Month: November 2019

As anti-corruption protests in Lebanon and Iraq have raged and quickly turned into massive anti-government protests, with the latter much fiercer and more violent, now with over 250 Iraqis killed and nearly 10,000 wounded, there’s growing fears that in both countries a Syria-style broader proxy war could emerge. 

Iran has accused the US and Israel for stoking unrest, while Washington and Tel Aviv officials see ‘Iranian expansion’ and meddling as the true culprit. It appears that some Iraqis agree, given the Iranian consulate in the city of Karbala came under attack Sunday, in the latest sign of public backlash over perceived Iranian control of Baghdad political leaders. 

“Protesters scaled the consulate’s walls late Sunday while hauling an Iraqi flag. Security forces fired rubber bullets to disperse protesters who were throwing Molotov cocktails over the wall,” The Wall Street Journal reported based on local video of the attack. 

It came after last week Ayatollah Ali Khamenei blamed foreign powers for unrest gripping Iraq and Lebanon. “I recommend those who care in Iraq and Lebanon remedy the insecurity and turmoil created in their countries by the US, the Zionist regime, some western countries, and the money of some reactionary countries,” Khamenei stated using his official social media accounts.  

This also as Iran has been blamed for intervening to prevent the ouster, via forced resignation, of Iraq’s Prime Minister Adil Abdul-Mahdi amid the popular protests and mayhem. 

We reported last week that during a surprise visit by Qassem Soleimani, the head of the IRGC international offshot Quds Force, the powerful military chief intervened by asking al-Amiri and his Iranian-backed militias to continue supporting Abdul Mahdi. Several senior Iraqi officials have told reporters that Soleimani showed up at a secret meeting in Baghdad on Wednesday that was supposed to be run by Abdul Mahdi, according to Israeli newspaper Haaretz.

Soleimani and many of the militia leaders who are loyal to Amiri raised concerns at the meeting that ousting Abdul Mahdi could weaken the Popular Mobilization Forces, an umbrella group of mostly Iran-backed Shiite militias who have allies in the Iraq’s parliament and government.

Watch as the Iranian consulate in the central Iraqi city of Karbala, south of Baghdad is torched:

And now, with his position firmly in place for now, PM Abdul Mahdi on Sunday issued a public message calling on demonstrators to “return the country to normal” — but made no mention of plans to step down. 

“Threatening the oil interests and blocking roads leading to Iraq’s ports is causing big losses exceeding billions of dollars,” he said, according to the WSJ. 

Anti-Iran anger has been particularly fierce in the restive southern provinces, given the important Shia pilgrimage centers in places like Karbala, where it’s believed Iran’s influence is felt most strongly and directly.  

Indeed the ‘proxy war’ nature of what’s unfolding in Iraq is increasingly tanking center stage, as President Trump himself tweeted about Monday morning:

Donald Trump is retweeting Saudi regime propaganda cheering over an attack on the Iranian consulate in Iraq.

Trump obviously doesn’t read Arabic, so it’s clear someone sent him this tweet from a Saudi monarchy-funded anti-Iran propaganda outlet so he could amplify it pic.twitter.com/hmpTFWF2sD

— Ben Norton (@BenjaminNorton) November 4, 2019

For example the Iranian consulate in Basra was torched by a mob last year, in events very similar to Sunday’s incident. During Sunday night’s unrest which saw the consulate in Karbala set ablaze, at least three protesters were killed by security forces.

Iran-backed Iraqi Shia militias have reportedly been increasingly involved in assisting security forces in putting down the popular unrest which has swept the country – by some accounts even deploying snipers.

Authored by Mike Shedlock via MishTalk,

After more than a decade, Waymo’s driverless ride-hailing service is open to customers. For now, it’s free.

TechCrunch discusses Hailing a Waymo Driverless Taxi.

“Congrats! This car is all yours, with no one up front,” the pop-up notification from the Waymo app reads. “This ride will be different. With no one else in the car, Waymo will do all the driving. Enjoy this free ride on us!”

It marks the beginning of a driverless ride-hailing service that is now being used by members of its early rider program and eventually the public.

Limitations

• The company’s driverless rides are currently free and only taking place in a geofenced area that includes parts of Chandler, Mesa and Tempe.

• Even Waymo vehicles with safety drivers don’t yet take riders to one of the most popular ride-hailing destinations: the airport.

• The everyday interactions between a passenger and an Uber or Lyft driver, such as conversations about pick-up and drop-offs as well as sudden changes in plans, become more complex when the driver is a computer. It’s an area that Waymo’s user experience research (UXR) team admits it is still figuring out.

• Computers and sensors may already be better than humans at specific driving capabilities, like staying in lanes or avoiding obstacles (especially over long periods of time), but they lack the human flexibility and adaptability needed to be a good mobility provider.

Pooh Poohs Coming

I expect many readers will pooh-pooh this story with the usual nonsense about weather, old men on roller skates veering into traffic, liability issues, theft, and other silliness.

The fact of the matter is this is 2019.

I expected trucks, not taxis would be far in front. And they likely still are.

City driving where riders might change their minds is far more complex that point-to-point trucking from interstate hub to hub. Taxi adoption is likely to be slower.

The primary thing holding up hub-to-hub trucking is national regulation. I expect to see that next year.

Once allowed, interstate truck driving will quickly adopt. Commercial taxis will have a longer adoption period.

Personal Anecdote

The limo service I typically take to the airport just got rid of all its limos and drivers. The drivers are now contractors and must own their own vehicles. Those who refused were fired.

With that change, the owner’s business model morphed into taking a percentage of the fare for scheduling rides rather than owning any vehicles and hiring drivers.

Within five years or less, those jobs will be gone.

Driverless Has Arrived

Driverless is here. The only debate is how fast it ramps up.

I suggest that within a 2-3 years of federal regulation, the majority of truck on the interstates will be driverless.

Even faster would not be a surprise.

Just hours after McDonalds unexpectedly fired its CEO late on Sunday because of his relationship with an employee, the company also announced that its top human-resources executive also left the company.

McDonald’s said its Chief People Officer David Fairhurst had left the company on Monday, without providing any details. Fairhurst, a 15-year veteran of the company, had worked with Easterbrook for McDonald’s in the U.K. and was promoted to the top human-resources job soon after Easterbrook became CEO in 2015, the WSJ first reported.

The company declined to comment on the nature of Fairhurst’s departure. Mason Smoot, an SVP who oversees strategic alignment and staff, will replace Fairhurst on an interim basis.

Earlier this year and following an inquiry from U.S. Senator Tammy Duckworth, McDonald’s said it was training workers to deal with harassment and starting a hotline for victims. In a response to Duckworth, an Illinois Democrat, Easterbrook said the company’s new strategy creates “a clear message that we are committed to creating and sustaining a culture of trust where employees feel safe, valued and respected.”

Separately, McDonalds reported in a Monday 8K that it would pay now former CEO Easterbrook six months in severance, and would grant him 18 months of health benefits. It wasn’t clear if Easterbrook would also get free hamburgers for life to make sure he uses those health benefits ASAP.

McDonalds also said the agreement absolved the company of any liability resulting from Easterbrook’s termination and barred him from working for another fast-food company for two years.

As part of the agreement, the former CEO will also will keep stock awards vesting within three years of his firing and forfeit later awards. He will be eligible for a prorated bonus for the current fiscal year determined by the company’s performance. This means that Easterbrook will get to keep unvested stock options worth about $23.5 million and possibly benefit from grants of restricted shares tied to the company’s performance that are worth roughly $13.8 million at their target payouts, according to calculations by Bloomberg. He’s also eligible for a pro-rated bonus for his work in fiscal 2019.

In return Easterbrook agreed to refrain from making disparaging comments about the company and would cooperate with any investigations or litigation arising from matters he has knowledge about.

As Bloomberg notes, not all CEOs who lose their jobs under similar circumstances fare so well. Brian Krzanich, who was fired by Intel last year after the board learned he had a consensual relationship with an employee, surrendered equity awards worth tens of millions of dollars and received no severance. A McDonald’s representative didn’t immediately respond to a request for comment about why the board opted against terminating Easterbrook “for cause.”

Easterbrook, who received $15.9 million in total compensation last year, will receive the severance six months after his termination date, Nov. 1. McDonald’s said on Sunday that it had appointed Chris Kempczinski, its former head of U.S. operations, to succeed Easterbrook immediately.

As the WSJ notes, Kempczinski, 51, and Easterbrook, 52, worked closely on a strategy in recent years to try to boost traffic at US restaurants through spending on new technology and menu items with fresher ingredients. As MCD’s recent press release showed, the company’s sales had risen thanks to those efforts and price increases, but traffic in the U.S. has remained largely flat and franchisees have pushed back at the costs of renovating restaurants and changing operations. Kempczinski said in an interview on Sunday that he would stick with the strategy and continue to discuss it with franchisees.

McDonald’s said Monday that it set Mr. Kempczinski’s base salary at $1.25 million. Mr. Easterbrook’s base salary last year was $1.35 million.

While investors were displeased with the unexpected CEO departure, pushing MCD stock lower on Monday, the burger chain faces other, more pressing problems: as traffic to burger chains slows generally in the US, McDonald’s is also facing threats to other parts of its business such as breakfast. A part of the day it once dominated with Egg McMuffins and hash browns has seen rival chains pile in as they also hunt for growth. The chain has still posted same-store sales growth in the U.S. and globally under Easterbrook’s watch.

As we reported last month, McDonald struck a number of technology deals to try to boost sales and improve operations. Those deals are driving up expenses. Kempczinski said in an interview Sunday that he expects them to eventually pay off, and he intends to keep Mr. Easterbrook’s focus on technology.

Submitted by SaxoBank equity strategist, Peter Garnry

For more than a year we have been negative on equities relative to bonds as global leading indicators have continuously deteriorated. We have never pulled out the “all out” alarm but encouraged our clients to be defensive on equities gravitating towards high quality and minimum volatility stocks. To be fair our factor tilts have done well against the general equity market with minimum volatility stocks delivering the same return as MSCI World, but quality stocks have delivered 6.4% more in total return this year. In a longer horizon both minimum volatility and quality factors have done even much better. While we have got the equity factor tilts right, we have been totally wrong on our general allocation decision of underweight equities and overweight bonds. As a result, we are now officially positive on equities until the downward dynamics return.

Given the market reaction despite overwhelming data suggesting trouble ahead we now must contemplate a melt up scenario in US equities like the one in 1999-2000. In our equity presentation back in March we did in fact highlight the case for a melt up scenario as the similarities to the 1998 drawdown in equities followed by Greenspan’s panic resemble that of Powell’s panic early this year after the Q4 2018 meltdown. However, as the macro data and the US-China relationship continued to worsen we never materialized the melt up scenario as our base scenario. But for now, we must accept that central bank action pushing down interest rates again is driving strong substitution effects from bonds into equities and creates a strong there is no alternative (‘TINA’) effects offsetting any weakness in macro.

As we highlighted last week S&P 500 is becoming increasingly expensive in long historical context as valuation multiples have risen as technology companies with higher growth and higher return on capital have come to dominate the index.

History shows that higher valuation comes with lower returns, so we are currently just borrowing returns from the future. In our monthly equity update published last Friday we are hypothesizing that that one of the key explanations for the disconnect between equities and macro is that equities are discounting a soft patch and a quick return to trend growth. This view is also reflected in current S&P 500 forward EPS estimates which are currently reflecting 14% growth over the next 12 month which in our view is an aggressive estimate for growth. It’s also important to note that S&P 500 estimates are generally too optimistic; the exact figures are 17% above realized earnings the following 12 months since 1991 and 7% in the period since the Great Financial Crisis. 

In other words, the optimistic view currently baked into forward estimates will not hold pushing up valuation multiples even more over the coming period.

If it seems like it was just over a month ago that the repo market suddenly suffered its biggest cardiac arrest since the financial crisis, when overnight repo rates exploded from 2% to 10% in an instant with no observable news or catalyst on the 11th anniversary of Lehman’s collapse…

… and only immediate Fed intervention prevented a full-blown financial crisis, it’s because it was.

As we have already discussed, we now know that said crisis was precipitated by JPMorgan quietly and steadily withdrawing liquidity from money markets…

… while at the same time Jamie Dimon’s bank reduced the cash it has on deposit at the Federal Reserve, from which it might have lent to other banks and prevent the repo crisis, by $158 billion in the year through June, a 57% decline, as JPM faced the highest G-SIB surcharges of all US banks due to the specific composition of its balance sheet.

Of course, whether this was indeed the reason behind JPM’s liquidity withdrawal, or if Jamie Dimon strategically shrank the bank’s available liquidity in order to incite a repo market crisis (the same way some speculate Lehman was sacrificed to launch QE1 and the global financial bailout), there is no way of knowing for sure – we can hope that Elizabeth Warren’s questions to Steve Mnuchin will provide some additional insight, although we doubt it – but what we do know is that in response to September’s repocalypse, not only did the NY Fed launch overnight and term repos to inject liquidity into the market, it also started “Not QE”, or “Quasi QE”, which is never ever to be confused with “QE 4” (as that would suggest the US economy is now in a recession and the Fed is panicking to prevent a market crash). Why? Because whereas the narrative never touched on JPM and its explicit liquidity withdrawal, pundits were all too eager to point to the drop in Fed reserves to “only” $1.3 trillion as the culprit behind September’s fireworks.

Fast forward to today, when for JPMorgan and all other US commercial banks (which happen to own the Fed), it is mission accomplished: not only did the Fed’s excess reserves spike to $1.5 trillion, a level which the experts say is far more suitable for the US financial system (as a reminder, before the financial crisis the level of excess reserves was precisely $0), but as of last week, the Fed’s balance sheet is now back over $4 trillion (at roughly the same time total US debt hit $23 trillion for the first time), surging over $250 billion since September, and one third of the way to regaining it’s all time highs of $4.5 trillion.

And since the Fed’s POMO will continue well into 2020, expect the previous all time highs in the Fed’s balance sheet to be surpassed soon. Just don’t call it QE.

Meanwhile, if one strips away the superficial debate whether the US repo market is fixed or still broken, if interbank plumbing remains clogged up, if JPM caused the September repo crisis (on purpose) or if the dollar funding crisis was due to a drop in bank reserves, and if this is QE or not QE, what is really taking place just behind the scenes is very simple: global central banks, from the ECB, to China, and now to the Fed, are once again flooding the world with liquidity. In fact, the only reason the S&P is up 23% YTD is – drumroll – a $4 trillion surge in the global money supply as shown in the chart below.

Finally, for those – who like the IMF – say central banks are tapped out, a recent report from Nomura shows that whereas some central banks – such as the ECB and BOJ – have already tried everything, there are those like the Fed and the PBOC which still have some ammo left…

… which means that the can will be kicked at least a little bit longer before central banks use up all their available means to extend and pretend, and the market finally collapses.