I can’t believe there is NOTHING about Barr and Mueller. Barr is a legal genius, in my opinion. You think someone on your crew would be interested in writing about this. No. Facebook, foot voting, and other such drivel make the cut.
I thought this would be a good occasion to remind people about how we see our role. “All the news that’s fit to print” is one noted publication’s slogan, but ours is more this:
People yakkity yak a streak and waste your time of day
But Mister Ed will never speak unless he has something to say.
Because of our special expertise, there are times when we can add special value beyond what others are already saying. Sometimes it’s about foot voting (which Ilya has been studying for decades). Sometimes it’s about free speech or Internet law, which many of us have likewise long researched. Sometimes it’s about criminal procedure, gun policy, and more. Occasionally it’s just something that we think is fun, or that resonates with us personally, though these tend to be an exception: a nice little bit of leavening, I think, but not the core substance.
It’s almost never “This is important news, so we must cover it”—and I don’t think you should want it to be. You doubtless read other news stories, and have access to many more; let them cover what they are expert in, or what they feel obligated to cover. They presumably have people who are paid to read the Mueller report and Barr’s response, and to cover the complicated factual disputes about them. Pay attention to them when they cover what they know, and to us when we cover what we know.
I sent a version of this to my correspondent, and got back a gracious reply that suggests that he sees our point on this. But I wanted to note this for the benefit of other readers as well.
from Latest – Reason.com http://bit.ly/2VbAj4Z
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Yesterday House Speaker Nancy Pelosi accused Attorney General William Barr of committing a crime by lying to Congress about Robert Mueller’s objections to his summary of the special counsel’s report. Justice Department spokeswoman Kerri Kupec called that allegation “reckless, irresponsible, and false.”
Kupec did not elaborate on her reasoning, probably because the explanation would not reflect well on Barr’s candor and honesty. She is nevertheless right to question Pelosi’s claim.
“The attorney general of the United States of America was not telling the truth to the Congress of the United States,” Pelosi said. “That’s a crime.”
Not quite. 18 USC 1621 makes it a felony, punishable by up to five years in prison, for someone to lie under oath. He is guilty if he “willfully and contrary to such oath states or subscribes any material matter which he does not believe to be true.” But the Supreme Court has held that the perjury statute does not apply to a statement that “is literally true but not responsive to the question asked and arguably misleading by negative implication.”
Another possibly relevant law, 18 USC 1001, makes it a felony, also punishable by up to five years in prison, to “knowingly and willfully” make “any materially false, fictitious, or fraudulent statement or representation” in congressional testimony. A statement can be misleading without being knowingly and materially false.
Keeping those qualifications in mind, let’s consider the testimony Pelosi thinks makes Barr guilty of a felony. When Barr testified before a House appropriations subcommittee on April 9, Rep. Charlie Crist (D-Fla.) asked him about an April 3 New York Times story that said members of Mueller’s team were unhappy with his March 24 summary of their findings:
Christ: Reports have emerged recently, General, that members of the special counsel’s team are frustrated, at some level, with the limited information included in your March 24 letter, that it does not adequately or accurately, necessarily, portray the report’s findings. Do you know what they’re referencing with that?
Barr: No, I don’t. I think, I suspect, that they probably wanted, you know, more put out, but in my view, I was not interested in putting out summaries, or trying to summarize, because I think any summary, regardless of who prepares it, not only runs the risk of, you know, being underinclusive or overinclusive, but also, you know, would trigger a lot of discussion and analysis that really should await everything coming out at once.
It has since emerged that Mueller himself, on three occasions in late March (twice in letters and once on the telephone) had told Barr his summary “did not fully capture
the context, nature, and substance of this Office’s work and conclusions,” resulting in “public confusion about critical aspects of the results of our investigation.” When Barr testified before the Senate Judiciary Committee on Wednesday, Patrick Leahy (D–Vt.) asked him about the apparent inconsistency between those communications and his statement to Crist that he didn’t know why Mueller’s underlings were “frustrated” by his summary:
Leahy: Why did you say you were not aware of concerns, when weeks before your testimony Mr. Mueller had expressed concerns to you? I mean, that’s a fairly simple—
Barr: I answered the question, and the question was relating to unidentified members who were expressing frustration over the accuracy relating to findings. I don’t know what that refers to at all. I talked directly to Bob Mueller, not members of his team. And even though I did not know what was being referred to, and Mueller had never told me that the expression of the findings was inaccurate—but I did then volunteer that I thought they were talking about the desire to have more information put out. But it wasn’t my purpose to put out more information.
Later in the hearing, Sen. Sheldon Whitehouse (D–R.I.) called Barr’s explanation “masterful hairsplitting,” which is not necessarily the same thing as a lying. What Barr told Crist was not helpful, candid, or forthcoming, and it created the misleading impression that Barr was “not aware of concerns,” as Leahy put it. But Barr never actually said that.
The perjury statute, as interpreted by the Supreme Court, pretty clearly does not apply to Barr’s April 9 testimony. Whether 18 USC 1001 applies is a closer call. But if we give Barr the benefit of the doubt, which is what he would get if he were actually prosecuted for lying to Congress, his “masterful hairsplitting” seems like enough to prevent a conviction.
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I can’t believe there is NOTHING about Barr and Mueller. Barr is a legal genius, in my opinion. You think someone on your crew would be interested in writing about this. No. Facebook, foot voting, and other such drivel make the cut.
I thought this would be a good occasion to remind people about how we see our role. “All the news that’s fit to print” is one noted publication’s slogan, but ours is more this:
People yakkity yak a streak and waste your time of day
But Mister Ed will never speak unless he has something to say.
Because of our special expertise, there are times when we can add special value beyond what others are already saying. Sometimes it’s about foot voting (which Ilya has been studying for decades). Sometimes it’s about free speech or Internet law, which many of us have likewise long researched. Sometimes it’s about criminal procedure, gun policy, and more. Occasionally it’s just something that we think is fun, or that resonates with us personally, though these tend to be an exception: a nice little bit of leavening, I think, but not the core substance.
It’s almost never “This is important news, so we must cover it”—and I don’t think you should want it to be. You doubtless read other news stories, and have access to many more; let them cover what they are expert in, or what they feel obligated to cover. They presumably have people who are paid to read the Mueller report and Barr’s response, and to cover the complicated factual disputes about them. Pay attention to them when they cover what they know, and to us when we cover what we know.
I sent a version of this to my correspondent, and got back a gracious reply that suggests that he sees our point on this. But I wanted to note this for the benefit of other readers as well.
from Latest – Reason.com http://bit.ly/2VbAj4Z
via IFTTT
New York Times White House correspondent Peter Baker has published an updated edition of his book “Obama: The Call of History”, and it includes several embarrassing details about President Obama’s reaction to Donald Trump’s historic electoral triumph, as well as Obama’s complaints about Hillary Clinton’s “scripted, soulless” campaign strategy.
According to the Daily Mail, which published some of the excerpts on Friday, Obama interpreted Trump’s victory as a “personal insult”, and whined to his aides and family that the loss “stings” and that the American people had “turned on him” while bashing Clinton for “bringing her many troubles on herself.”
As Baker wrote, as Obama saw it, the “real blame” for Clinton’s loss “lay squarely with Clinton” – despite her many well-documented attempts to make every conceivable excuse, from blaming Bernie Sanders and his misogynistic “Bernie Bros” to misogynistic Trump supporters.
But as Obama vented, nobody forced Clinton to take money from Goldman Sachs, or set up an illicit private email server at her house in Chappaqua.
In a stinging passage Baker writes: ‘To Obama and his team, however, the real blame lay squarely with Clinton.
‘She was the one who could not translate his strong record and healthy economy into a winning message.
‘Never mind that Trump essentially ran the same playbook against Clinton that Obama did eight years earlier, portraying her as a corrupt exemplar of the status quo.
‘She brought many of her troubles on herself. No one forced her to underestimate the danger in the Midwest states of Wisconsin and Michigan.
‘No one forced her to set up a private email server that would come back to haunt her.
‘No one forced her to take hundreds of thousands of dollars from Goldman Sachs and other pillars of Wall Street for speeches.
‘No one forced her to run a scripted, soulless campaign that tested eighty-five slogans before coming up with ‘Stronger Together’.
Feeling secure in Clinton’s impending victory, Obama and his top aide Valerie Jarrett retreated to the White House movie theater to watch the Marvel Movie Dr. Strange. Michelle Obama went to bed early that night, but later in the evening, as results from Florida started coming in, Obama checked the results, and was suddenly struck by a sinking feeling.
He watched in abject horror as Trump won Michigan, Wisconsin and Pennsylvania – formerly Democratic strongholds.
In the weeks after Trump’s victory, Obama vacillated from philosophical contemplation to rage, and complained to his speech writer Ben Rhodes that he was about to hand the nuclear codes over to a “cartoon character” and a “huckster straight out of Huckleberry Finn”.
Obama tried to keep his cool in the weeks afterwards and texted his speechwriter Ben Rhodes: ‘There are more stars in the sky than sand on the earth’.
But soon he was unable to contain his rage which escalated after he met Trump in the Oval Office.
Baker writes that despite being cordial in public he afterwards summoned Rhodes who told him that Trump ‘peddles in b*******’
Rhodes said: ‘That character has always been part of the American story. You can see it right back to some of the characters in Huckleberry Finn’.
Obama replied: ‘Maybe that’s the best we can hope for’.
As the weeks went by Obama went through ‘multiple emotional stages’, at times being philosophical and other times he ‘flashed anger’.
He also showed a rare self-doubt and wondered if ‘maybe this is what people want’, Baker writes.
Obama told one aide: ‘I’ve got the economy set up well for him. No facts. No consequences. They can just have a cartoon’.
Of particular interest considering the Mueller report’s findings, which have been endlessly relitigated since the redacted report was released last month, Baker explains Obama’s decision not to come out harder against Russia during the campaign, after US intelligence warned about the Kremlin’s attempts to ‘interfere’ in the US election.
As Baker tells it, Obama’s “don’t-do-stupid-shit” instincts made him reluctant to bash Russia over the meddling, as did his confidence that Clinton would surely prevail. As Obama saw it, if he made a big deal about Russian interference, Trump would simply complain to his voters that the whole election was rigged.
Baker’s book also gives new insight into why Obama was so hesitant about criticizing Russia for meddling in the 2016 election before vote took place.
Obama was led by his ‘cautious don’t-do-stupid-s**t instincts’ and feared that a forceful response would make Russia ‘escalate’ its operation.
Then there was the question of how Trump would react and Obama admitted that ‘if I speak out more, he’ll just say it’s rigged’.
Obama wrongly assumed that Clinton would win the election and Obama said in one meeting that Russian President Vladimir Putin ‘backed the wrong horse’.
When it came time to meet his successor and start planning the transition, Obama was cordial. But he never could get past the unshakeable feeling that the American people had rejected his legacy.
Charlottesville’s Confederate monuments are here to stay, a Virginia judge ruled this week, reigniting debate over whether statues of Gens. Robert E. Lee and Stonewall Jackson deserve a place in the public square.
“While some people obviously see Lee and Jackson as symbols of white supremacy, others see them as brilliant military tacticians or complex leaders in a difficult time,” Judge Richard E. Moore of the Charlottesville Circuit Court says in a letter detailing his decision. “In either event, the statues to them under the undisputed facts of this case still are monuments and memorials to them, as veterans of the Civil War.”
The ruling comes nearly two years after the Unite the Right rally, where white supremacists carrying tiki torches and chanting “Jews will not replace us” marched in Charlottesville to protest the removal of Lee’s statue. The demonstrations culminated with the death of a counterprotester after a white nationalist rammed a car into a crowd of people.
Moore’s decision hinges on an early 20th century law that allows local governments to approve the construction of war memorials but prohibits them from taking those same monuments down without the state government’s approval. The Charlottesville City Council acted in defiance of this, a lawsuit alleges, when it voted in February 2017 to remove the statue of Lee situated in a public park that bears his name. Following the Unite the Right demonstrations, local officials also voted to remove Jackson’s memorial, which the lawsuit was then amended to include.
“It’s based on a flawed law, so the law doesn’t make much difference,” Bob Fenwick, a former Charlottesville City Council member, tells the local CBS affiliate. “It was a public process, it was a lawful process, so that’s our case.”
The law is flawed, and it should be amended. If a local governing body may erect monuments without state approval, it follows naturally that the exact same officials should be permitted to follow the exact same processes for their removal. They know the needs of their constituents far better than state officials, who are further removed from the daily goings-on in local communities.
Charlottesville’s leaders have spoken, and they believe the monuments should come down. And they should.
It is not lost on me that the vast majority of Confederate monument admirers aren’t waving tiki torches in service of white nationalism and are genuine in their calls to preserve heritage. But as Reason‘s Ron Bailey—a Charlottesville resident—notes, those concerns are misplaced when considering the historical context, much of which is unknown among many people born and bred in the South. He writes of his experience in 1963:
My third grade Virginia history book referred to the Civil War as the War Between the States and asserted that that conflict was chiefly over state’s rights. Virginia Generals Lee, Jackson, and Stuart were portrayed as honorable and heroic defenders of Southern rights.
Not much has changed. I grew up in Virginia a few decades later, and my teachers up through high school described the Civil War as a violent skirmish waged over federalism. It wasn’t until after I graduated from the University of Virginia in 2013 that I learned the central role played by slavery.
As the legal fight continues, the City Council has an unlikely ally in removing Lee’s monument. It would be “wiser…not to keep open the sores of war but to follow the examples of those nations who endeavored to obliterate the marks of civil strife, to commit to oblivion the feelings engendered,” wrote Robert E. Lee in 1869, as he declined an invitation to place memorials for fallen soldiers.
The state would do well to get out of the way and let Charlottesville, and Lee himself, commit the monuments to oblivion—along with all the ugly feelings that come along with them.
from Latest – Reason.com http://bit.ly/2LiybE5
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Charlottesville’s Confederate monuments are here to stay, a Virginia judge ruled this week, reigniting debate over whether statues of Gens. Robert E. Lee and Stonewall Jackson deserve a place in the public square.
“While some people obviously see Lee and Jackson as symbols of white supremacy, others see them as brilliant military tacticians or complex leaders in a difficult time,” Judge Richard E. Moore of the Charlottesville Circuit Court says in a letter detailing his decision. “In either event, the statues to them under the undisputed facts of this case still are monuments and memorials to them, as veterans of the Civil War.”
The ruling comes nearly two years after the Unite the Right rally, where white supremacists carrying tiki torches and chanting “Jews will not replace us” marched in Charlottesville to protest the removal of Lee’s statue. The demonstrations culminated with the death of a counterprotester after a white nationalist rammed a car into a crowd of people.
Moore’s decision hinges on an early 20th century law that allows local governments to approve the construction of war memorials but prohibits them from taking those same monuments down without the state government’s approval. The Charlottesville City Council acted in defiance of this, a lawsuit alleges, when it voted in February 2017 to remove the statue of Lee situated in a public park that bears his name. Following the Unite the Right demonstrations, local officials also voted to remove Jackson’s memorial, which the lawsuit was then amended to include.
“It’s based on a flawed law, so the law doesn’t make much difference,” Bob Fenwick, a former Charlottesville City Council member, tells the local CBS affiliate. “It was a public process, it was a lawful process, so that’s our case.”
The law is flawed, and it should be amended. If a local governing body may erect monuments without state approval, it follows naturally that the exact same officials should be permitted to follow the exact same processes for their removal. They know the needs of their constituents far better than state officials, who are further removed from the daily goings-on in local communities.
Charlottesville’s leaders have spoken, and they believe the monuments should come down. And they should.
It is not lost on me that the vast majority of Confederate monument admirers aren’t waving tiki torches in service of white nationalism and are genuine in their calls to preserve heritage. But as Reason‘s Ron Bailey—a Charlottesville resident—notes, those concerns are misplaced when considering the historical context, much of which is unknown among many people born and bred in the South. He writes of his experience in 1963:
My third grade Virginia history book referred to the Civil War as the War Between the States and asserted that that conflict was chiefly over state’s rights. Virginia Generals Lee, Jackson, and Stuart were portrayed as honorable and heroic defenders of Southern rights.
Not much has changed. I grew up in Virginia a few decades later, and my teachers up through high school described the Civil War as a violent skirmish waged over federalism. It wasn’t until after I graduated from the University of Virginia in 2013 that I learned the central role played by slavery.
As the legal fight continues, the City Council has an unlikely ally in removing Lee’s monument. It would be “wiser…not to keep open the sores of war but to follow the examples of those nations who endeavored to obliterate the marks of civil strife, to commit to oblivion the feelings engendered,” wrote Robert E. Lee in 1869, as he declined an invitation to place memorials for fallen soldiers.
The state would do well to get out of the way and let Charlottesville, and Lee himself, commit the monuments to oblivion—along with all the ugly feelings that come along with them.
from Latest – Reason.com http://bit.ly/2LiybE5
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President Trump on Friday spoke with Russian President Vladimir Putin for the first time since the release of the Mueller report.
The two spoke on the phone for more than an hour, discussing the Mueller report, Venezuela, Noth Korea and other matters, according to White House Press Secretary Sarah Sanders.
.@PressSec Sarah Sanders: “Earlier this morning the president spoke with President Putin. They had a very good discussion. Spoke for a little over an hour.” pic.twitter.com/ywIlX11Sy4
On the Mueller report, Sanders said “both leaders knew there was no collusion,” adding that their discussion on the matter was brief, according to CNBC.
The two world leaders have spoken via phone over six times, according to official readouts from the White House. Putin said last year that the two spoke “regularly,” according to the report.
The discussion between the two leaders comes amid a tense political standoff in Venezuela. Opposition leader Juan Guaido has escalated his calls in recent days for a mass uprising, with the backing of the United States, against Russian-supported leader Nicolas Maduro.
The two countries have warned each other against intervention –CNBC
“This is our hemisphere,” said National Security Adviser John Bolton on Wednesday. “It’s not where the Russians ought to be interfering.”
Meanwhile, Russian Foreign Minister Sergei Lavrov issued a warning to US Secretary of State Mike Pompeo that US intervention in Venezuela would violate international law and could lead to grave consequences, according to Reuters.
via ZeroHedge News http://bit.ly/2WnNwUL Tyler Durden
There’s some good news for employees of Tesla that haven’t yet been laid off, and are burning the midnight oil working tirelessly for their visionary leader Tony Stark Elon Musk: the company is now offering them personal loans that can be paid back directly from their paychecks, according to CNBC.
As if going into the insurance business (please clap) wasn’t enough of a pivot for Tesla of late, the company is now also apparently going to try its hand in loansharking… to its own employees. The loans will be facilitated through London-based fintech start-up Salary Finance, and funded via its partner Axos Bank.
The plan is being pitched as a way for employees to “borrow money at relatively affordable rates”, where the key word, of course, is relatively.
Salary Finance is in the business of letting workers borrow up to 20% of their salary and pay it back at rates under 5%, although the “under” tends to be loose. Tesla is referring to this plan as a “financial well being” benefit, as if charging employees 5% interest is somehow a convenience. Though, it doesn’t surprise us entirely that a company with over $11 billion in debt is following this line of logic.
Tesla says that the plan is a way for employees to “handle their debt and expenses without turning to higher-cost alternatives like a 401k loan, credit cards with a high annual percentage rate, or traditional payday loans.” Cynics have seen right through these explanations, and believe this is a way for the company to avoid its employees being “forced” to liquidate their TSLA stock, especially as it drops ever lower, and subjects an increase number of them to margin calls.
Current employees, however, don’t seem to excited about the idea.
CNBC spoke to three employees who said that they view employee loans as a “band-aid”. Maybe Tesla should promote these three employees to their accounting department for a couple days – sounds like they may be able to clean up some of the company’s finances. Instead, employees are only asking for the basics: “more predictable income from a set, 40 hour work week” as Tesla is notorious for asking its employees to change hours, change departments and change schedules on the fly:
In recent weeks, for example, Tesla sent workers home early from their shifts after glitches at the Fremont car plant. In the production line under the tent at the site, conveyors have broken down at the point where cars are carried forward for “battery marriage,” where workers install heavy battery packs into the Model 3 sedans and join two halves of the cars together. Inside the main building, there have been troubles with camera calibration, where employees test the in-vehicle cameras on a Model 3 to make sure they are working properly in concert with sensors to enable Tesla’s semi-autonomous-driving features.
Tesla also told some workers not to come in to work at the Gigafactory during what employees described as unexpected maintenance and cleaning.
Six additional employees said that raises and bonuses typically “don’t cover cost-of-living increases.” Other employees said that the company caps raises at about 2%, even for those with the best performance ratings by their managers. One employee recalled getting an annual raise of less than 1% and three shares of stock as a bonus after a year of “good, but not spectacular” performance.
Social media seems to be enjoying the news:
I haven’t read details yet but I surmise it is loans against your shares so you don’t need to add more selling pressure to the markets. $tsla
After Jerome Powell sent stocks into a downward spiral on Wednesday with his view that low inflation is expected to be ‘transitory’, surprising the market with its hawkish overtones, Fed Vice Chairman Richard Clarida has once again been brought in to offer a safely dovish counterpoint.
Adding his voice to a chorus of dovish Fed officials speaking on Friday, Clarida reassured markets that inflation expectations are “stable” and that there is “no need” for the Fed to change its policy stance at the moment.
On the face of it, Clarida’s comments don’t offer much new:
CLARIDA: WE’LL WEIGH `WHAT, IF ANY, FURTHER ADJUSTMENTS’ NEEDED
CLARIDA: FED FUNDS RATE NOW IN RANGE OF NEUTRAL ESTIMATES
CLARIDA SAYS FED CAN AFFORD TO BE DATA DEPENDENT
FED’S CLARIDA SAYS U.S. ECONOMY IS IN A `VERY GOOD PLACE’
With stocks already in rally mode, Clarida’s comments didn’t elicit much of a reaction.
Though at least where rate-expectations are concerned, it appears the dovish offensive is having the desired effect.
On another note, analysts pointed out that New York Fed President John Williams released a paper that sounded ‘pretty darn dovish’:
This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates “lower for longer” after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy. Both of those “key themes” appear to argue for low interest rates, which probably explains the bid to fixed income.
via ZeroHedge News http://bit.ly/2LkXQfp Tyler Durden
The relationship between the performance of emerging market stocks and the US dollar is one of the tightest macro relationships that exists in investing. As we can see in the first chart, the relative performance of EM stocks vs the S&P 500 is highly negatively correlated with the level of the dollar. That is, when the dollar goes up, EMs underperform US large caps and when the dollar goes down they outperform. It’s like clockwork really. But that observation is nothing new. Indeed, given the recent strength of the dollar we’ve written about it twice in the last two weeks here and here. But it’s also a good time to not just remind readers of the relationship, but also to describe the mechanics of it. That’s what I’ll do here, using the Philippines as our case study. I have no particular bias one way or the other with the Philippines, it’s just one example of many in the EM world for which dollar strength equals trouble, and vice versa.
The reason EM stocks and economies tend to struggle in the face of dollar strength is largely due to the quantity of US dollar denominated debt those countries tend to carry as a share of total debt. Why would they carry USD denominated debt instead of local currency denominated debt? The answer is lower interest rates and the ability to place larger amounts of debt. Of course, there are consequences to issuing debt in a currency a country’s central bank cannot print, one of which is that it makes the economy of the issuing country extremely procyclical. That is, economic outcomes are amplified both to the upside and to the downside. This is opposed to many developed market countries which tend to have built in mechanisms in the economy and financial markets that taper cyclicality in both directions.
For example, in the case of a developed market country, when growth and inflation are strong and rising the central bank may raise short-term rates and the bond market will experience higher longer-term rates. With a lag and all else equal, this will tend slow down the economy. When growth and inflation are low and slowing, a developed market central bank may lower short rates or take other measures to boost demand while longer-term rates will naturally fall. With a lag and all else equal, this will provide a cyclical boost to the economy.
However, when a country’s debt is denominated in a different currency all that changes. Economic booms cause the currency to strengthen and inflation to fall, which allows the central bank to lower policy rates. Because rates are falling and the currency is strengthening, interest and principle payments on foreign currency denominated debt go down, making economic agents feel richer. The government budget balance improves, often moving to surplus and bringing the current account with it. Long-term rates fall in sympathy with short rates, which lower default risks and provides further stimulus. Investment increases, wages rise, growth picks up even more and the currency continues to strengthen. It’s a self reinforcing loop of strength begetting strength.
It’s ugly when it happens in reverse. Weakness in growth causes the currency to fall, which then causes inflation to rise. Higher inflation means the central bank must tighten policy despite the economy turning down. The government surplus turns to deficit, and the need for imported capital causes the current account to turn negative too. The rising short rates and a lower currency causes foreign currency denominated debt payments to increase rapidly. There is a cash flow squeeze, and especially a shortage of US dollars with which to make debt payments. Non-performing loans rise, growth slows more, investment is cut, wages fall, and the currency weakens even more. It’s a self reinforcing loop of weakness begetting weakness. With that, let’s dig into the Philippines example.
This first chart breaks down the local currency and foreign currency denominate government debt as a percent of the total. Local currency debt accounts for only 7% of total debt issuance in the Philippines. The remainder is largely USD denominated debt.
Here we show the twin deficit as a percent of GDP (right axis, inverted) overlaid on the Philippine peso per USD exchange rate (left axis). The exchange rate leads by one year. As the currency rises (blue line going down), the twin deficits improve materially, as they did from 2009-2014. When the currency falls the twin deficits deteriorate as USD debt payments become more onerous.
Currency rises and falls bring inflation with it. When the currency strengthens (blue line going down) inflation tends to fall, and vice versa.
The inflationary dynamics cause the central bank to act. In the case of the Philippines, this meant rate cuts from 2011-2012 as the currency was strengthening and rate hikes in 2018 as the currency was falling precipitously. In this case, currency moves led central bank action by about a year.
Of course, economic strength caused by the rising currency pushes down long-term bond rates credit risk abates. The opposite is true when the currency weakens.
When the currency is falling, debt service gets harder. The government and companies must come up with US dollars with which to pay the lenders. The way they earn those US dollars is through exports. As the currency falls, a larger and larger portion of the US dollars the country earns through exports get used in debt repayment. In other words, US dollar liquidity tightens dramatically, which only reinforces the currency weakness. Of course, the opposite is also true when the currency is strong.
Non-performing loans are highly correlated to changes in the exchange rate. A rising local currency means debt payments are easier to meet and NPLs fall. A falling currency means debt payments are much more difficult to meet and NPLs rise.
If companies are flush because their debt obligations are lower, they are more inclined to invest, and vice versa. Dramatic currency strength or weakness feeds right into the real economy through investment.
While unemployment may or may not be affected by the currency, real wages (wage growth after inflation) do tend to be highly correlated to the currency, with a lag of 18-24 months. Higher wages obviously raise consumption and reinforce the growth while falling wages reinforce the downturn.
The cycle ends when the currency gets to such extreme levels that foreigners add to or subtract from foreign direct investment. When the currency is so low that the future ROIC of foreign direct investment is exceedingly high, dollars will start to flow back into the country. This was 2009 and 2016 in the case of the Philippines. Foreign investors were rather tepid from 2010-2013 and then again in 2018, but may be coming back in. Foreign direct investment flows lead currency moves by 12-24 months.
As readers can see, there happen to be logical, almost mechanical, relationships between EM currencies and the economy that reinforce either growth or a slowdown. In the end, it all comes back to debt, and the propensity of EMs to issue debt denominated in currency other than the one they print. The result for investors is a very predictable EM relative performance pattern that is directly tied to the US dollar.
via ZeroHedge News http://bit.ly/2DXPLav Tyler Durden
