20 years, to the day, after Greenspan’s iconic speech that warned of the unintended consequences of “irrational exuberance,” we find ourselves, yet again, in the midst of perhaps the largest asset bubble in history. In fact, Greenspan’s warning, previously made in a speech on Dec. 5, 1996, eerily reflects many of the same concerns surrounding the market today with low interest rates and lower risk premiums driving an unprecedented equity bubble.
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
Of course, since Greenspan’s initial warning in 1995 U.S. equity markets have bubbled up and crashed twice. Now, with the broader indices up 500-600%, one has to wonder whether “irrational exuberance” has once again “unduly escalated asset values.”
Meanwhile, the lower inflation expectations that Greenspan warned of, combined with endlessly accommodative Fed policies, have continued to push treasury yields ever closer to 0. For that reason, per Bloomberg, these days Greenspan seems to be more worried about the debt bubble than the equity bubble.
Even after the pullback, bonds look more like the real bubble today — the 10-year term premium only climbed back above zero three weeks ago after hitting an unprecedented minus 0.75 percentage point in July.
Greenspan himself now says he’s more worried about debt than equity, speaking in an interview with the Wall Street Journal published Dec. 3. He also recognized his warning had had little impact; and repeated his view that bubbles are almost impossible to stop once they get going.
And, after a massive expansion of the Fed’s balance sheet, Greenspan has only his successors to thank for his latest worries.
Of course, as Greenspan warns, “bubbles are almost impossible to stop once they get going.”
With Matteo Renzi’s resignation formally announced just after midnight local time yesterday following the rout in the Italian referendum, the prime minister met with Italian president Sergio Mattarella to discuss the terms of his resignation. However, it appears that Renzi’s departure may not be as clear cut as some had expected, and as Ansa reports, Renzi may delay his resignation following a request by the president to hold the post until the Senate Budget Law is passed, which could take place as soon as later this week, or – this being Italy – may stretch quite a bit longer.
Matteo Renzi was up at the Quirinale by the President of the Republic Sergio Mattarella after the Council of Ministers called on the outcome of the referendum vote. In the CDM would have confirmed, according to relate multiple sources, the intention to resign policy. But the formalization of the resignation will explain the same sources, only after the approval of the maneuver in the government’s intentions should take place in the shortest possible time, perhaps as early in the week. The hypothesis more accredited so far – therefore – is that Renzi can remain until the approval of the Budget Law to be launched in the Senate very soon, already by Friday. The assumption, therefore, is that of a trust ‘technical’. One option that has as its precondition the freezing of the resignation of Matteo Renzi until approval of the law. The process could also be further accelerated if the Senate is on an agreement to bring forward the date of the expiry of the amendments in committee and not to submit any proposal for amendment. A similar scenario was already practiced in 2011 with the Berlusconi government.
But on assumptions of this type comes the No Forza Italy – “The strange hypotheses circulating about a possible freezing of the Renzi government crisis, with the accelerated approval of the budget bill through even in so-called” technical trusts “are totally impassable. The No in the referendum is a vote of no confidence Renzi and his government activity as a whole. ” I say in a joint statement the leaders of Forza Italy in the Senate and the House, Paolo Romani and Renato Brunetta.
The President of the Council in the morning he went to the Quirinal to an interview of more than an hour with the President of the Republic Sergio Mattarella.
The head of the State in a note said that “We are in front of us commitments and deadlines which the institutions will have to ensure in any case the respect, providing answers to the height of the problems of the moment”. “Italy is a great country with a lot of positive energy in it. This too will mean that the political climate, despite the necessary dialectic, is marked by serenity and mutual respect.” “The high voter turnout, registratasi in the referendum yesterday, is the testimony of a solid democracy, a passionate country, capable of active participation”.
Meanwhile, the EURUSD continues its surge, and is now up 300 points higher from the overnight lows on the latest vicious short squeeze.
As BofA’s rates strategist Ralf Preusser writes in a note this morning, “not even a month since the US election and markets seem unrecognizable” adding that the Trump election represented a paradigm shift. Fiscal easing would take over from monetary easing and would allow for the dollar and rates to rise in unison, a trend not seen for a while. The bank notes that whilst the direction of the moves since the election is in line with its expectations and forecasts, “the speed has come as a surprise.” and while fundamentally the repricing has further to go, especially in light of OPEC’s decision to end the price war within the cartel, there are red flags emerging among which vulnerability of EMs, and the reaction function of the PBOC, while warning that investors should not forget that premature tapering by the ECB risks exposing the Euro area’s fault lines again.
Below is a summary of what BofA’s Preusser lays out as the key risks to the “post-Trump” market:
EM, China and Europe remain risks to central scenario
With no additional clarity on the policies that President-elect Trump will pursue once in office, it is worth revisiting some of the risks to our central scenario. The vulnerability of EM, and in particular the reaction function of the PBOC, is a concern. At the same time, investors should not forget that Europe continues to dance to a different inflation tune, and that any premature tapering by the ECB risks exposing the Euro area’s fault lines again.
ECB to extend QE, removing Euro area risks to reflation sentiment
In Europe, we fear that investors are losing sight of the extent to which the recovery and inflation dynamics rely on ECB support. This makes this week’s ECB meeting by far the biggest upcoming risk event, and arguably of more importance to the rates market than the Italian referendum. Our economists’ central scenario of an EUR 80 bn extension for six months should be bullish both rates and spreads. We therefore reiterate our constructive stance on EUR rates vs the US.
More importantly, however, for US rates to be able to reprice higher, in turn providing support for the dollar, the market must not start questioning the integrity of the Euro area. Decisive action by the ECB on Thursday is therefore a necessary condition for a continuation of our year ahead themes.
OPEC decision and breakevens suggest EM could become a reflation trade
In EM: a deflation or reflation trade? we highlight that rising US rates are not inconsistent with rising EM, as we saw in the 2004-06 Fed hiking cycle. The OPEC decision (OPEC delivers at last) makes us comfortable reiterating our bullish, aboveforward oil price forecast. Crucially for EM, this implies a much higher chance of revisiting the positive correlation between commodity prices and US data surprises that characterized the positive correlation between US rates and EM returns in 2004-06.
Second, unlike the botched track relay handoff in 2013, fiscal policy will be stepping into any void left by monetary policy, pointing to a much smaller risk of breakevens treating tighter monetary policy as a mistake, again leaving room for EM as a reflation trade.
RMB devaluations in response to protectionism
Even if EM as a whole seems in a decent position as of now, questions over China’s vulnerabilities are unlikely to disappear anytime soon. In Trump’s policies and Asia, we discuss why we do not believe that US protections would trigger RMB devaluations. We do see continued downward pressure on RMB and remain long USD/CNH, but do not expect the kind of disorderly moves that would put the current reflation sentiment at risk.
Of the four, the last one is the one that has received the most attention in recent days, so here is some additional details on “Trump’s policies and Asia” per BofA’s Claudio Piron:
* * *
Asia waits for clarity on Donald Trump’s trade policy as he fills his Cabinet. Trump’s Presidential election campaign website stated that one trade policy of a Trump administration is to reduce the US trade deficit1. In EM Asia, China and Korea accounted for 53% of the US trade deficit in 2015. Trump has publicly discussed asking the US Treasury Secretary to label China as a “currency manipulator”2; imposing a 45% tariff on imports from China; and criticised the South Korea-US Free Trade Agreement.
Whether or not a Trump administration seeks to label China a “currency manipulator” as suggested in Trump’s Presidential campaign, once in office as President, Trump could still impose tariffs on China directly on the basis of different legislation. There are five statutes that empower a President to impose tariffs on any economy (Table 4). This means a President does not need the Treasury to consider an economy a “currency manipulator” before he imposes tariffs. In practical terms, we believe only the Trade Act of 1974, Section 301 could be invoked eventually. In our opinion, the invocation of other Acts would not be applicable and could trigger strong court challenges.
We may get a signal from the Trump administration on how it will handle the US’s trade relationship with China in mid-December, when China expects to be given market economy status from 11 December 2016. We think a tough stance against China being granted market economy status would increase the likelihood of tariffs being imposed against China. It could also be a precursor to the US trade stance with South Korea. On his Presidential election campaign website, Trump stated that the trade deal with South Korea has reduced nearly 100,000 American jobs. As another trade policy of Trump is to “negotiate fair trade deals that create American jobs”, we believe the Trump administration could consider seeking to renegotiate the South Korea-US FTA. We don’t see China and S. Korea devaluing their currency in reaction to US protectionism:
It would be against China’s interest to engage in such currency devaluation practices. We think this could exacerbate RMB depreciation expectations and, in turn, capital outflows. We recently showed how USD appreciation can lead to capital outflows from China by Chinese residents. Furthermore, the effectiveness of China to contain capital outflows is arguably questionable given the persistent and negative net error and omissions in its balance of payments.
South Korea’s capacity and willingness to competitively devalue its currency against the USD is limited. Korea would need to forego either monetary sovereignty or free capital flows. But neither option is palatable for Korea, in our view.
Protectionism in the US is an inherent risk for Asia. We think the likelihood of steep tariffs is low, as it would raise prices in the US and reduce disposable income, which would be politically costly. That would limit the magnitude of potential retaliatory tariffs from China. Ultimately, if the trade policies of a Trump administration were to successfully lower the US trade deficit, China and Korea would have a lower trade surplus than before, all other things being equal. But this would decrease the selling of USD, and purchase of local currencies, by Chinese and Korean exporters.
The potential trade policies of a Trump administration could cause the RMB and KRW to depreciate. This would be consistent with our end-2017 USD/CNY and USD/KRW forecasts of 7.25 and 1,270, respectively. A US trade policy-related risk to our view is that the Trump administration adopts tough trade policies that trigger strong response from China and Korea and fuel strong depreciation expectations of the RMB and KRW.
Chart 9 shows that Chinese exporters have become net sellers of fx since March 2016: selling fx and purchasing RMB. In this environment, a weaker trade surplus in China would reduce the net selling of FX and alleviate appreciation pressure on the RMB. We stay long 12M USD/CNH (current: 295bps, target: 373bps, stop: -116bps). Risks to this trade are a strong growth recovery in China and intense capital outflows.
In South Korea, we estimate corporates would sell their FX receipts when USD/KRW is above 1.144. When the KRW is weak, Korean corporates would want to sell their FX receipts to benefit from a favourable exchange rate (Chart 10). Therefore a reduction of the US trade deficit with South Korea could put depreciation pressure on the KRW.
Yves Smith – who runs the respected website Naked Capitalism – has retained a top gun lawyer to sue the Washington Post for defamation unless it retracts its smear piece calling alternative media sites “Russian propaganda.”
Smith has also launched PropOrNot.org … a satirical site complaining about the lack of first-rate propaganda by the powers-that-be.
We – American alternative media who are loyal to the U.S. and no other country – fully endorse both efforts.
Unlike the knuckleheads who are attempting to shut down alternative media by lumping us in with Russian state-sponsored media, and the twits who wrote and approved the Washington Post smear piece – who apparently embrace the values of tyrants we fought the Revolutionary War to escape – we at Washington’s Blog actually believe in Americanvalues, such as freedom of the press and other liberties.
After several relatively uneventful months passed in Germany without a major incident involving migrants or refugees, the local migrant debate was again reignited after German Police arrested a 17-year-old Afghan teenage refugee in a high profile sexual assault and murder case that had kept the residents of Freiburg, Germany in suspense for months. The old town is seen from the cathedral tower in Freiburg, Germany
A medical student, officially identified only as Maria L., 19, was raped and allegedly drowned on the night of October 16, when she was returning to her residence hall from a student party by bicycle. Her body was found the next morning by locals on the bank of the Dreisam River in Freiburg, home of one of Germany’s elite universities RT reports.
The case has sparked massive public outcry, prompting police to form a special group consisting of about 40 investigative officers and forensic specialists. After an investigation that lasted for more than a month, police finally arrested the alleged murderer and rapist on Friday. “The suspect is a minor, 17, from Afghanistan, who came to Germany in 2015,” said Dieter Inhofer, the regional chief prosecutor, at a press conference following the arrest.
A single strand of black hair partially dyed blonde, a scarf found on the riverbed, and several DNA samples found on the victim’s body and at the crime scene led investigators to the suspect, police revealed during the press conference. “We were able to speak to the foster family,” David Mueller, head of the special investigative group, told journalists, but refused to reveal the nature of the conversation. “The suspect still refuses to testify,” he added.
The suspect was charged with sexual assault and murder, police said during the press conference, adding that it is yet unknown whether he deliberately drowned the victim or threw the woman in the water while she was unconscious. “The death occurred due to drowning,” Mueller said, stressing that it is the only fact confirmed so far regarding the victim’s death.
As part of their findings, which provoked another wave of revulsion against Merkel’s “open door” policies, officials confirmed that the suspect entered Germany illegally and later filed an asylum request as an unaccompanied minor. He then lived with a foster family in Freiburg. He had been charged once before with inflicting bodily harm, but the case was later dropped, police told journalists during the press conference without giving further details. It was unclear if the suspect and the victim had known each other before the incident, or if the attack was planned in advance.
Police also mentioned a similar incident in the nearby town of Endigen, just 30 kilometers from Freiburg, where a woman, 27, was also raped and murdered weeks after Maria L.’s death. No links between the two cases have been found, though a connection might still be investigated, Inhofer said.
“We will have no rest. We will thoroughly examine every lead and will look under every rock – many times, if needed,” Bernhard Rotzinger, head of the Freiburg Police Department, said on Friday.
Meanwhile, as expected, the news provoked outrage on social media, where people again blamed Angela Merkel’s open-door policy for what happened in Freiburg.
“Angela Merkel, look here! Blood of this person is on your hands!” a Twitter user wrote in a post featuring a photo of the victim.
As RT reports, some Twitter users expressed outrage over the situation and mocked the slogans used by advocates of the open-door policy.
The murderer & rapist is a 17 year old illigal migrant from Afghanistan who has been known to police for previous violent offenses #Freiburghttps://t.co/S3M5PGyqIG
It appears that Germany also has a problem when it comes to objective media coverage, and many criticized the German media for their reluctance to cover the story, dismissing it as “an incident of regional significance.”
Following the outrage, Freiburg Mayor Dieter Salomon called for discretion and urged Germans “not to draw generalized conclusions from the suspect’s origin and regard [the incident] as an isolated one instead,” Die Welt reported.
* * *
Capitalizing on the outrage, Germany’s anti-migrant AfD party blamed the “uncontrolled” influx of foreign undocumented migrants, with the local police union reminding of the “dangers that go along with massive immigration,” according to AFP. But some politicians wished to “dispel the atmosphere of fear.” Vice Chancellor Sigmar Gabriel told Bild the murder should not serve as basis for anti-refugee hatred, especially given that “Such horrible murders already happened before the first Afghan or Syrian refugee arrived here.”
“We will not allow incitement after such violent crimes, no matter who commits them.”
A total of 21,000 rejected asylum-seekers were repatriated in 2015, and an additional 35,000 in the first seven months of 2016, German Interior Minister Thomas de Maiziere said at a cabinet meeting in August. In late November, Merkel announced that up to 100,000 rejected asylum-seekers would be returned from Germany to their home countries by the end of the year.
The machinery of government typically works glacially slow, but the Senate didn’t miss a moment to pass the “Anti-Semitism Awareness Act of 2016” just two days after it was introduced by Sens. Bob Casey (D-PA) and Tim Scott (R-SC), and later co-sponsored by Sens. Lindsey Graham (R-S.C.) and Michael Bennet (D-Colo.).
S-10, as it will forever be known in the Congressional record, passed by unanimous consent last Thursday, and a companion bill has been sent to the House Committee on the Judiciary.
As noted here at Reason last week, the bill is both contradictory and constitutionally problematic. In trying to give the Department of Education (DOE) “the necessary statutory tools at their disposal to investigate anti-Jewish incidents” on college campuses, the bill attempts to conflate “unfair” political opposition to Israel with anti-Semitism. In doing so, it misses the point that things like holding Israel to “a double standard that one would not apply to any other democratic nation” and even something is repugnant as Holocaust denial are protected speech under the First Amendment.
The bill doesn’t make anti-Semitism (or any form of bigotry) illegal, but its intent is to “provide for the consideration of a definition of anti-Semitism for the enforcement of Federal anti-discrimination laws concerning education programs or activities,” which it justifies by invoking Title VI of the Civil Rights Act of 1964, which “prohibits discrimination on the basis of race, color, or national origin.”
So, if it’s just a tool to help the DOE investigate allegations of anti-Semitic violence on campus, what’s the constitutional objection to the bill?
It’s that it gives the federal government the authority to investigate ideas, thoughts, and political positions as violations of the Civil Rights Act of 1964. By specifically using the broad language of a 2010 State Department memo attempting to define anti-Semitism, the Senate bill wades into thought policing.
Seemingly anticipating the arguments of pesky critics with a rudimentary understanding of the First Amendment, the very last section of the bill includes this provision:
Nothing in this Act, or an amendment made by this Act, shall be construed to diminish or infringe upon any right protected under the First Amendment to the Constitution of the United States.
While investors are focused on Italy, Bloomberg's Mark Cudmore warns that another Mediterranean country is poised to grab their attention very soon. A currency crisis in Turkey is rapidly deteriorating, setting the stage for dramatic and unscheduled central bank action.
The lira has weakened by more than 11% in the last six weeks against an equally weighted dollar-euro basket. This devaluation is exacerbating the situation rather than providing a relief valve.
Turkish corporates’ FX liabilities have expanded at an extraordinary pace in recent years. As of August, they exceeded their FX assets by $210.5 billion dollars — an increase of 15% on the previous year.
So corporations are being forced to chase the move in the lira and buy even more foreign currency. Turkey’s citizens are understandably joining them, driven by anxiety over how this will end.
Over the weekend, President Erdogan pleaded for his compatriots to start converting their foreign currency savings back to lira. His words will be insufficient to stem outflows, especially as he used the same speech to again call for lower interest rates. That’s exactly what investors don’t want to hear.
Only a sudden large rate rise will stop the rout. The troublesome fact the president is actively fighting against the help that’s needed means the market will be more confident in selling the lira.
Global events aren’t helping. As a major commodity importer, the country’s terms of trade are starting to slump again in the wake of last week’s OPEC deal. Trump’s threatened geopolitical approach of reduced intervention is increasing the risk premium on assets in the region.
This movie has played out twice before in Turkey, in both 2006 and 2014, so traders should know how it ends. Erdogan will eventually lose, and the central bank will hike rates by several percent, striking further blows to a slowing real economy.
Get your fill of the Italian excitement today, but remember it’s just an antipasto. Turkey is the main course.
If you live in the Washington, D.C. area, come to Reason’s DC HQ on Thursday for a fast-paced, substantive discussion about race, multiculturalism, and libertarianism in the age of Trump.
Anti-immigration conservatives and liberals have long argued that as the United States brings in more foreigners, our common culture and values slip further and further away from the nation’s founding ideals of limited government and self-sufficiency. Donald Trump supporters who cheered the candidate’s plan to curtail immigration from Mexico and ban Muslims from entering the country often stressed the we’re just importing “Democratic” voters who will expand welfare. Is any of that true? And what about the large numbers of native-born whites who, while perhaps shrinking as a percentage of the population nonetheless had the clout to elect (if barely) the most restrictionist (and protectionist) president since at least World War II?
Government debt continues to grow and spending as a percentage of the GDP has stayed at or near post-WWII highs. Trump’s spending plan hardly reins in such largess even as his tax plan threatens to reduce revenues (and thus raise deficits) by massive amounts. What is the effect of such policies on libertarian visions for smaller, cheaper, and less-intrusive government? Will Trump end the federal war on pot even if he’s ramping up the war on immigrants? Will more protectionist economic policy be offset by more wide-open energy or education plans? We’re just a few weeks away from the start of President Trump’s first term and only this much is certain: It is going to be a hell of a ride.
The event is free and open to the public. Here are the details:
Prospects for Liberty in a Diversifying America
Location: 1747 Connecticut Ave. NW, Washington D.C. 20009
December 8, 2016
Now that the election is over, libertarians and conservatives are wondering what the Trump administration will mean for those who favor limited government, free markets, and the rule of law.
On Tuesday, December 8, you are cordially invited to a panel discussion moderated by Nick Gillespie featuring Reason’s Shikha Dalmia, Avik Roy, Co-Founder of the Foundation for Research on Equal Opportunity; and journalist Charles Cooke of National Review.
“Prospects for Liberty in a Diversifying America”
Panel Discussion moderated by Nick Gillespie, Reason.com
After repeatedly referring to NAFTA as “the worst trade deal maybe ever signed anywhere” during the presidential campaign, the Trump administration seems to be softening it’s protectionist rhetoric. According to The Hill, in speaking to a group of concerned business leaders, Trump advisor Anthony Scaramucci said that the new administration isn’t looking to “rip up NAFTA” but rather to “right-size it and make it fairer.”
Anthony Scaramucci, a senior advisor on the Trump transition team, told a group of business leaders convened at a bipartisan meeting by the group No Labels that President-elect Trump is a free-trader who is looking to make trade deals more fair, not scrap them.
“I don’t think we’re looking to rip up NAFTA as much as we are looking to right-size it and make it fairer,” he added. “He’s got a great relationship, by the way, with the Mexican president. They talk regularly,” referring to Trump and Mexican President Enrique Peña Nieto.
Scaramucci said his homework on Trump’s economic team has been to study the impact of the North American Free Trade Agreement (NAFTA), which Trump called “the worst trade deal maybe ever signed anywhere” during the campaign.
“I don’t think anybody in the administration from the top to the bottom is looking for protectionism. We understand the economic harm and the impact that would take,” he said. “I don’t think anybody in the administration is looking for quote-unquote tariffs, but I think they are a cudgel if you will to lay out there if we can’t get the trade deals to be right-sided to now benefit the American people.”
All that said, the suggestion that no one within the administration “is looking for quote-unquote tariffs,” would seem to slightly contradict tweets from the President-elect himself who has directly warned, as recently as yesterday, that companies looking to offshore manufacturing jobs should expect a 35% import tariff.
The U.S. is going to substantialy reduce taxes and regulations on businesses, but any business that leaves our country for another country,
Of course, only time will tell if the Trump administration will pursue protectionist policies like a 35% tariff or whether the tough talk is all simply a negotiating tactic as suggested by Scaramucci.
He added that deals signed since World War II were designed to promote global peace and stability, but sometimes came at the expense of American workers.
“This economic interdependence has actually reduced conflict around the world. However, one of the deleterious side effects of this is that it’s hollowed out the manufacturing base of the United States,” Scaramucci said.
“Things get snippeted a certain way in the media and they get framed a certain way that he’s a protectionist and he’s against trade. I can state categorically that if he were standing here right now he’d tell you that he’s a free trader,” he said.
In the end, we’re certain the Trump administration fully appreciates that while protectionist policies may have a positive impact on manufacturing employment levels in the short term, in the long term keeping manufacturing costs artificially high only serves to improve the return profile of automation and other technology-based capital investment projects.