, which will assist and reassure economic operators pursuing legitimate business with Iran.”
“In practical terms, this will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world,” she told reporters.
As a result of Trump’s aggressive new sanctions on Iran, and potentially more sanctions after November as Trump hinted during his UN speech, European companies have been flocking out of Iran’s market and ending contracts to avoid risking U.S. sanctions. Meanwhile, Iran – which has argued that the 2015 deal entitled the Islamic Republic to benefit from lifting of sanctions and to enter the world market – has seen its economy stumble, with the currency collapsing almost daily against the U.S. dollar since the U.S. exited the deal.
Telegraphing that Europe will continue cooperation with Iran despite US sanctions, Mogherini said Iran has remained fully committed to its obligations under the nuclear deal, as certified by a dozen reports from U.N.’s nuclear watchdog, the International Atomic Energy Agency. She also hailed the 2015 agreement as a major achievement for diplomacy and nonproliferation and “deeply regrets” what she called the unilateral withdrawal of the U.S. from the deal.
* * *
In any case, creating “a defensible banking architecture” may well be the end goal for the Europeans, China and Russia, anyway because, as noted above, Iran is merely a convenient pretext: after all, the nuclear agreement is one of the few things that unite the EU, China and Russia against the U.S.
But, as Bershidsky notes, “working to undermine the dollar’s global dominance isn’t ultimately about Iran at all. In his recent State of the European Union speech, European Commission President Jean-Claude Juncker called for strengthening the euro’s international role and moving away from traditional dollar invoicing in foreign trade.”
China and Russia have long sought the same thing, but it’s only with Europe, home of the world’s second biggest reserve currency, that they stand a chance of challenging American dominance.
While it remains to be seen if the “special purpose vehicle” would entice European companies such as France’s Total or Germany’s Daimler to get back into business with Iran remains to be seen, the optics of the move by the European Union together with China and Russia to defy the U.S. signaled continued criticism of the Trump administration for its decisions on Iran.
More importantly, it strikes at the heart of the current economic and financial system which is held together by the dollar. By providing an alternative, the global #resistance sets the stage for what potentially could be the ascendancy of other global reserve currencies, and/or a world of bilateral trade agreements which bypass both the US Dollar and Swift entirely, eliminating Washington’s “veto powers” on global trade.
Given U.S. law enforcement’s wide reach, there would still be a risk involved, and European governments may not be able to protect the companies from it. Some firms will be tempted to try the new infrastructure, however, and the public isn’t likely to find out if they do. In any case, in response to Trump’s aggressive foreign policies and “weaponization” of the dollar, it is worthwhile for Europe, Russia and China to experiment with dollar-free business.
But this brings up the bigger point: no currency’s international dominance has lasted forever, and there’s no reason for the U.S. dollar to be the exception to this rule.
Meanwhile, as Bershidsky concludes, “Trump’s confidence in his ability to weaponize the dollar against adversaries and stubborn allies alike could eventually backfire for the U.S. as efforts to push the dollar off its pedestal grow ever more serious.”
Don’t say things. What you are stands over you the while, and thunders so that I cannot hear what you say to the contrary.
– Ralph Waldo Emmerson
This past Friday, PayPal informed Alex Jones’ Infowars it was severing ties with the website and that it had ten days to find an alternative payment processor. The news transported me back to that summer day a little over six years ago when I first acutely recognized the power and potential of Bitcoin, and then publicly decided to embrace it.
By August 2012, Wikileaks had been under a financial blockade for nearly two years. It was at this point I came across an article by Jon Matonis published in Forbes, detailing the predicament as well as the clear threat this posed to freedom of the press and free speech in general. He noted:
After yesterday’s ugly, tailing 2Y auction, moments ago the Treasury sold $38 billion in 5 Year paper in an auction that was just as forgettable, and perhaps just as weak.
The high yield came in just shy of 3%, or 2.997%, a generous 0.4bps tail to the 2.993% When Issued, the biggest since June; the stop was nearly 24 bps higher than August’s yield of 2.765%, and the highest stop September 2008.
The internals were similarly ugly, with the Bid to Cover sliding to 2.39 from 2.49 last month, below the 2.53 six auction average, and the lowest going back to December 2017. Just like yesterday, Indirect demand slumped, dropping from 66.2% last month to 57.9%, below the 62.6% average, while Directs took down 9.2%, in line with the 9.0% in August, leaving 32.9% to Dealers, the the highest since December 2017.
Whether the subdued demand for auctions this week is a function of the Fed’s imminent rate hike, due to a pull back in pension demand or the absence of Chinese and Japanese buyers yesterday (they should be back today), is unclear but the curve tightening along the belly is accelerating, with the 5s10s now just over 10bps and as the curve continues to pancake, the danger is of an all out flattening, something which the Fed will surely want to avoid.
From Ottawa to Oslo, policy makers have been considering whether that level of consumer-price growth, a Holy Grail for the world’s major central banks over the past quarter-century, is still relevant.
The 2% target was always an arbitrary figure, some economists argue, and even if it was optimal two decades ago, that is no longer the case given deep changes that have since reshaped the global economy.
Trouble is, it isn’t clear what inflation rate would be better.Dozens of academic studies that considered that question have produced answers ranging from 6% to less than zero, according to a survey published last year by Federal Reserve economist Anthony M. Diercks.
“Whatever [inflation] rate was thought to be optimal in 2006 or before is now too low,” says Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., who has called for a 4% target.
Factors such as aging populations, low economic growth and higher savings rates are working to push down the neutral interest rate, at which the economy is growing at a sustainable rate for the long run and inflation is stable. As a result, central banks run a greater risk of taking benchmark interest rates to zero or below when seeking to support growth.
Demographics
Logic would dictate that if demographics work to hold the inflation target lower, then the target ought to be lower not higher.
Lesson from Japan, ECB
Japan provides ample evidence of what happens to savers when the central bank holds down rates hoping for higher inflation. All Japan did was accumulate debt. Inflation went nowhere.
What good does it do to set a target when you struggle for decades in the case of Japan and one decade in the case of the ECB to hit your target?
Fundamentally, these are not even the correct question, but they do highlight the silliness of the discussion which is asinine on many levels.
Absurd Discussion, Multiple Levels
Central banks do not even know how to measure inflation. Yes, they have there smoothed formulas etc. But the alleged “average” rate of inflation is “average” nonsense. Home prices are not in the CPI nor are asset prices in general. Central banks have not once in history spotted a bubble. Bernanke and Greenspan went out of there way to deny them. If you cannot spot bubbles, how the hell can you possibly know if interest rates are too high or too low?
Central banks set inflation targets and fail to hit them, then make up excuses such a Janet Yellen’s famous dissertations: 1) It’s transitory and 2) the Phillips Curve isn’t dead yet. This is despite the fact Fed studies show the Phillips curve is total nonsense.
In practice, central banks do what they want, targets be damned. If the Fed wants to hike it will, if for no other reason than to have “ammunition” for the next decline. Group think is at work.
Implicit in this discussion is the notion that real wages will rise. Alternatively, Blanchford and other economists failed to assume anything at all. Real wages, even nominal wages may barely rise, if at all.
The BIS conducted a study of deflation and recessions over a long period of time. The BIS found that falling prices are not a problem except when accompanied by asset price deflation. Thus, despite all of the nonsense about 4% or even 6% rates, which by the way would crucify those on fixed incomes, there is nothing wrong with negative inflation.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, bank loans become impaired and debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
It would behoove the Fed, Olivier Blanchard, and every other economist to take a look at Japan as well as the BIS study.
They Do What They Want
The Fed, Olivier Blanchard, BOJ etc, are not interested in reality. They are all interested in absurd theories that do not work in the real world.
Moreover, the Fed, BOJ, and ECB will all do what they want, targets be damned, with no regards to asset bubbles, demographics, or even a decent measure of what inflation really is.
I have a better way: Get rid of central banks, their bubble-blowing polices, charlatan economists preaching about inflation targets, and fractional reserve lending.
Despite the absurdity of it all, economists still place faith in models proven wrong. Nearly every week I see someone proclaim the Phillips Curve is about to work or is working again.
In reality, since the curve is totally random, it’s bound to look as if it’s working about half the time.
With the ink on Trump’s (somewhat less) fiery UN speech still fresh, moments ago the White House announced that Trump would hold a press conference at 5pm on Wednesday.
President @realDonaldTrump will hold a press conference tomorrow at 5pm to discuss the #UNGA trip and news of the day.
While the discussion of the UNGA trip is to be expected, speculation has arisen about what “news of the day” will be, with some wondering if Trump will announce he is dumping Kavanaugh, while others suggesting Trump could take the opportunity to provide more clarity on Rosenstein’s fate. In any event, and the fact that it is after market hours, likely means that it will have notable implications.
It was February 15, 1898. The American Civil War was a distant memory, and the United States had become the largest economy in the world.
Still, something was missing in the Land of the Free: colonies.
More than 100 years before, other leading powers like Spain and Britain had established colonies all over the world back when the US was just an infant.
By the time the US became wealthy and powerful, the Age of Imperialism was over– all the exotic foreign lands had already been claimed.
So, in 1898, the US decided if it couldn’t establish its own colonies, it would take them from somebody else…
Cue the Spanish American War.
A US naval ship called the Maine was miraculously sunk off the coast of Cuba on February 15, 1898. The US immediately blamed Spain, and declared war two months later on April 25th.
Spain had no desire to go to war… and was flummoxed at the accusation. They claimed they had nothing to do with the Maine’s sinking and had no possible reason to attack.
More importantly, by the late 1800s, Spain was broke and losing control of its colonies– an empire in decline. That made Spain the perfect target.
The US, on the other hand, was so prosperous and flush with cash, it simply wrote a check to fund the war (oh how times have changed).
And in less than three years, the remains of the Spanish Empire were virtually disassembled, and the US took possession of several colonies including the Philippines… and Puerto Rico.
Puerto Rico has remained a US territory ever since… going on 120 years.
Now, there a few differences between a US territory and a state.
First of all, Puerto Ricans are US citizens with US passports. And they use the US dollar as currency.
Traveling to/from Puerto Rico from the US mainland is no different than traveling from Texas to Oklahoma.
(My lawyer is down here visiting me today from New York, in fact– it’s just a domestic flight from JFK on Jet Blue.)
But, in other way, Puerto Rico is separate from the United States. Taxes are a great example– Puerto Rico has a completely different tax system that is disconnected from the IRS.
So if you’re a Puerto Rican resident earning your income in Puerto Rico, you no longer have to pay US state or federal tax.
Puerto Rico is also different because residents of the territory can’t vote in the US general presidential election.
So, essentially, Puerto Ricans are subject to US federal laws without participating in the election process.
This bugs a lot of locals… and over the past several decades there have been a number of movements to try to make Puerto Rico the 51st state.
The most recent of these movements was launched again last week by Puerto Rico’s governor, who used the one-year anniversary of Hurricane Maria destroying the island to demand that Congress consider statehood for Puerto Rico.
The governor says Puerto Ricans have been treated like “second-class citizens,” and he’s questioning how the US can preach democracy and freedom around the world with this two-tier citizenship structure.
Now let’s be honest– there’s practically zero chance of Puerto Rico becoming the 51st state.
If that happened, then the US federal government would have to do the same with its other territories– Guam, Northern Mariana Islands, US Virgin Islands, American Samoa… so there would end up being FIVE new states.
Adding five new states to the US would be so painfully time consuming and suck up so many government resources, it would make the UK’s “brexit” departure from the European Union look like a cakewalk.
And the federal government definitely doesn’t want this.
My guess is that the local government here is just trying to kick up a bunch of noise and threats, hoping to get Congress to cough up billions of dollars in economic aid for last year’s hurricane relief (in the same way that other states would receive disaster relief).
I can’t imagine anyone would really want statehood for the sole benefit of being able to vote for President.
If so, they really haven’t thought it through.
Puerto Ricans currently pay tax as high as 33% (though they’re looking to cut this). But if they became a state, they’d have to add another 37% in US federal income tax.
Imagine– paying SEVENTY PERCENT TAX just to be able to choose between a buffoon and a sociopath in an election where your vote doesn’t even really count.
Hardly seems worth the price of admission.
The island has definitely had its share of problems – a huge natural disaster, a financial crisis and a long-term economic depression that’s lasted for a decade.
And undoubtedly there are people here who think that statehood will solve all of those problems.
Not likely. It’s not like becoming a state will cause the skies to open and money to come pouring out like a summer rain.
They’ll just end up paying more taxes to fund the federal government.
The real growth potential here is in what the government has already been doing for the past few years– creating incredibly compelling incentives to attract talented people to the island.
The two most famous of those, Act 20 and Act 22, provide a tax rate as low as ZERO percent for investment income, and just FOUR percent for business income.
It’s one of the best deals in the world.
And in my travels here over the past few years, it’s becoming clear that those programs are working.
Foreigners are moving here. They’re starting businesses, spending money, and injecting much needed capital and talent into the economy.
Progress is still nascent, so there’s a lot more room to grow. But that also means there are still a ton of interesting opportunities that have yet to be explored.
As an example, I’m looking at a number of distressed real estate opportunities here, some of which are truly unbelievable. In some instances even the Catholic Church itself is being forced to auction off property.
Most of the time when countries end up in dire economic straits like Puerto Rico is in, governments simply resort to the old playbook of plundering the wealth of its citizens.
Here they went with the opposite approach– slashing taxes (initially for foreigners, and now they’re working on the same for local residents), and cutting regulation.
So for people with talent and vision (and you don’t even have to be a US citizen to benefit) this place definitely has a lot to offer.
For the last three months, traders have been positioned to expect a rate-cut in 2020 – disagreeing with The Fed’s forecast of more hikes. That changed this week as traders push their bets in eurodollar futures on a hike in 2020.
The Fed (red line below) expects rate hikes to continue through the end of 2020, and until recently as OIS (green) and ED (black) market expectations show, investors expected a net rate cut across 2020…
But now, as Bloomberg’s Ye Xie notes, not only have traders fully priced in two rate hikes in 2019 after two more this year, they are now moving to think that the Fed could extend the rate cycle through 2020. The spread between euro-dollar futures in December 2019 and 2020 is no longer inverted.
Admittedly, the spread is only 4bps, which translates to a 16% of a chance for a single 25bps rate-hike; but it is another move in the direction of The Fed’s thinking. Furthermore, it gives The Fed some runway in its belief that it can raise rates without having to worrying about cutting the expansion short.
Additionally, Bloomberg notes that there’s been some funny/strange action in Fed Funds Futures recently, ahead of Wednesday’s meeting/press conference. For example, the odds that the Fed goes 50 bp stand at 8%, up from zero a month ago. And while we don’t think that will happen (no reason for the Fed to spook the horses), it is clear that both Futures and shorter dated Treasuries expect the Fed to sound more aggressive this week.
With the tenth anniversary of the Lehman bankruptcy just passed, one theme of this writer’s message to investors of late has been that politics has now become the main driver of world financial markets replacing the central banks who have played that role for most of the past 10 years. But the problem for investors is that politics is less predictable than the actions of central banks…
VOTING ON THE DONALD
It is clear that the view on the outcome of the November mid-term US Congressional elections now diverges significantly from what had been the base case here. That base case has been that the midterm vote would be a vote on Donald Trump and that the Republicans would win because of the all too evident improvement in the American economy and the stock market as a result of the dramatic impact of the Trump administration’s corporate tax cuts in terms of the surge in corporate earnings and the related surge in share buybacks.
The broadest macro measure of US after-tax corporate profits, reported in late August by the Bureau of Economic Analysis, rose by 16.1%YoY in 2Q18, the highest year-on-year growth rate since 1Q12. While taxes paid by the corporate sector declined by 33.4%YoY in 2Q18, following a 39.1%YoY decline in 1Q18 (see following chart).
S&P500 actual reported share buybacks also surged by 42%YoY to a record US$189 billion in 1Q18 (see following chart). There were another US$410 billion worth of buyback announcements in 2Q18, according to Bloomberg.
US AFTER-TAX CORPORATE PROFITS AND CORPORATE TAXES
Note: US corporate profits after tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) Source: US Bureau of Economic Analysis
S&P500 ACTUAL REPORTED SHARE BUYBACKS
Source: S&P Dow Jones Indices
Still, it now seems that base case could be wrong. A chart of Donald Trump’s popularity rating shows that, after many months of resilience, it broke below the 200-day moving average since early September though it has bounced back in recent days.
The average Trump approval rating declined from 43.7% in late August to a low of 40.6% in mid-September and has since risen to 42.2% on Friday, compared with a 200-day moving average of 42.0% (see following chart).
Meanwhile, perhaps more importantly, the Iowa Electronic Markets, where traders bet real money on the outcome, now shows a 64% probability that the Democrats will regain control of the House of Representatives. Still, there is only a 14% possibility that the Democrats will also win the Senate (see following chart).
PRESIDENT DONALD TRUMP’S AVERAGE APPROVAL RATE
Note: RCP averages polls published over the past 2 weeks. Source: RealClearPolitics (RCP) Poll Average
IOWA ELECTRONIC MARKETS (IEM): 2018 US CONGRESSIONAL CONTROL MARKET
Note: Implied probability of Democrat control of Congress after the mid-term elections. Source: The University of Iowa
THE EFFECT ON THE MARKETS OF THE DEMOCRATS WINNING CONGRESS
What would a complete Democratic Party takeover of the Congress mean for markets? The view here is that anybody who thinks such an electoral outcome is possible should short the American stock market ahead of the vote.
The reason the US stock market has been rallying, and the economy accelerating, is because of the frontend-loaded impact of tax reform combined with the undoubtedly pro-growth implications of Trump-style deregulation.
Democrat control of both houses of Congress would threaten a complete reversal of these policies as well as a realistic threat of an attempt to impeach the incumbent president. Still, a Democratic takeover of just the House of Representatives, which is now the base case, would also probably be somewhat stock market negative since it would likely mean renewed policy gridlock in Washington, in terms of the ability to get anything done. Impeachment proceedings would also probably be launched even if they would very likely not turn out to be successful.
WHAT IMPACT WOULD A DEMOCRATIC CONGRESS HAVE ON THE TRADE ISSUE?
What about the trade issue? In theory, a gridlocked Washington does not hamper the Donald’s ability to implement tariffs as president. So, in that sense, Trump can continue to implement his protectionist agenda. But there is another possibility investors should now consider. If Donald Trump is confident the Republicans can regain control of Congress, there is seemingly no reason for him to do a deal on trade with China ahead of the pending polls.
Still, if he becomes concerned in coming weeks that such an outcome looks increasingly unlikely, then the temptation will grow for the incumbent president to do a deal with China so that he can present a “win”. This is why it was interesting that it was reported in mid-September that Treasury Secretary Steven Mnuchin had invited Chinese officials headed by Vice Premier Liu He for another round of bilateral trade talks in the coming weeks (see The Wall Street Journalarticle “US seeks new trade talks with China to avoid tariffs”, September 13, 2018). But yesterday it was reported that Beijing has now cancelled the trade talks which were scheduled for the coming days (see The Wall Street Journal article “China pulls out of trade talks with US”, September 22, 2018).
Meanwhile, none of this has stopped Trump from following through on his further 10% tariff on US$200 billion worth of Chinese exports, which will take effect on Monday. Still, it is interesting that some high profile consumer electronic items, such as smartphones, were excluded from the tariffs, suggesting that the Trump administration is concerned about the negative reaction of the American electorate to higher consumer prices.
The conclusion must be that a Trump U-turn on trade becomes more likely the closer to the November elections. This is a point worth making since the reality, at least until today, is that market action, particularly in Chinese stocks, suggests investors have given up on a trade deal. The other point is that Trump’s psychological make-up suggests he will want to do a deal and declare a “win”.
