Month: December 2019

Hawaii Rep. Tulsi Gabbard (D) has taken flack from the left after voting “present” during last week’s formal House impeachment vote, and now says that the process may only “embolden” President Trump and increase his chances of reelection (which House Speaker Nancy Pelosi warned about before she caved to her party).

“I think impeachment, unfortunately, will only further embolden Donald Trump, increase his support and the likelihood that he’ll have a better shot at getting elected while also seeing the likelihood that the House will lose a lot of seats to Republicans,” said Gabbard in a Saturday interview with ABC News in Hudson, New Hampshire.

Tulsi Gabbard: “Unfortunately the House impeachment of the President has greatly increased the likelihood that Donald Trump will remain the President for the next 5 years… Furthermore the House impeachment has increased the likelihood that Republicans will take over the House.” pic.twitter.com/gQIPssX0nS

— The Hill (@thehill) December 31, 2019

Gabbard also told CBS News that impeachment may allow Republicans to regain the majority in the House after the 2020 election. 

WATCH: I sat down with @TulsiGabbard to discuss her “present” vote on impeachment. Gabbard says the Senate trial will strengthen President Trump.

Most Gabbard supporters I’ve spoken with in New Hampshire approve of her vote, particularly independents.

🔗https://t.co/SOsvF9jsHQ pic.twitter.com/hDi7JoI4Kg

— Nicole Sganga (@NicoleSganga) December 31, 2019

Gabbard — a 2020 president candidate — noted that the prospect of a second term for Trump and a Republican-controlled House is a “serious concern” of hers, adding that she’s worried about the potential ramifications that will be left if Trump is acquitted.

She told ABC News that it could leave “lasting damage” on the country as a whole.

The Democratic congresswoman — who is known to be an outspoken critic of her own party — was the lone lawmaker to not choose a side on impeachment, and has faced intense criticism for her choice. –ABC News

Gabbard defended her decision to vote present, calling it an “active protest” against the “terrible fallout of this zero sum mindset” between Democrats and Republicans. She told ABC News that her vote was “not a decision of neutrality,” and that she was indeed “standing up for the people of this country and our ability to move forward together.

 

Authored by John Rubino via DollarDollapse.com,

Of all the amazing scenes in The Big Short, a film about the genesis of the Great Recession, arguably the most shocking is the meeting between a couple of hedge fund managers trying to understand the housing bubble and “Georgia,” a (in a bit of symbolic overkill) visually-impaired executive with the Standard & Poor’s bond rating agency.

Beginning at the 2:15 mark in the following video clip, the money managers demand to know why she’s handing out AAA ratings to clearly high-risk mortgage backed paper. To which she responds,

“If we don’t give them the ratings they’ll go to Moody’s, right down the block. If we don’t work with them they’ll go to our competitors. Not our fault, it’s simply the way the world works. It is not my decision. I have a boss.”

The rating agencies’ blatant corruption contributed to one of history’s biggest bubbles and subsequent multiyear financial crisis. But at least it taught those guys a valuable lesson and led to changes that will prevent a recurrence.

Just kidding. They learned nothing and are already back at it, this time with collateralized loan obligations, or CLOs. From yesterday’s Wall Street Journal:

Fight for Market Share Gives Bond Issuers Pick of Ratings

Last spring, a real-estate lender hired three ratings firms to rate a series of bonds backed by speculative real-estate loans. Only one of the three got to rate all the bonds. Moody’s Corp. said about half were triple-A. Another firm said about 61% merited that grade. DBRS Inc. said two-thirds.

The winner was DBRS, which had just changed its methodology for rating this type of debt. Moody’s was only hired to rate one of the eight bonds in the deal, and rival Kroll Bond Rating Agency Inc. for a handful. DBRS rated all eight.

The ratings-selection wasn’t unusual: It has become standard industry practice. Fierce competition among ratings firms in a fast-growing corner of the bond market is allowing issuers to cherry pick the most favorable ratings. The result is that securities deemed safe by the ratings firms have increasingly smaller cushions against losses.

The security in question is a cross between two of Wall Street’s hottest markets—commercial mortgage bonds, which are backed by mortgage payments on apartment buildings, malls and the like—and collateralized loan obligations, which are pools of bonds backed by payments on corporate borrowings.

Banks sold a record $21.4 billion commercial-real estate CLOs in 2019, according to commercial mortgage tracker Trepp LLC. That was up from less than $1 billion in 2012 and made it one of the fastest-growing segments of the larger market for commercial-mortgage bonds, Trepp data show.

Issuance is soaring because investors are thirsty for financing to fix up buildings, a popular strategy in hot real-estate markets. Known as transitional loans, these mortgages are often based on a borrower’s plan to turn around a struggling property and fetch higher rents. Such plans might not pan out, making the loans riskier than debt that can be paid off with existing rent payments from a property.

The lenders that make the loans often securitize them by packaging them into bonds sold by an investment bank to investors. That means obtaining ratings from firms like Moody’s or DBRS to help investors judge how risky the bonds are. The firms provide bankers initial feedback on how they might grade deals and get hired based on that feedback. The fees are lucrative and can top $1 million, SEC disclosures show.

As issuance has grown, so has competition to rate the debt. DBRS had the early lead in the sector, rating 10 of 18 deals in 2017. But rival Kroll Bond Rating Agency Inc. began to dominate the sector after it changed its methodology that year. Kroll rated 21 of 25 deals in 2018, according to data from the Commercial Mortgage Alert, which tracks the industry.

A comparison of Kroll’s old methodology and its new one shows that the firm relaxed some rent and occupancy stress tests for mortgages financing multifamily apartment buildings—a big part of the market for these loans. That could yield higher ratings, according to current and former ratings analysts.

So how accurate is the comparison of CLOs with the mortgage bubble? Pretty damn accurate, unfortunately. But not surprising. As expansions enter their latter innings, the people making fortunes by doing various kinds of financial deals realize that the only way to keep the deals (and thus their massive incomes) coming is to relax standards beyond what is normally considered prudent.

So lending standards fall, true risk is hidden in various ways, and hot money pours into ever-less-appropriate places. See, for instance, Signs Of A 2020 Top: “Buyers Return to Riskiest Junk Bonds”.

You see the dilemma here, right? If normal credit standards are maintained, the deal flow ceases and the economy tanks. But if safeguards are corrupted and/or abandoned, the game goes on, and all that capital gravitating towards extreme risk creates a debt bomb that has to blow up eventually. At which point the economy tanks.

In Austrian school of economics terms, over the course of a credit cycle an economy moves from “hedge finance” where debt is used for productive things that actually lower systemic risk, to, eventually, “Ponzi finance” where debt can only be paid off with the proceeds of new, even more risky debt. If past is still prologue, we’re either there or very close.

As Mike Shedlock put it in a recent post, “Fear Has Left The Building.”

Ford issued a press release on Monday detailing how reservations for the Mustang Mach-E “are officially full.”

The statement read, “other models like the Premium edition and the GT are still available for pre-order.” 

The US automaker debuted the new electric Mustang last month and began taking a $500 refundable reservation. 

Ford didn’t mention how many reservations it took but noted key choices consumers made in their pre-orders: 

• 2021 Mustang Mach-E First Edition reservations are full
• Carbonized Gray is the most popular choice with 38% choosing it, with Grabber Blue Metallic 35% and Rapid Red 27%
• More than 80% of US customers are reserving Mach-E with an Extended Range Battery
• About 55% are opting for all-wheel drive
• Almost 30% of US customers are choosing the Mach-E GT
• More than a quarter of all reservations are coming from California

Prices for the Mach-E start at around $45,000 and can range up to $60,000 for the Mach-E GT Performance Edition. The price is in range with Tesla’s Model 3 and Model Y. 

The Mach-E GT has an estimated 459 horsepower from two electric motors. It can do zero to 60 mph in 3.5 seconds, a time similar to the Model 3. 

As far as range, the Mach-E comes with a standard 240 miles, but long-range models can be extended up to 300 miles. 

Ford executives recently said that an all-electric version of the F-150 pickup truck is currently in development and could be released in 2021.

 

Authored by Patrick Buchanan via Buchanan.org,

“It’s tough to make predictions, especially about the future,” Yogi Berra reminded us.

But on “The McLaughlin Group,” the TV talk show on which this writer has appeared for four decades, predictions are as mandated as was taking Latin in Jesuit high schools in the 1950s.

Looking to 2020, this writer predicted that Donald Trump’s great domestic challenge would be to keep the economy firing on all cylinders. His great foreign policy challenge? Avoiding war.

When one looks at the numbers — unemployment at or below 4% for two years, an expansion in its 11th year, the stock market regularly hitting all-time highs — Trump enters his reelection year with a fistful of aces. One has to go back half a century to find numbers like these.

Moreover, the opposition shaping up to bring him down seems, to put it charitably, not up to the task.

Joe Biden, 77, with 45 years in electoral politics, has lost more than a step or two and his most memorable Senate vote was in support of George W. Bush’s decision to take us to war in Iraq, the greatest blunder in U.S. diplomatic history.

Biden’s challengers are a cantankerous 78-year-old democratic socialist who just had a heart attack and a 37-year-old mayor of a small town in Indiana who claims that his same-sex marriage is blessed by the Bible.

Tom Steyer and Mike Bloomberg are white male billionaires who are dumping scores of millions into TV ads to buy the nomination of a party that professes to stand on principle against white male privilege, wealth inequality and the noxious effects of big money in politics.

While Trump is facing an impeachment trial, an acquittal by a Mitch McConnell-run Republican Senate seems a pretty good bet.

And the coming report of U.S. Attorney John Durham into the origins of the Russiagate probe is expected to find political bias, if not conspiracy, at its root. Trump could emerge from the Mueller Report, Horowitz Report and Durham Report as what his allies claim him to be — the victim of a “deep state” conspiracy to fix the election of 2016.

If there are IEDs on Trump’s road to reelection, they may be found in the Middle and Near East, land of the forever wars, and North Korea.

Not infrequently, foreign policy has proven decisive in presidential years.

The Korean War contributed to Harry Truman’s defeat in the New Hampshire primary and his 1952 decision not to run again. When General Eisenhower, architect of the Normandy invasion, declared, “I shall go to Korea,” his rival Adlai Stevenson was toast.

Lyndon Johnson saw his party shattered and chances vanish with the Tet Offensive of 1968, Eugene McCarthy’s moral victory in New Hampshire, and antiwar candidate Bobby Kennedy’s entry into the race.

Jimmy Carter’s feckless response to the seizure of U.S. hostages in Iran consumed the last year of his presidency and contributed to his rout by Ronald Reagan.

The critical foreign theaters where Trump could face problems with his presidential re-election include Afghanistan, Iran and North Korea.

As of Dec. 30, Kim Jong Un’s “Christmas gift” to Trump had not been delivered. Yet it is unlikely Kim will let many weeks pass without making good on his warnings and threats. And though difficult to believe he would start a war, it is also difficult to see how he continues to tolerate sanctions for another year without upgrading and rattling his nuclear arsenal.

Trump is eager to make good on his promises and remove many of the 14,000 U.S. troops in Afghanistan before Election Day. Yet such a move is not without risks. Given the strength of the Taliban, the casualties they are able to inflict, the inability of the Afghan army to hold territory, and the constant atrocities in the capital city of Kabul, a Saigon ’75 end to the Afghan war is not outside the realm of the possible.

Nor is a shooting war with Iran that rivets the nation’s attention.

Yesterday, U.S. F-15s, in five attacks, hit munitions depots and a command center of the Iran-backed Kataib Hezbollah militia in Syria and Iraq, a retaliatory raid for a rocket attack on a U.S. training camp that killed an American contractor and wounded four U.S. soldiers.

“For those who ask about the response,” warns a Kataib Hezbollah spokesman, “it will be the size of our faith.”

One has to expect Iran and its militia in Iraq to respond in kind.

They have a track record. During 2019, with its economy choked by U.S. sanctions, Iran and its allies sabotaged oil tankers in the Gulf, shot down a $130 million U.S. Predator drone, and shut down with missiles and drones half of Saudi Arabia’s oil production.

In former times, a confrontation or shooting war often benefitted the incumbent, as there was almost always a rallying to the flag. Those days are gone. This generation has had its fill of wars.

*  *  *

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Following the headline decline for Conference Board Consumer Confidence in November, analysts are expecting an exuberant bounce in December as every asset class rose majestically (despite retail sales slowing).

But, despite record high stocks, the headline consumer confidence data disappointed, printing 126.5 (down from the upwardly revised 126.8) and well below the hopeful 128.5 expected.

While the Present Situation picked up modestly, the Future Outlook weakened:

• Present situation confidence rose to 170.0 vs 166.6 last month

• Consumer confidence expectations fell to 97.4 vs 100.3 last month

Combining for the 4th monthly headline drop in the last 5…

Source: Bloomberg

Interestingly, this is the 4th straight month of YoY declines in confidence…

Source: Bloomberg

And expectations for stock market gains also faded…

Source: Bloomberg

Isn’t the whole point of The Fed to pump enthusiasm up “by whatever means”?

Source: Bloomberg

It’s not working!

Authored by Mike Shedlock via MishTalk,

Companies with tangible net value of less that zero have increasingly outperformed the market for decades.

Bloomberg comments Capitalists Without Capital Are Ruling Capitalism

Some 40% of public stocks quoted in the U.S. have negative tangible book value, meaning that their tangible assets aren’t worth enough to repay all their debt. Two decades ago, this was only true of 15% of companies, according to Vincent Deluard of INTL FCStone Inc., who has carried out intensive research on the subject.

Such companies sound dreadful. In tangible, material terms their share certificates aren’t even worth the paper they are written on.

And yet, incredibly, a “negative-value” fund, composed of the shares of companies with negative tangible book value, would have beaten the main U.S. stock market, represented by the Russell 3000 Index, by 24% over the last 20 years. That outperformance has almost all happened since the financial crisis — before that, the negative-value fund had roughly tracked the benchmark.

Extreme Zombification

This is of course a result of Fed-sponsored zombification by keeping real interest rates negative for most of the last decade.

Real Interest Rates

Real means inflation-adjusted.

I created the above chart by subtracting year-over-year Consumer Price Index (CPI) from the Effective Fed Funds Rate.

Yet, the CPI is a fatally-flawed measure of inflation.

It fails to factor in housing prices and dramatically understates the rising cost of medical care.

Yet, even though inflation is hugely understated, real interest rates have been mostly negative since 2002.

This encouraged speculation in spades.

Meanwhile, thanks to Fed bubble-blowing policies, companies that have no tangible value can keep rolling over debt and even adding to it to pay the bills.

It was supposed to usher in a market crisis that would prompt the Fed to launch QE4 according to repo guru Zoltan Pozsar. In the end, the preemptive liquidity tsunami unleashed by the Fed in mid-December which backstopped just shy of $500 billion in liquidity, proved enough to keep any latent repo market crisis at bay.

The year’s final overnight repo operation, which the Fed expanded to as much as $150 billion ended up being just 17% subscribed, as Dealers submitted only $25.6 billion in securities ($15.2BN in TSYs, $2BN in Agencies, $8.35BN in MBS) in the year, and decade’s, final overnight repo meant to bridge the financial system’s short-term funding needs into 2020.

As a result of the Fed’s massive, preemptive liquidity backstop, the overnight G/C term repo rate quickly dropped back to a subdued, and quite normal, 1.55% after starting the day north of 1.80%.

One thing is certain: last New Year’s firework, which saw the overnight G/C repo rate shoot up as high as 5% into Jan 1, 2019, will not repeat itself.

The final hint that a repo crisis would be averted came on Dec 30, when the Turn repo rate dropped another 75 basis points from 2.75% down to 2.00%, confirming that dealers had lost all fears of a year-end funding squeeze. This happened after only $8.3 billion showed up for the 15 day term operation out of a possible $35 billion On Monday. And, as Curvature’s Scott Skyrm explained yesterday, turn rates rallied and the Fed RP term operation was well undersubscribed.

And so, with the “turn” collapsing and today’s overnight repo confirming that all funding needs were met, Skyrm summarized the current, non-crisis state of the repo market as follows:

• There is no more Repo market fear of a year-end rate explosion
• Year-End is now trading more like a quarter-end
• Given the rally in Turn rates, undersubscribed Fed RP operations can be considered to be due to banks getting funded and NOT to full balance sheets

And while a year-end repo crisis was averted thanks to a historic surge in the Fed’s balance sheeet…

… two questions emerge: i) would this have been the outcome had Pozsar not published his report warning about a repo market fireworks had the Fed not unleashed an unprecedented $500 billion liquidity backstop, and ii) will the Fed be able to successful drain the hundreds of billions in excess liquidity it injected to avoid a funding paralysis, while sending stocks to all time highs? While we will never know the answer to the first question, the answer to #2 will be made apparent in the first weeks of 2020 when the Fed decides to either keep rolling its repo operations or end them, cold Turkey, risking another funding crisis for one simple reason: the true level of cash in the market, excluding Fed intervention, has collapsed and once again the entire financial system is living on Fed generosity.

It appears they have completed the much-anticipated translation.

Following White House Trade Adviser Peter Navarro’s comments on the likelihood of Phase Two and Phase Three China trade deals, President Trump has confirmed the date for the historic signing of Phase One…

I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!

— Donald J. Trump (@realDonaldTrump) December 31, 2019

At the end of the tweet, Trump, most likely attempting to excite equity futures after a rather sour mood on Wall Street to end the year, said that he will go to Beijing to begin talks for the Phase 2 trade deal. 

And while the initial reaction was muted, the US cash open seems to have provided a lift…

We do wonder what the brouhahah was earlier in the week about senior Chinese officials coming to Washington this weekend for a signing?