Month: September 2019

Authored by Patrick Buchanan via Buchanan.org,

Even before seeing the transcript of the July 25 call between President Donald Trump and Ukrainian President Volodymyr Zelensky, Nancy Pelosi threw the door wide open to the impeachment of Donald Trump by the Democratic House.

Though the transcript did not remotely justify the advanced billing of a “quid pro quo,” Pelosi set in motion a process that is already producing a sea change in the politics of 2020.

The great Beltway battle for the balance of this year, and perhaps next, will be over whether the Democrats can effect a coup against a president many of them have never recognized as legitimate and have sought to bring down since before he took the oath of office.

Pelosi on Tuesday started this rock rolling down the hill.

She has made impeachment, which did not even come up in the last Democratic debate, the issue of 2020. She has foreclosed bipartisan compromise on gun control, the cost of prescription drugs and infrastructure. She has just put her own and her party’s fate and future on the line.

With Pelosi’s assent that she is now open to impeachment, she turned what was becoming a cold case into a blazing issue. If the Democrats march up impeachment hill, fail and fall back, or if they vote impeachment only to see the Senate exonerate the president, that will be the climactic moment of Pelosi’s career. She is betting the future of the House, and her party’s hopes of capturing the presidency, on the belief she and her colleagues can persuade the country to support the indictment of a president for high crimes.

One wonders: Do Democrats blinded by hatred of Trump ever wonder how that 40% of the nation that sees him as the repository of their hopes will react if, rather than beat him at the ballot box, they remove him in this way?

The first casualty of Pelosi’s cause is almost certain to be the front-runner for the party nomination. Joe Biden has already, this past week, fallen behind Sen. Elizabeth Warren in Iowa, New Hampshire and California. The Quinnipiac poll has her taking the lead nationally for the nomination, with Biden dropping into second place for the first time since he announced his candidacy.

By making Ukraine the focus of the impeachment drive in the House, Pelosi has also assured that the questionable conduct of Biden and son Hunter Biden will be front and center for the next four months before Iowa votes.

What did Joe do? By his own admission, indeed his boast, as vice president he ordered then-Ukrainian President Petro Poroshenko to either fire the prosecutor who was investigating the company that hired Hunter Biden for $50,000 a month or forgo a $1 billion U.S. loan guarantee that Kiev needed to stay current on its debts.

Biden insists the Ukrainian prosecutor was corrupt, that Hunter had done no wrong, that he himself was unaware of his son’s business ties.

All these assertions have been contradicted or challenged.

There is another question raised by Biden’s ultimatum to Kiev to fire the corrupt prosecutor or forgo the loan guarantee. Why was the U.S. guaranteeing loans to a Kiev regime that had to be threatened by the U.S. with bankruptcy to get it to rid itself of a prosecutor whom all of Europe supposedly knew to be corrupt?

Whatever the truth of the charges, the problem here is that any investigation of potential corruption of Hunter Biden, and of the role of his father, the former vice president, in facilitating it, will be front and center in presidential politics between now and New Hampshire.

This is bad news for the Biden campaign. And the principal beneficiary of Pelosi’s decision that put Joe and Hunter Biden at the center of an impeachment inquiry is, again, Warren.

Warren already appears to have emerged victorious in her battle with Bernie Sanders to become the progressives’ first choice in 2020. And consider how, as she is rising, her remaining opposition is fast fading.

Sen. Kamala Harris has said she is moving her campaign to Iowa for a do-or-die stand in the first battleground state. Sen. Cory Booker has called on donors to raise $1.7 million in 10 days, or he will have to pack it in. As Biden, Sanders, Harris and Booker fade, and “Mayor Pete” Buttigieg hovers at 5 or 6% in national and state polls, Warren steadily emerges as the probable nominee.

One measure of how deeply Biden is in trouble, whether he is beginning to be seen as too risky, given the allegations against him and his son, will be the new endorsements his candidacy receives after this week of charges and countercharges.

If there is a significant falling off, it could be fatal.

Submitted by Nicholas Colas of DataTrek Research

For an equity market at near all-time highs, there’s been a remarkable number of important blow-ups in recent months: WeWork, Uber, Lyft, Tesla/Nio, Netflix, marijuana stocks, vaping, and crypto currencies all come to mind. That’s important, because these are all “platform” companies/products – the exact business model that has driven significant increases in stock market value over the last 5 years. Let’s hope 2019 is just a bump in the disruptive road, because we need more of this sort of innovation. Not less.

Let’s start with some examples:

#1: WeWork, which was supposed to remake the concept of office space/leasing, had to pull its IPO, fire the company’s founder from his CEO slot, and now faces an unexpected capital crunch.

#2: Uber and Lyft, which were billed as the future of mobility, did manage to IPO but their stocks are now 30%/43% below their issue prices.

#3: Tesla and Nio, 2 pure play public electric car companies, are down 31%/70% respectively this year with deeper-pocketed conventional rivals (e.g. GM and VW) fully committed to selling EVs at a loss for the foreseeable future.

#4: Netflix, once a go-to name to get investment exposure to the cord-cutting trend, is down 33% from its June 2018 highs. As with Tesla/Nio, there’s plenty of new competition in the streaming space, many at lower price points.

#5: Marijuana stocks, which ride investor perceptions on both the future of legalization and a range of potential new uses for the plant, currently trade right where they were in early 2016 and are down 46% from their September 2018 highs.

#6: Vaping has gone from hero to near zero, with Juul’s valuation dropping from where Altria invested ($38 billion) to “pick a much lower number” today, scuttling the MO-PM merger in the process.

#7: Bitcoin was seemingly on the path to redemption this year, but has been rolling over hard in the last week, down 23%. That’s a big drop, even for that asset.

Now, the easy explanation here is that all these are examples of capital markets mispricing, bursting bubbles one and all. The ingredients that go into investment manias are certainly all there: groupthink, focus on price momentum over fundamentals, and belief in the “greater fool”.

• Venture capital drank too much of its own Kool-Aid and thought public markets would embrace chronically money-losing businesses with fuzzy plans for future profitability.
• Equity investors embraced charismatic founder-CEOs, buying into a vision of huge upfront investments for disruptive technologies while dismissing the idea that established competitors could create their own compelling offerings.
• Younger investors’ naïve belief that their own vision of the future would arrive promptly and with few detours.

That’s a perfectly good rearview mirror take, but let’s focus on what really matters: future equity returns. Here’s the problem in a nutshell:

#1: When it comes to “platform” companies, venture capital has done a generally terrible job building these businesses into viable companies. WeWork, Uber and Lyft raised a combined $43 billion from VCs. Yet for all that capital, none of these companies developed a business model that could reliably generate profits or even show meaningful progress to that goal without a deus ex machina innovation like self-driving cars.

#2: Electric/autonomous vehicles, vaping, marijuana and bitcoin have theoretical value because they are “platforms”: scalable products and services that can disrupt entrenched competition ranging from user-owned vehicles to financial services.

#3: Public equity markets need vibrant, growing platform companies to create long-term value for investors, as the last 5 years clearly shows. Some examples:

• Tencent: Chinese gaming/music/social media platform. $410 billion market cap, +186% over the last 5 years on a price basis.
• Alibaba: Chinese ecommerce platform. $456 billion market cap, +99% over the last 5 years.
• Apple: global smartphone platform. $998 billion market cap, +121% over the last 5 years.
• Google: global search/advertising platform. $863 billion market cap, +117% over the last 5 years.
• Amazon: global ecommerce platform. $863 market cap, +440% over the last 5 years.
• Facebook: global social media platform. $514 billion market cap, +132% over the last 5 years.

#4: The problem is that, with the exception of Google, every one of these companies’ stocks peaked a year ago or even further back. Incremental regulatory scrutiny combined with their already super-sized market caps may well limit further upside. It is therefore hard to see these stocks compounding at 23%/year – their average 5-year historical returns – over the next half decade. And remember that the S&P 500 has only compounded at 9% over the same time frame and owns all the US names on our list.

Summing up: the old saw about stock markets discounting future earnings will always be true, but over the long term the companies that create those profits change. In a global, tech-enabled world, platform companies and products have the best chance to create sustainable cash flows and future shareholder value. Hopefully this year’s spate of failures is just a bump in the road, and history says it should be. But it is a worrisome development nonetheless.

With Chinese EV maker Nio falling as much as 10% again on Friday (its sixth straight red day) to new record lows…

…the outlook for Tesla in China continues to be in focus – and it doesn’t look optimistic. 

Well known Tesla analyst and skeptic, Gordon Johnson of GLJ Research says in his latest note that Tesla’s Q3 aggregated cars sold should fall 38.6% on a sequential basis, a result he simply refers to as “bad”. 

Using data from the China Passenger Car Association and the China Association of Automobile Manufacturers, Johnson concludes:

…a total of 1,062/1,736 TSLA M3/total-TSLA-cars, respectively, registered in July 2019, and 1,500/2,500 TSLA M3/total-TSLA-cars, respectively, registered in Aug. 2019. Thusly, assuming ~2.7K total TSLA cars registered in Sep. 2019, one arrives at 6.95K TSLA cars registered in China in 3Q19.

He continues, explaining that this would “represent growth of -38.6% q/q.” He says that the publicly available data rebuts those who believe that China sales will be “strong” for Q3.

He also embarrasses politely critiques the assertions of sell side analysts, who have claimed that “Tesla’s deliveries to real, actual people are still rising at a triple-digit pace, despite being hamstrung by import duties, a flagging auto market, and a historical inability to tap electric vehicle subsidies (due to a lack of local manufacturing).”

Johnson provides a chart citing public data that indicates Tesla’s sales were down -16.4% y/y, after falling -2.1% y/y in July.

Johnson also comments that Tesla may find it difficult to command a bigger share of the BEV market in China due to its price points:

Taking the above analysis a bit further, using CPCA, CAAM, and Importers Organisation data dating back to 1/1/13, it becomes clear that while TSLA’s current share of the Chinese BEV market is just 3.1% (this figure got as high as 17.6% 6/14), it has consistently average around 3% since 2017, despite the introduction of the “mass-market” Model 3.

Why is this the case, in our view? Well, when considering BAIC controlled ~21% of the Chinese BEV market in Aug. 2019, and currently prices its best-selling Senova D50 sedan at around $20K, it seems TSLA may remain hard-pressed to sell its ~$46.336K M3 cars broadly in China (i.e., TSLA’s entry level price for the M3 in China).

Johnson estimates that Tesla has sold an average of just 2,407 cars per month since launching in China in March 2019:

Furthermore, when considering, according to CPCA, CAAM, and the Importers Organisation, TSLA has sold an avg. of just 2,407 M3 cars/month since launching in China Mar. 2019 (with Aug. sales [i.e., second month of 3Q19] of M3 cars of 1.5K -28.1% below the 2.1K cars sold in May [i.e., second month of 2Q19]), vs. its plan to produce ~12.5K M3 cars/month when “Gigafactory 3” ramps in Shanghai at the end of 2019, it would seem that the fixed cost absorption for TSLA in China will be, for lack of a better word, massive (meaning they will lose a lot of money making cars for which there is no demand – our opinion).

Obviously, he notes, this does not gel with the company’s plans of producing 150,000 Model 3 cars per year beginning at the end of 2019. He makes this point by providing a very simple history of Tesla’s vehicles sales in China, per year.

As you can see from Johnson’s chart, 2018 comes in about 10x below the company’s targeted Model 3 production – a huge gap for a company (not known for its operational efficiency) to make up. 

Johnson concludes that Tesla’s foray into China is a “disaster of herculean proportions”:

In short, in our opinion, TSLA’s foray into the Chinese BEV market is shaping up as a disaster of herculean proportions as planned production appears to be an order of magnitude ahead of demand. We would strongly suggest our readers take some time to understand this dynamic as, based on what we’re seeing in the media, it seems many of the TSLA pundits, both on the sell-side and the media, are currently unaware of this.

But hey, “there’s this place called Shanghai…”

Authored by James Howard Kunstler via Kunstler.com,

UkraineGate, son of RussiaGate, raises an interesting question:

is our Central Intelligence Agency really this crude that they would loan out a CIA officer to the White House’s National Security Council (NSC) and use him as a weapon to shiv the occupant of the oval office? Or was The New York Times’s unmasking of the “whistleblower” just another ruse by the Deep State Disinfo Division?

Let’s face it, there were not so many CIA spooks working in that White House office, so it shouldn’t be too hard to figure out who it was. A leading candidate is veteran CIA officer Michael Barry, an assassination expert, as it happens, who was loaned out during Mike Pompeo’s brief stint as CIA chief. Barry acted as the NSC’s chief intelligence officer. Barry or otherwise, I predict the whistleblower’s identity will be known for sure in pretty short order.

So much material in this tale doesn’t add up that it looks like the results of a math test in a Baltimore middle school. For one thing, the now public whistleblower complaint makes it clear that the whistleblower’s information is second-hand. The Intel Community Whistleblower Protection Act (ICWPA) explicitly prohibits complaints based on second-hand news:

“In order to find an urgent concern credible, the IGIC [Intel Community Inspector General] must be in possession of reliable, first-hand information. The IGIC cannot transmit information via the ICWPA based on an employee’s second-knowledge of wrongdoing. This includes information received from another person, such as when a fellow employee informs you that he/she has witnessed some type of wrongdoing.”

See for yourself in the ICWPA Form 401:

Did Director of National Intelligence Joseph McGuire know that when he testified that the whistleblower’s complaint was “credible” and made in “good faith.” Did ICIG Michael Horowitz know that when he sent the whistleblower complaint to Admiral McGuire? Did House Intel Committee Chair Adam Schiff know that when he led a grandstanding exercise in his committee on Thursday?

Others have pointed out that the whistleblower’s complaint was composed as a legal brief, leading to the inference that it was constructed by lawyers and perhaps a team of lawyers. The whistleblower’s lawyer is Andrew Bakaj, a former CIA employee who got his start interning for Senator Chuck Schumer and then Hillary Clinton. The Washingtonian said Bakaj “actually wrote the CIA’s internal rules on whistleblowing.” Is that so? Did he write Form 401 then? His client’s complaint states: “I was not a direct witness to most of the events described. However, I found my colleagues’ accounts of these events to be credible because, in almost all cases, multiple officials recounted fact patterns that were consistent with one another.” In other words, second-hand information. Dismissed.

Everyone and his uncle remembers the infamous threat issued to Mr. Trump by Senator Schumer during the transition period in January, 2017: “Let me tell you: You take on the intelligence community — they have six ways from Sunday at getting back at you.”

Perhaps Senator Schumer should have kept his pie-hole shut on that. He made it official that the Intel Community would act as an adversary and antagonist to the President, and that appears to be exactly what has happened. One suspects that this rogue agency has captured The New York Times, The Washington Post, National Public Radio, and several TV cable news networks as well. And now they are metamorphosing into an enemy of the people.

The moment approaches when Mr. Trump will have to carry out a severe housecleaning of the CIA and perhaps many other agencies under the executive branch of the government. Their ongoing campaign to undo the 2016 election is igniting a civil war. Clearly a part of the whistleblower gambit was an attempt to discredit Attorney General William Barr and set up a device that would force him to recuse himself from any further inquiry into shenanigans carried out in and around Ukraine since 2014, when the CIA and the Obama State Department overthrew the government of Viktor Yanukovych. Mr. Barr is a sturdy fellow. He may have seven ways from Sunday for countering their seditious monkeyshines. Wait for it.

In the meantime, is there any question that UkraineGate has put the schnitz on Joe Biden’s political career. The notorious video of Mr. Biden bragging on his shakedown of then-president Poroshenko has been seen by everybody over age five in the USA. Hillary must be lovin’ it as she makes the rounds on her latest listening tour. Listen to this, Hillary, lost in your wicked daydreams of riding to the Democratic Party’s rescue for yet another shot at the White House: your reputation will never survive the blizzard of indictments coming down on your partisans. And one of these bills might have your name on it.

And to think just earlier this morning we were mocking the complacent market – and this Reuters headline – for justifying the latest overnight levitation in risk assets.

Just like last Friday, when out of the blue stocks tumbled when suddenly it appeared that a trade suddenly was far less likely after China canceled its trip to Montana and Nebraska, just before noon risk took a plunge when Bloomberg reported that the Trump administration was considering delisting Chinese companies from US stock exchanges and limiting Americans’ exposure to the Chinese market through govt pension funds, sending shares of some marquee Chinese companies including Alibaba and Baidu tumbling, and sparking yet another shocked among Wall Street analysts, which ranged from ignore this news, it’s just “another market burp” as Trump will “have a hard time making the case for capital controls” to “this is not little stuff… this is huge”, and serves as a “harsh reminder that we could very easily see trade talks fall apart next month.” Some even suggested that if Trump will limit US investment into Chinese stocks, Beijing may retaliate with its own nuclear weapon, and dump some or all of its US Treasury holdings: “You know those Treasury bonds you’re issuing? We don’t want so much of that anymore.”

And despite some marginal difference as to the severity of today’s news, all analysts appeared to agree that today’s news “opens up a new front in the U.S.-China trade conflict” and the only question is whether these are “just loose headlines with U.S. capital flows used as a bargaining chip, or whether the threat is real.”

We are confident that Trump’s twitter feed will give us the answer soon enough.

Below is a summary of some more notable Wall Street reactions, courtesy of Bloomberg and others:

Jennifer Ellison, principal at San-Francisco based BOS:

“This is not little stuff. This is huge. The cost of tariffs on the economy, the impact on growth around the world when you don’t have trade flowing, the potential impact of China getting really mad and looking at us and saying ‘You know those Treasury bonds you’re issuing? We don’t want so much of that anymore.’ There’s a lot more potential downside than there is upside when this is all resolved. To say ‘We’re closing the gates, you can’t invest your money outside U.S. borders, it’s just ludicrous. The market is a little tired of it.”

Ed Moya, senior market analyst at Oanda:

“Just like we saw in the previous lead-up to high-level talks in the past, the White House is trying to increase their negotiating chip count with a fresh threat that could cripple Chinese companies,” he said. “The limitation of American pension funds access to Chinese markets would see massive portfolio swings that spells disaster for the tech sector. This threat is harsh reminder that we could very easily see trade talks fall apart next month.”

Ed Al-Hussainy, a strategist at Columbia Threadneedle:

“This one is a non-starter. Even this administration will have a hard time making the case for capital controls at this scale. Just another market burp.”

Alan Ruskin, chief international strategist at Deutsche Bank AG:

“This policy risks reciprocity from China, where China is of course a much bigger player in U.S. portfolio markets, than the U.S. is in China. In general, headlines like this also suggest that U.S.-China relations remain extremely tense, so not a great sign on the state of the trade negotiations. These headlines help assets that do well in ‘risk-off’ like gold, Swissie and yen. The euro likely also benefits in part as China could in theory search for alternative liquid markets,” he said. “One important caveat to above is we need to see if these are just loose headlines with U.S. capital flows used as a bargaining chip, or whether the threat is real.”

Zach Pandl, co-head of global FX and emerging-market strategy at Goldman Sachs Group Inc.:

“The news opens up a new front in the U.S.-China trade conflict. Looks likely to weigh on the yuan and neighboring currencies, and support safe havens, especially the yen.”

Mike Collins, senior portfolio manager at PGIM Fixed Income:

“It’s another example of how every time people think this trade war is deescalating, it escalates again,” he said. “We’re in this for the long run. There’s no end in sight.”

Brad Setser, senior fellow at the council on foreign relations.

Some argue that the US has leverage because China needs US financial investment.   I am not at all convinced.  China has plenty of domestic savings — its problem has been putting that to good use.   It doesn’t need to import savings and China’s current account surplus has been rising (along with China’s trade surplus) this year — China is on net still a capital exporter.

Authored Scott Adams via ScottAdamsSays.com,

Here’s a question you haven’t heard anyone ask about the Ukraine phone call story: If the Biden family never existed, would it have still been a good idea for President Trump to put a hold on funds already approved by Congress for Ukraine until the leaders spoke?

Answer: Yes.

The citizens who voted for Trump knew what they were getting. He promised to be a tough negotiator with our allies and adversaries alike. So what would a competent negotiator do when dealing with a new leader — of any country — before their first conversation? If he’s smart, he would “set the table” as Trump sometimes says about negotiating. In other words, you don’t start the conversation with someone important until you have arranged as many variables as you can in your favor. In the Ukraine phone call situation, President Trump effectively transferred power from Congress to himself in terms of “approving” Ukraine’s funds. Then he took a phone call with the new President of Ukraine.

That was perfect negotiating form.

We give our presidents a lot of flexibility in dealing with foreign affairs because it works better to have one “boss” in these situations. Had Trump permanently withheld funds approved by Congress, that would be a system problem on our end. But temporarily putting a hold on those funds before speaking leader-to-leader is just smart presidenting. It creates the impression that the president is the only American the foreign leader needs to deal with. That’s “setting the table.”

Does it matter exactly what Trump was going to discuss, negotiate, or request?

Nope. If the only thing Trump did on the phone call was congratulate President Zelensky on his election victory, it would still be smart to hold the funds until then. We want our president to go into every conversation with foreign leaders fully armed, persuasion-wise. When Trump brings the full weight of the office with him, it sets the table for the current conversations, and every one after that. When Trump withholds funds, pulls out of a deal, or otherwise transfers power from Congress to himself, it makes him a more effective negotiator. It puts him in charge. It is a strong psychological advantage.

Compare that approach to sending a president out weak, dependent on Congress to wipe his nose. Those are not similar table settings. Trump knows the difference. So does everyone who read his book, The Art of the The Deal.

We’ve heard Trump say he was concerned about corruption in Ukraine, and that was why he put a hold on the funds. I’m sure that was at least a part of his concern. Probably every American has that same concern about foreign aid in general. But as I said, it doesn’t matter what reason he gives the American public. Regardless of corruption in Ukraine, it was still smart to withhold funds until after the leaders spoke, because it made Trump the only person Zelensky needs to satisfy. That’s what we want from our presidents. We want them going in strong, with the full weight of their office and influence, to every interaction with foreign leaders, every time.

But what about Trump asking Zelensky for help looking into Hunter Biden’s business dealings? Isn’t it inappropriate for a president of the United States to ask a foreign leader to help him win reelection? If that’s ALL it was, it would absolutely be inappropriate. But was that all it was?

Suppose a candidate for president of the United States is leading in all the polls and he has publicly known conflicts of interest with a foreign country, such that blackmail-like influence was a real risk. Or at least it looks that way on the surface. What kind of priority should a sitting president put on that situation?

Answer: Top priority

Here I’m assuming there are no hot wars or other disasters at the same time, and the economy is doing well. That’s our current situation. Protecting the Republic from potential foreign influence — especially when that potential influence is so obvious to the entire country — is pretty near the top of any President’s priority list. Or at least it should be.

I am also assuming that whatever Ukraine knows, Putin can find out. You have to assume Putin has a lot of spy resources directed at Ukraine. Do you want your next president to be in Putin’s pocket? I hear that’s a bad thing.

Obviously President Trump had self-interest in mind when asking Ukraine to look into Hunter Biden’s situation. But we don’t impeach presidents for doing what is good for their reelection if it is also good for the country. Personally, I wouldn’t be comfortable with a future president whose son is suspiciously well-compensated by a foreign entity. I want my sitting president to look into that sort of thing.

The anti-Trump media and Democrats are performing an impressive magic trick with the public right now. They have cleverly framed the situation as Trump bullying a foreign country to help him get reelected. As long as you focus on that frame, you are somewhat blind to the better question: Is it risky to have a candidate for president — who is leading in every poll — while the candidate’s son is taking money from a foreign country and giving not-so-much back to them in return? That seems risky as hell to me. Do you see it differently?

Some people ask why the President didn’t assign the FBI, or whoever handles such things, to look into the Hunter Biden situation so it didn’t come off as campaign interference. The obvious answer is that it amounts to the same thing. And if you have any experience with large organizations, you know it is usually a waste of time to assign underlings to cooperate across big bureaucratic organizations unless the leaders have spoken on the topic directly.

I don’t want a president who goes into talks with foreign leaders without knowing how to set the table for persuasion. And I don’t want a president who ignores an obvious risk to the Republic, such as the Hunter Biden situation. And I’m fine with a president who is trying hard to get reelected, so long as he is also handling the top priorities for the country. Trump said his call with Zelensky was “a perfect call.”

He was right. It was flawless.

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Scott’s new book “LOSERTHINK” goes on sale 11/5. Pre-order: https://bit.ly/2NRammu