Rand Paul’s Iowa Chances

“We must be brave enough to believe that ideas are powerful, maybe even stronger than armies,” said Sen. Rand Paul (R-Ky.), speaking before a crowd at the private Drake University in Des Moines, Iowa, last week.

Throughout the half hour he talked, he was mostly calm, offering sometimes long-winded libertarian truths, getting big cheer lines from an often-rowdy crowd for everything from how we will soon run out of other people’s money, and how we must fight Big Brother; how he will “never ignore the human costs of war” (which triggered a wave of “President Paul!” shouts) and that “we must be the party of justice and justice begins when the war on drugs ends,” while also stressing that we must stop IRS harassment.

Not much he said made him seem like he was fighting on the same ground as any of his opponents, except when he slammed Donald Trump for his practice of eminent domain and Ted Cruz for his hunger for government to swallow up our phone records.

Paul opened with a curiously spiritual rap prefaced with “What victory is faith if we are not free to choose it?” and assured the students that he was the candidate who wanted to build a bigger, broader party, “with more walks of life, with tattoos and without, with earrings and without, in overalls and in suits, a bigger more diverse party because, as my dad always said, ‘liberty brings people together.'” 

Liberty needs to bring a lot of people together for Rand Paul in Iowa’s caucuses tonight for his campaign to have much life left.

Paul’s been doing many similar talks before students and other groups of Iowans over the past week, sometimes drawing over 1,000. Last night, he did a rare dual appearance with his father, former Texas congressman Ron Paul, who won the caucus votes of over 21 percent of Iowans four years ago. (Rand tells reporters he has reason to believe that some extant polling in Iowa seems to be missing a lot of that group.)

He’s been defending a foreign policy opposed to regime change in the Middle East to the last, as USA Today reports:

“You want somebody that’s going to be the commander in chief who has some temperament. That really isn’t eager to pull the trigger,” he said. “I want a foreign policy that defends America. That makes us strong again. But I don’t want a foreign policy that thinks that regime change in the Middle East is going to work.”

The national optics for Paul going into the caucus are as good as can be expected for a candidate who suffers both crummy poll numbers and a general sense that his quasi-libertarian approach seems the last thing GOP voters want in an age of Trump.

Those problems combined have relegated him to “who cares?” status to most media and possibly most voters. He was even denied a seat in the Jan. 14 Fox Business News main debate, an insult that Paul turned into a good earned media opportunity.

As his presentation at Drake indicates, to the extent Paul does do well tonight, sticking to mostly libertarian bonafides will be why. (Even to non-libertarians, Paul’s stances can seem like refreshing common sense compared to his opponents.) But it seems clear that the currently Trump-Cruz dominated party base isn’t libertarian dominated. Even if he shocks the world tonight, Paul will still at best be leading a rump revolution within the Party, not its ruling faction.

Poll numbers in Iowa on the rise got him got him back into the last pre-caucus debate on Thursday (he was 5th in the lastest Des Moines Register poll), his last chance to potentially reach voters across the state who didn’t leave their house to see him.

Paul had a good night. He skillfully, if not necessarily passionately, hit his unique libertarian-ish bonafides over surveillance and privacy, criminal justice reform, and foreign intervention. (He might have whiffed on abortion, from whatever side you approach the matter.) The Washington Post declared Paul the top winner of the debate though also confident it’s still “too little too late” for him. Data journalism superstar Nate Silver at his FiveThirtyEight site also called Rand the winner, as did James Poulos at The Week, praising Paul’s “brilliant combination of high dudgeon and medium chill.”

But what has to happen for him to win even a perception victory in Iowa? As Stephanie Slade wrote here last week, it is going to be about turnout, and Rand had both a campaign and an unaffiliated SuperPac, Concerned American Voters (CAV) working Iowa on that. Paul’s people are confident their get-out-the-vote (GOTV) operation will deliver 10,000 students to caucus for Paul, which in and of itself would amount to over 8 percent of the 2012 caucus turnout.

Cliff Maloney, who’s running the youth operation for the campaign in Iowa, answered some questions about the operation via email. He says they will have made 1.2 million phone calls by the time everything is over today, and currently have 150 active volunteers at their Iowa HQ. While Ted Cruz is also reported to have a very impressive ground and phone operation, Maloney is “confident that Team Rand has the top ground game in Iowa.”

The key to student appeal, Maloney says, is that “every student we speak with loves that Rand is consistent and authentic. Students love that he is an every-day Joe, an eye surgeon from Bowling Green. The more we talk about privacy, a sober foreign policy, and his consistent stance for the principles of liberty, the more we find students joining our SFR [Students for Rand] chapters.”

Matt Kibbe of CAV says that while they have not had a specifically student-focus like the campaign, they are confident they’ve identified and are communicating well with over 30,000 Rand-identified potential caucusers, and are helping house squads of door-knockers for Paul in these last 48 hours.

Paul’s appeal isn’t single issue, says Steve Grubbs, a veteran of earlier Steve Forbes and Herman Cain (among other) GOP campaigns, who has been helming the Paul campaign’s Iowa operations. “With Forbes it was all the flat tax, with Herman Cain it was 999, but with Rand Paul it’s the overall liberty message and how it applies to all issues, but particularly peace through strength, audit the Fed, civil justice reform.”

Grubbs says as of late last week that they had around 1,025 precinct captains for the state’s 1,681 precincts, who are important as folk handling the most granular GOTV efforts, making sure local committeds show up to the polls, and also for handling the vital task of convincing, in short speeches before their neighbors at the caucus meeting, why they should vote for Rand Paul.

Grubbs says that “a significant number” of Iowans don’t really finally settle their decision til after they’ve heard what their neighbors caucusing for the various candidates have to say at the meeting itself. Grubbs says their precinct captains will be giving out lapel stickers to supporters that push three issues: term limits, peace through strength, and flat tax.

I spoke to a handful of Concerned American Voters canvassers, some who’d worked in Iowa and some who are working in Nevada. (The Paul campaign itself holds its volunteers to a non-disclosure agreement, and even ones I reached out to informally over social networking held to it. While I understand message discipline, as with the Ron Paul campaign, a potentially inspirational story of youth and grassroots activism that could be grand for general media optics is there to be told, though the campaign seem to insist it can’t be told, at least not on their watch.)

Adam Sullivan, who was in college in Iowa during the 2012 Ron Paul campaign and who did activism work later with the Paulist Young Americans for Liberty, was a field director for CAV in Iowa this campaign. He says for Rand fans, the “outside, the anti-establishment thing” was hot, and he didn’t think a majority of Rand supporters would necessarily self-identify as “libertarian.”

That said, even among the constitutionalists or conservatives, “I didn’t hear anyone saying we definitely need to keep pot illegal, keep filling the prisons” and he is sure progress on that “is a credit to Ron and Rand Paul.” Despite what current polls might indicate, Sullivan thinks the idea that a vast majority of Ron voters are turned off this year by some perceived softness in Rand’s small-government bonafides is a myth.

Evangelicals are a big thing in Iowa, and Sullivan thinks most of them at least like Rand fine, even if he’s not their first choice. Of the big “values” issues in Iowa, they are far more concerned with pro-life than gay marriage these days. Sullivan, and other CAV canvassers in Nevada, acknowledge that some GOP voters see Paul as “insufficiently aggro” or “too dovish” when it comes to foreign policy. The most likely voter to be hostile to Paul is the Trump voter.

A profile of CAV’s digital video ad strategy in Rare says they’ve found “topics that performed well were Paul’s correct predictions about the perils of arming jihadists, and strong condemnations of politicians for getting us into $18 trillion in debt.”

CAV has spent around a million on such ads, and the PAC’s operator Jeff Frazee told Rare that “Everything [CAV] has done has been very data driven. We’ve made sure to check our own intuitions and opinions at the door, and let the data tell us what messaging is strongest and what’s resonating with voters.”

Kibbe of CAV says that, even though foreign policy might be understood to be a weak point for Paul with the imagined modal GOP primary voter, “his stance on foreign interventions is a key issue for us.” That makes sense since it has been a major way he’s “differentiated himself from a crowded field” in which you need motivated folk to actually show up and wait through Iowa’s long and complicated caucus process. That involves sitting through long meetings and literally standing up in public for your candidate; it’s not like going into a booth, pulling a lever, and heading home. 

Kibbe is confident enough the polls are wrong about Paul that he calls a top-three showing for his man tonight, and vows regardless that CAV is “in it til the day he’s sworn in office” and already has active operations in groundwork in Nevada and social media work in New Hampshire.

CAV has pulled in six-figure donations from a handful of wealthy libertarians, including Whole Foods co-founder and co-CEO John Mackey. Overall, the three SuperPACs dedicated to Rand took in $4.6 million in the second half of 2015, spending $5.9 million in the same period but still holding $4.4 million in reserve.

Paul campaigns believe in phone calls, and plenty of them. As with Ron Paul in Iowa in 2012 I’ve seen some signs that some people are annoyed and frustrated at how many times Rand Paul makes their telephone ring. National Journal reported that your Cruzes and Bushes are also making over 10K calls a day using sophisticated computer data systems, but Trump’s voter identification or GOTV efforts are a black box and may be non-existent.

If that is true, and a huge chunk of those polling now for Trump don’t actually trouble themselves to go caucus for him today, Rand Paul’s hopeful declaration in a press conference last week that polls may be not just 5 but 15 percent off could have some bearing.

The idea that Trump may have picked up a portion of the old Ron Paul coalition just on the basis of being the most convincing “radical outsider” (independent of actual ideas) rings true with some, but not all, Paul watchers. One longtime Paul fan admits that to some in 2012 Ron was not necessarily the libertarian candidate but just the radically anti-Washington “drain the swamps” guy and Trump plays the same role for many now. That same analyst thinks that libertarians, and the GOP establishment, both underestimate how strong in Iowa is the desire to just see “every illegal immigrant sent back home, no matter how many buses it takes.”

Kibbe says from his years of tending the Tea Party grassroots via his previous work with FreedomWorks that the GOP powers-that-be underestimated exactly how much they had pissed off and disenfranchised many of their voters. Many of them now see Trump as “a convenient wrecking ball to take out the Republican Party and start over” which given his character and ideas is a “dangerous game” that Kibbe still hope Paul can block.

Something to ensure Trump doesn’t do as well in Iowa or down the road as currently seems likely is key to the campaign’s or the PAC’s hope. 

Paul is definitely selling a very different spirit than Trump, for those who still want to hear it. While rock n’ roll as the language of rebellion may be an outmoded concept, it still warms this libertarian’s heart seeing Paul take the idea of liberty past just specific things government may be doing, from taxing to spying, that make our lives harder, to a more idealistic and cosmic sense of individual possibility, by quoting that most cosmic of classic rock bands, Pink Floyd.

At his talk last night, as reported in the Des Moines Register, Paul:

elicited the help of Pink Floyd’s infamous “Shine on You Crazy Diamond” to drive home his point that free ideas are the most powerful weapon.

“For the crazy diamonds to shine, government must get out of the way,” he said. “The leave-me-alone generation is a generation that believes they can conquer the world and solve any problems if left free to follow their dreams. You are the leave-me-alone-generation, and I want you to shine, shine on.”

If Iowa doesn’t work out impressively for Paul, what then?

Paul is famously not thrilled with campaigning as a way of life. Will he just chalk up any failure in 2016 to Trump, or the times, and try again in 2020 to proceed further with what’s already been built? One anonymous observer close to the campaign who has spent time with the candidate doesn’t think so. “I personally don’t think he will run again. He just doesn’t enjoy the process. The redeeming thing about Rand Paul is that he’s a family guy, he’s really isn’t fond of D.C. and he’d really just like term limits to get rid of all the rotten people in D.C. I think he wants to return to his family and his eye practice.” 

But that same observer doesn’t think tonight is going to be the end, no matter what happens. He does feel Paul has a sense that it would be “a disservice to the antiwar people and the liberty minded people if Rand doesn’t allow them a place to cast their vote” even if he doesn’t seem on a path to win. But then that observer makes it sound more like hope than expectation. “I hope he stays in, or at worst just suspends active campaigning [if he’s doing poorly in early states], but totally ending it would take away a place for liberty people to vote.”

Paul and his campaign don’t want to speculate about a bad outcome right now. “We’re going to surprise a lot of people on Monday,” Paul said at his campaign speech this weekend. It might be his last chance to do so.

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Snow Expected for Iowa Caucuses, Iran Awards Medals Over Captured US Soldiers, Israel Permits Non-Orthodox Jews to Pray at Western Wall: A.M. Links

  • Snow is expected tonight for the Iowa caucuses.
  • Super PACs in support of Jeb Bush raised a lot less money in the last quarter of 2015.
  • Thousands of people in San Diego were without power and at least one person is dead after a Pacific storm hit southern California.
  • ISIS claimed responsibility for bombings in Damascus that killed at least 45 while John Kerry was in Geneva calling for peace in Syria. Meanwhile in Kabul, at least nine people were killed in a suicide bombing.
  • Iran awarded medals to the navy commanders responsible for capturing U.S. sailors who strayed into its territorial waters last month.
  • Burma’s newly elected parliament convened for the first time, with former political prisoner Aung San Suu Kyi heading the largest party.
  • The government of Israel will open up the Western Wall to prayer by non-Orthodox Jews.

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Savings Rate Surges To Highest Since 2012 As Spending Disappoints

The Keynesians will not be pleased. Despite the holiday season, December spending disappointed with no change MoM (0.0% vs +0.1% exp). This is further sentiment-destructivbe as income data rose more than expected MoM (+0.3% vs +0.2% exp) even as income growth YoY slipped to its weakest in 9 months.

Perhaps most sadly of all, 42% of December Personal Income gains came from Government Social Benefits, mostly Social Security and Medicare. Vive le recovery.

Spending on Goods, both durable and non-durable, tumbled by $34.6 billion offset by $33.9 billion jump in spending on services.

Widening the gap…

 

This of course means the personal savings rate rose, pushing to 5.5% – the highest since 2012.

Not what the PhDs in The Eccles Building are demanding or their textbooks are predicting.

 

Charts: Bloomberg


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Key Events In The Coming “Payrolls” Week

After last week’s relatively quiet, on macro data if not central bank news, week the newsflow picks up with the usual global PMI survey to start, and end the week with the US January payrolls report.

Here is a closer look at what to expect via DB:

  • We’ve got a busy day of data kicking off on Monday in Europe with the final revisions to the manufacturing PMI’s (January) for the Euro area, Germany and France. UK money supply and credit aggregates data is also due this morning. Over in the US we’ll get the December core and deflator PCE data along with personal income and spending, manufacturing PMI, construction spending and the important ISM manufacturing and prices paid.
  • It’s a quieter session on Tuesday with just Euro area PPI and German unemployment data in the morning, before we get vehicle sales data and the IBD/TIPP economic optimism print in the US.
  • Wednesday starts in China where we’ll get the Caixin services and composite PMI prints. We’ll also get the non-official readings for Japan before we get the final revisions for the services and composite prints for the Euro area, Germany and France along with readings for UK, Italy and Spain. Euro area retail sales is also due. Over in the US on Wednesday the ADP employment change print for last month will be closely followed for clues ahead of Friday. The ISM non-manufacturing print is the other big release along with the final services and composite PMI’s.
  • The main focus during the morning session on Thursday will be on the UK where the BoE rate decision is due. Over in the US we’ll get final revisions to those soft December durable and capital goods orders data, along with initial jobless claims, nonfarm productivity, unit labour costs and December factory orders.
  • The only data of note on Friday in Europe will be German factory orders. Over in the US the main event will of course be the January employment report where we’ll get payrolls, unemployment, participation rate and weekly earnings data. If that wasn’t enough we’ll also get the December trade balance and consumer credit data.

And some more detail from Goldman on what to expect:

Monday, February 1

08:30 AM Personal income, December (GS +0.3% consensus +0.2%, last +0.3%)

  • Personal spending, December (GS flat, consensus +0.1%, last +0.3%)
  • PCE price index, December (GS flat, consensus flat, last flat)
  • Core PCE price index, December (GS +0.11%, consensus +0.1%, last +0.1%)
  • PCE price index (yoy), December (GS +0.6%, consensus +0.6%, last +0.4%)
  • Core PCE price index (yoy), December (GS +1.42%, consensus +1.4%, last +1.33%)

We forecast personal income grew by a modest 0.3% in December. Payroll growth was strong in December, although wage growth was modest. Personal spending was probably flat in December, in line with the weak December retail sales report and some modest deceleration in services expenditures reported in last week’s Q4 GDP report. We expect core PCE prices to increase by 0.11% in December but the gain in the quarterly core PCE price series from Friday’s GDP suggests some upside risk to this forecast. The core PCE price index likely rose 1.4% over the past year with the possibility that the year over year rate rounds to 1.5%.

10:00 AM ISM manufacturing, January (GS 48.4, consensus 48.5, last 48.2)

Manufacturing surveys were mixed, with all but the Richmond Fed and Chicago PMI pointing to contracting activity. The Philly index rose by 6.7pt to -3.5 and the Chicago PMI was up 12.7pt to 55.6. The Empire State index declined (-13.2pt to -19.4), as did the Richmond Fed (-4pt to 2) and the Dallas index (-13.0pt to -34.6) while Kansas City was flat at -9. On net, our manufacturing survey tracker – which is scaled to the ISM index – rose 0.8pt to 49.2. We find that that weak net exports – probably caused by continued dollar appreciation and weak foreign demand- play the most important role in the manufacturing’s sector recent difficulties (in addition to reduced orders from the energy sector), and are likely to contribute to a contractionary read on ISM manufacturing for January.

10:00 AM Construction spending, December (GS +0.6%, consensus +0.6%, last -0.4%)

We expect construction spending rose in December, reflecting continued strength in private residential investment. Construction spending unexpectedly declined 0.4% in November, but remains 10.5% higher over the last year.

01:00 PM Vice Chairman Stanley Fischer (FOMC voter) speaks

Vice Chairman Fischer will discuss recent developments in the U.S. economy and monetary policy at a Council on Foreign Relations event in New York. We will be looking for indications about the weight Vice Chairman Fischer puts on the recent tightening in financial conditions in the outlook for monetary policy.

Tuesday, February 2

01:00 PM Kansas Fed President Esther George (FOMC voter) speaks

Federal Reserve Bank of Kansas City President Esther George will speak about the U.S. economic outlook and monetary policy in Kansas City at the Central Exchange, a group that promotes leadership development for women. President George is a voting FOMC member this year.

04:00 PM Total vehicle sales, January (GS 17.3mn, consensus 17.4mn, last 17.2mn)

Domestic vehicle sales, January (GS 14.0mn, consensus 13.7mn, last 13.5mn)

Our auto analysts expect total vehicle sales to accelerate slightly from December to 17.3mn.

Wednesday, February 3

08:15 AM ADP, January (GS +185k, consensus +190k, last +257k)

Based on our understanding of how ADP filters its own proprietary data with other publicly-available information, we expect a 185k gain in ADP payroll employment in December.

10:00 AM ISM non-manufacturing, January (GS 55.0, consensus 55.2, last 55.8)

Among service sector surveys, the Dallas Fed index (-12.7pt to -10.4) and the Philly Fed (-21.6pt to 5.1) declined. The NY Fed increased by 2.0pt +4.0. (The New York survey is a relatively new and seasonally-not adjusted series). The Richmond Fed also rose (revenues +10pt to 10, employment flat at +18), while the Markit PMI was flat. The ISM non-manufacturing index fell by 0.8pt last month.

Thursday, February 4

08:30 AM Nonfarm productivity, Q4 preliminary (GS -1.2%, consensus -2.0%, last +2.2%)

Unit labor costs, Q4 preliminary (GS +4.4%, consensus +4.0%, last +1.8%)

Nonfarm business output growth was close to flat in Q4, while hours worked likely rose at a roughly 1.2 % rate, implying a roughly 1.2% decline in productivity. Unit labor costs—compensation per hour divided by output per hour—likely rose at about 4.4%.

08:30 AM Initial jobless claims, week ended January 30 (last 278k)

Continuing jobless claims, week ended January 23 (last 2,268k)

08:30 AM Dallas Fed President Robert Kaplan (FOMC non-voter) speaks

Federal Reserve Bank of Dallas President Robert Kaplan will speak on global economic conditions in Dallas.

10:00 AM Factory orders, December (GS -3.1%, consensus -2.8%, last -0.2%)

Factory orders likely declined markedly in December, reflecting the already-reported weak December durable goods orders.

Friday, February 5

08:30 AM Trade balance, December (GS -$43.0bn, consensus -$43.2bn, last -$42.4bn)

The new advance report on trade showed a slightly wider goods deficit in December (-$61.5bn from -$60.5bn), reflecting a widening trade balance across most sub-categories. We expect the services balance to be little changed in December. Overall, we expect the total trade deficit to be at -$43.0bn, and for the deficit to continue acting as a drag on GDP growth in the coming quarters.

8:30 AM Nonfarm payroll employment, January (GS +190k, consensus +190k, last +292k)

  • Private payroll employment, January (GS +180k, consensus +180k, last +275k)
  • Average hourly earnings (mom), January (GS +0.3%, consensus +0.3%, last +0.0%)
  • Average hourly earnings (yoy), January (GS +2.2%, consensus +2.2%, last +2.5%)
  • Unemployment rate, January (GS 5.0%, consensus 5.0%, last 5.0%)

Data have been broadly softer this month, including the higher claims data. In addition, we expect to see some payback from the warm weather-induced boost to payroll growth at the end of last year. We expect a December payroll gain of 190k after the strong December 292k print and an upwardly revised 252k read for November, which resulted in the firm Q4 2015 average of 284k. We also expect the unemployment rate to be unchanged at 5.0%, and average hourly earnings to increase 0.3%.

* * *

Finally, in table format courtesy of SocGen:

Source: DB, GS


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Rates Are “Screaming” That Investors Are In Panic Mode, Trader Warns

Haruhiko Kuroda’s move to NIRP and Mario Draghi’s implicit promise to ramp up PSPP in March underscore the extent to which Janet Yellen has made a policy mistake by hiking at a time when the US economy (not to mention the global economy) looks to be decelerating and the disinflationary impulse looks to be gathering steam.

January marked a rather inauspicious start to the new year with wild swings in Chinese markets fueling volatility across the globe and crude carnage taking its toll on investors’ collective psyche. Oil managed to ramp but China is still a (big) problem, as we explained this morning in the overnight wrap. 

With Beijing set to export its deflation to the rest of the world and with central bankers in panic mode, investors are piling into core paper like there’s no tomorrow. Below, find some insightful commentary from former FX trader Mark Cudmore.

From Bloomberg

For all the January focus on oil and China, and both have certainly provided much of the volatility, the largest asset shift so far in 2016 has been in core sovereign bonds.
  • Friday’s surprise move to negative rates by Japan may have provided the ceremonial flourish, sending Japanese yields to record lows. But that’s far less noteable than moves elsewhere. Japan’s two-year rate has dropped 14 basis points this year, which is dwarfed by other sovereigns
  • Mario Draghi’s commitment that the European Central Bank will soon ease further has seen German two-year yields also hit record negative levels; the drop there has been 14 basis points as well
  • However, both pale in comparison to what is happening in the equivalent paper in the U.S. and U.K. The former has seen a 28 basis point plunge, while U.K. two-year yields are currently trading at the lowest level in over a year after plummeting 32 basis points
  • A year ago, we were debating whether the U.K. might even raise rates before the U.S. -– now markets are indicating the Bank of England’s next move is more likely to be a cut
  • Rates are either screaming out that the deflation battle is far from over or they’re implying that investors are so worried about 2016 that they’d prefer to pay the German government 0.5% per year to keep their cash “safe.” In other words they see deflation in financial assets, if not in consumer prices
  • With that in mind, Brent crude’s rebound of more than 30% from the January 20 intraday low, prompts two thoughts
  • The first is that the risk of headline consumer-price deflation is much less than it was two weeks ago, which suggests that fear is indeed the dominant driver of rates markets
  • The second is that when one of the world’s key economic inputs, oil prices, can rally 30% but still be down on the month, then investors may have a valid reason to be scared


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Privatize Flint’s Water System: New at Reason

Social media sites are awash in pictures of Flint’s awful water. Local children exposed to lead will likely face long term health consequences—and it appears that kids suffer from high lead levels in many Michigan cities.

Amidst revelations that the state of Michigan made sure its Flint employees had clean water long before taking action on the rapidly declining tap water, maybe shame will at last lead state and local officials to look at how to fix the water utility. And maybe other localities can start thinking about how to best prevent the next mass water poisoning.

It is very unlikely any of this could have happened if Flint’s water utility had been private.  Maybe with Walmart, Coca Cola, Pepsi and other companies overcoming their greed to donate massive amounts of bottled water to Flint residents, suspicion of privatizing water utilities will lessen.

View this article.

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Crude Sinks To Day Lows After Goldman Explains Why No Oil Production Cuts Are Coming

Moments ago, following last week’s torrid crude oil price rebound driven entirely by now-denied hopes of some production cut consensus between oil suppliers, namely Russia and Saudi Arabia, oil halted its four-day rally as weak Chinese manufacturing data added to economic demand concern.

“The risk seems to be the greatest on the downside again” and speculation of OPEC production cuts has “faded fast,” says Saxo Bank head of commodity strategy Ole Hansen. “China and South Korea are both helping the market return to fundamental focus where it is worried about demand.”

But the biggest downward catalyst overnight as noted previously, was not demand concerns but a return of oversupply fears following a note by Goldman’s Damien Courvalin who warned quite explicitly that “cuts are unlikely” in what Goldman dubs the New Oil Order, and that in the current rebalancing phase, oil prices will “remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.” But most importantly Goldman writes that “given the likely time necessary to enact such cuts, the continued large builds in US and global inventories and the fast pace at which US Gulf Coast spare storage capacity is filling, it may already be too late for OPEC producers to be able to prevent another large decline in prices.” Here’s why:

The past week featured headlines suggesting that OPEC producers and Russia would meet in February to discuss a potential coordinated cut in production. Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists’ forecast. This view is anchored by our belief that such a cut would be self-defeating given the short-cycle of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximize long-term revenues. As a result, we reiterate our view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium. We believe this inflection phase requires oil prices to remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.

The full list of Goldman points listed below, which incidentally are quite accurate, is a useful primer for any oil bull who hopes that a prompt supply cut is in the cards:

  1. The potential for production cuts became once again a key driver to oil prices following headlines last Wednesday (January 27) that Russian officials had decided to talk to Saudi Arabia and other OPEC members about output cuts of 5% although no discussions are scheduled at this time and other headlines suggested the move was instead initiated by Saudi Arabia or Venezuela. On Thursday, ministers from Saudi Arabia and the UAE were instead commenting on their continued oil field investments to sustain production. Despite this lack of clarity, oil prices rallied 7% last week, taking 1-month oil price volatility to 70%, its highest level since April 2009.
  2. We continue to view a coordinated production cut as highly unlikely and ultimately self-defeating. The decision made by OPEC in November 2014 and again in December 2015 to sustain production is the one that maximizes their revenues medium term. While fiscally difficult in the short term, it was nonetheless necessary in the face of strongly growing higher-cost non-OPEC production (see The New Oil Order, October 2014). And after a 14-month wait, the strategy is finally bearing fruit, with non-OPEC producer guidance pointing to production declines since oil prices fell below $40/bbl a few weeks ago. We had identified this as the required pain threshold to see sufficient financial stress and shut funding markets to finally impact forward production (see Lower for even longer, September 2015). As such, a cut that would bring prices above $40/bbl now would undermine this only nascent adjustment. Exacerbating the difficulty of enacting a correctly sized cut in our view are (1) the current high price volatility, (2) the remaining uncertainty on the size of the oil oversupply, (3) the continued rapid fill of remaining storage capacity, and (4) the potential for US production to quickly respond.
  3. We believe that the spring 2015 rally in oil prices has increased the resolve of core OPEC producers to stick to their policy of sustaining production and let oil prices rebalance this market (as they have repeatedly commented in recent months). Specifically, last year’s price rally was quickly followed by an increase in the US oil rig count and we would expect such a response once again should prices rally near $60/bbl. In fact, recent E&P cost and efficiency guidance and producer comments at our equity analysts’ Energy Conference in January suggest that this threshold is now likely even lower. Further, the velocity of such a response will be much greater this time as the average number of days from beginning of drilling to production collapsed by 40% from 1Q to 3Q15 to reach 80 days in the Permian. The magnitude of such a response will also be supported by the acreage highgrading that occurred last year, lower legacy decline rates and average first 3 months’ production for new wells up by 25% over that period.
  4. Such a production cut would further require cooperation between OPEC members. And while Venezuela, Algeria and Iraq – which for the first time last week hinted at welcoming cuts – would agree to such a decision, Iran’s production ramp up would likely be a significant hurdle to any OPEC action. While Iranian officials have commented on their desire to not flood the market, their production recovery target remains aggressive and their desire to regain market share steadfast. Iranian observed exports have already picked up in January to their highest level since April 2014 despite these remaining to destinations permitted under sanctions given reported caution in granting ship insurance to vessels carrying Iranian crude to new customers. As a result, a production cut would likely need to accommodate continued growth in Iranian production, an agreement which seems unlikely given recent tensions with Saudi Arabia.
  5. For Russia, the desire to join a coordinated production cut would need to come from the government as our Russian energy analyst, Geydar Mamedov, estimates that Russian oil producers remain free cash flow positive even at $30/bbl given the concurrent Ruble depreciation (we continue to expect steady production growth in 2016 and 2017). The strain of low oil prices are visible at the government level however as $30/bbl oil prices would leave the 2016 federal budget deficit reaching 5% of GDP vs. the government’s/President Putin’s 3% target according to our Russian economist Clemens Graffe. Since oil taxation is progressive and causes the deficit to widen faster as oil prices decline, current prices raise the risk of a potential increase in oil taxation and in turn lower production, which should it occur, would be an incentive to have other countries cut output at the same time. While a risk, our Russian economist estimates that given the need for legislative changes in order to institute tax changes and consensus expectations for prices to recover from current levels in 2H16, the pressure would likely be instead on better collection rates and an increased allocation of spending into regional budgets or off-budget to meet the 3% deficit threshold (see Russian budget pressures shifting from discretionary to structural, December 2015).
  6. Despite our belief that no cut will occur, we nonetheless reviewed the recent history of production cuts as well as their price impacts. First and foremost, OPEC and non-OPEC (mainly Russia, Norway, Mexico and Oman) coordinated production cuts occurred in periods of weak economic and oil demand growth, which despite current concerns are not our economists’ forecasts. That was the case in 2009 (Financial Crisis), 2001 (September 11 attacks) and 1998-1999 (Asian Crisis). As we have argued before, we believe that weak global growth also remains a required condition for OPEC production cuts this time around. Second, while the headline cuts were large and did help support prices upon announcement, compliance was weak initially with production cuts delayed (by a year in 1998-1999). Consequently, prices only sustainably recovered once inventories started to draw which coincided with the lagged cuts in production.
  7. As a result, should a cut occur, its impact on inventories would matter most, just as the current non-OPEC guidance cuts will only support prices once inventories stop to build. While prices may rally initially upon announcement, we would expect this move to fade and the oil forward curve to remain in contango until inventories decline, just as was the case in 1998-1999. Consistent with our current forecasts, the rise in long-dated prices would only occur once the inventory normalization is well under way as only then will new production need to be incentivized.
  8. Most importantly, given the likely time necessary to enact such cuts, the continued large builds in US and global inventories and the fast pace at which US Gulf Coast spare storage capacity is filling, it may already be too late for OPEC producers to be able to prevent another large decline in prices. As a result, we reiterate our view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium with this inflection phase requiring oil prices to remain between $40/bbl (financial stress) and operational stress at $20/bbl (well-head cash costs) until 2H16 with the price lows of this phase likely still to be set.

And the charts:

Exhibit 1: The US shale production response to higher prices will be rapid
Days to production – quarterly mean of Permian wells

Exhibit 2: OPEC production cuts in 1998 occurred because of weak demand and did not generate sustained rallies…
WTI oil prices and forward curves ($/bbl)

Exhibit 3: … as OPEC production cuts were well shy of agreed targets
WTI oil prices (lhs, $/bbl); OPEC crude oil production (thousand barrels per day, rhs)

Exhibit 4: Oil prices troughed only once inventories started to draw 
WTI price ($/bbl, lhs); OECD commercial stocks (crude and products, million barrels, rhs)


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Clinton Gets $6 Million From Soros As Money Race Winners Revealed Ahead Of Iowa Caucus

On Sunday night we got a look at the 2015 campaign reports for US presidential candidates as the deadline for FEC filings came and went.

There were a number of notable donations, but the headline grabber was George Soros who in the second half of last year gave $6 million to Hillary Clinton’s super PAC, bringing his total donation to $7 million.

Clinton’s “Priorities USA” pulled in $25.3 million in H2 and ended the year with more than $35 million in the bank. Hollywood billionaires Cheryl and Haim Saban gave $1.5 million each and producer Tom Tull chipped in a million. As CNN notes, two other groups supporting Clinton, American Bridge and Correct the Record, brought in an additional $6 million total.

Soros – a longtime Democratic supporter – is keen on ensuring Donald Trump doesn’t end up in The White House. “By fear mongering, he’s doing the work of ISIS,” Soros told a dinner in Davos last month. “He wants people to turn against the Muslim community and make the Muslim community think there is no alternative to terrorism.”

“We’re heading into the first caucuses and primaries with an organization second to none thanks to the support of hundreds of thousands of people across the country,” Robby Mook, Clinton’s campaign manager boasted. “We will have the resources necessary to wage a successful campaign in the early states and beyond.” All told, Priorities USA got 80 contributions in H2. 31 of those were for $100,000 or more.

In stark contrast Bernie Sanders has eschewed the super PAC. The senator raised $20 million in January alone ($34 million during Q4) from small donors. The average donation: $27.

The Sanders campaign says Bernie is “built for the long haul.”  “As Secretary Clinton holds high-dollar fundraisers with the nation’s financial elite, our supporters have stepped up in a way that allows Bernie to spend the critical days before the caucuses talking to Iowans about his plans to fix a rigged economy and end a corrupt system of campaign finance,” Sanders’ campaign manager said in a statement. 

Sanders isn’t the only one upending the traditional campaign finance system. Trump is of course self-funding his campaign – something he’ll happily tell you all about if you ask him. The GOP frontrunner raised $13.6 million in Q4. $10.8 million of that total came in the form of a loan from .. Donald Trump. He spent $6.8 million during 2015’s final quarter, leaving him with nearly $7 million on hand.

His campaign’s biggest expense: hats.

Trump spent $941,000 on “Make America Great Again” baseball caps.


The brazen billionaire also paid $908,000 for air travel. Of course that doesn’t really matter because $827,000 of the total went to Tag Air, a company Trump owns, so he’s effectively paying himself to fly around the country. 

“He’s running on his own terms, and he’s not backed by big corporations,” one 20-year-old sophomore graphic-design major from Drake University who plans to caucus for Trump told WSJ.

For his part Jeb Bush is effectively finished as donors jumped ship to Marco Rubio in Q4. Bush raised just $7.1 million in the quarter while Rubio pulled in $14 million. Rubio’s super PAC (“Conservative Solutions) raked in $16 million in H2 as donors increasingly believe the senator is now the most viable mainstream candidate able to mount a serious run at Ted Cruz and Donald Trump.  

Trump is depending on a strong turnout from first time caucus goers. “Some 39% of likely GOP caucus-goers who haven’t turned out in past contests prefer Mr. Trump over his rivals,” WSJ writes, “10 percentage points higher than the portion of past participants who favor the front-runner. That poll found Mr. Trump leading the GOP field.”

“The bigger the turnout, the better it is for Trump,” Iowa Gov. Terry Branstad, said.

Right. And the same thing goes for Bernie Sanders. “My prediction is that if tomorrow night there is a large voter turnout we win,” Sanders said on Sunday.

So strap in, because come Tuesday we’ll know if Trump and Sanders have managed to stage a coup by mobilizing previously inert portions of the American electorate and remember, billionaires can give millions to the political aristocracy, but they can only vote once. 

We close with a quote from Alec Bognor, 18, a Drake student who spoke about Trump to WSJ:

“I’m not sure I could be this excited about another candidate. I wouldn’t sit in line for three hours for Marco Rubio.”

*  *  *

Graphics: Bloomberg


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Frontrunning: February 1

  • Stocks cautious after rocky China data, bonds fly high (Reuters)
  • Oil falls on China data, fading prospect of OPEC action (Reuters)
  • Republican Vote in Iowa Caucus Hinges on Newcomer Turnout (WSJ)
  • When Trump tells supporters not to donate, they mostly listen (Reuters)
  • Goldman Sachs Employees Shift to Rubio as Bush Support Fades (BBG)
  • Four Theories on How Oil Has Hypnotized the Global Stock Market (BBG)
  • Global Yields Hit 12-Month Low With Japan 2-Year at Minus 0.16% (BBG)
  • Record China Factory Gauge Slump Adds to Monetary Policy Dilemma (BBG)
  • Euro-Area Factories Cut Prices as Deflation Risks Loom Large (BBG)
  • Oops: Cheap oil less of a boon for U.S. growth than in the past (Reuters)
  • February Is the Longest Month for Central Bank Watchers (BBG)
  • Marc Andreessen and Silver Lake have considered a deal for Twitter (Information)
  • Credit Suisse, Barclays to Pay $154.3 Million to Settle ‘Dark Pool’ Investigations (WSJ)
  • Death toll up to 70 from Islamic State Damascus attack (Reuters)
  • Toyota to stop Japan production for one week due to steel shortage (Reuters)
  • HSBC to Freeze Hiring, Salaries in 2016 Amid Cost Reductions (BBG)
  • Marissa Mayer to Make Case That Yahoo Can Be Turned Around (BBG)
  • Zika virus spreads fear among pregnant Brazilians (Reuters)
  • Google Defends U.K. Tax Accord as Legal, Not ‘Sweetheart Deal (BBG)
  • China Calls Lending Platform Ezubo a $7.6 Billion Ponzi Scheme (WSJ)
  • China-Built High-Speed Rail in Indonesia Gets Off to Bumpy Start (BBG)

 

Overnight Media Digest

WSJ

– The E. coli outbreak that sickened more than 50 Chipotle Mexican Grill Inc customers in nine states last year is expected to be declared over. Investigators haven’t been able to pinpoint the ingredient responsible for the contamination. (http://on.wsj.com/1Svlj84)

– Time Warner Inc and Hulu have been in talks since late last year about Time Warner buying into the streaming site as a part-owner. In the discussions about taking a 25 percent equity stake in Hulu, Time Warner has told the site’s owners that it ultimately wants episodes from current seasons off the service, at least in their existing form, although that is not a condition for its investment. (http://on.wsj.com/23CeQ0x)

– A frigid January for initial public offerings – there were no U.S. IPOs for the month – is pointing to a hard winter for fledgling biotech firms and other private companies. (http://on.wsj.com/1PpNx3h)

– Crude-oil prices fell in early Asia trade, dragged by lackluster Chinese manufacturing data and dimming prospects of a coordinated production cut. (http://on.wsj.com/1WWiQV2)

 

FT

* J Sainsbury Plc has been advised that it should raise its offer for Home Retail Group Plc to at least 160p per share or preferably closer to 165p to support a bid and pressure Home Retail Plc’s board to accept the deal.

* The new chief executive of Alstom SA Poupart-Lafarge said the sector in Europe is good for consolidation and it would “make sense” for Alstom to look at transformational deals.

* Ofcom urged Brussels to block the merger of telecoms operators O2 and Three, highlighting concerns that mobile phone bills for users in the UK would move sharply higher.

* Christine Tacon’s probe of Tesco Plc’s accounting practices has raised fresh concerns that the balance of power in the grocery supply chain lies far on the side of retailers.

 

NYT

– Microsoft Corp sank a data center on the ocean floor, where the sea water acts as a coolant, and plans to use the waves to power it. The results were encouraging enough to try a bigger version. (http://nyti.ms/1WVJflC)

– Europe is greatly increasing military and security spending on the fight against terrorism, a shift from austerity methods that dominated its policies in recent years. (http://nyti.ms/1mAo3BN)

– Anna Wintour, Condé Nast’s artistic director, and Bob Sauerberg, its new chief executive, are trying to keep the publisher’s many magazines profitable and relevant in the Internet age. (http://nyti.ms/1QBjepr)

– Barclays PLC and Credit Suisse will pay a combined $154.3 million to settle allegations that they misrepresented their private stock trading services. The systems, known as dark pools, are supposed to offer a haven to traditional traders and investors from predatory trading behavior. (http://nyti.ms/1QRLlT3)

 

Canada

THE GLOBE AND MAIL

** China Minerals Mining and its subsidiary Cassiar Gold Corp have filed a petition with the Supreme Court of British Columbia that seeks to reverse a portion of the British Columbia government’s transfer of Crown land near the Yukon border in northern British Columbia to the Kaska Dena Council. (http://bit.ly/1SmwZvD)

** The rout in commodities has hit men harder than women in Alberta. Nearly 16,000 men in the western province have been laid off from September 2014 through the end of last year. Meanwhile, 22,800 women have found new positions over the same period, according to Statistics Canada. (http://bit.ly/1SmxjKV)

** The Canadian government is busy promoting its defense industry in Kuwait even as a United Nations report accuses a Saudi-led coalition, which includes Kuwait, of “widespread and systematic” bombing of civilians in Yemen. (http://bit.ly/1SmxUwk)

NATIONAL POST

** A class action lawsuit against Valeant Pharmaceuticals has alleged that the makers of Cold-FX sat for years on a study that suggested Canada’s most popular cold and flu remedy was no more effective than a placebo in treating symptoms of the viruses. Valeant owns the product after buying Edmonton’s Afexa Life Sciences in 2011. (http://bit.ly/1Kl7zM2)

** British Columbia’s top court has torpedoed a popular consumer loyalty rewards program for pharmacies, a sort of frequent flyer plan for prescription drug users, over fears it can be abused to the detriment of health. (http://bit.ly/1Kl7Gat)

 

Britain

The Times

– Sharon White, the head of Ofcom, has expressed her concerns to Europe’s regulators that the takeover of O2 by Three, its smaller rival, will lead to less competition and higher prices. (http://thetim.es/1UBiqlg)

– J Sainsbury Plc has been speaking to Home Retail Group Plc’s leading shareholders and has been told by the company’s largest investor that the offer must rise to at least 160p, or £1.3 billion. (http://thetim.es/1UBiwcS)

The Guardian

– A senior government minister has admitted the tax settlement between Google and the UK government “was not a glorious moment”. The admission by the business secretary, Sajid Javid, came as a senior executive from Google claimed he could not say how much UK profit has been generated by the technology firm in the past decade, or how many meetings had been held between the company’s executives and ministers. (http://bit.ly/1UBiC47)

– Barclays Plc and Credit Suisse Group AG are paying more than $150m to settle charges that they misled investors who used their dark pool trading platforms. The US Securities and Exchange Commission and the New York attorney general are expected to announce the settlement on Monday. (http://bit.ly/1UBiHF2)

The Telegraph

– Hitachi will continue to invest in the UK even if the country votes to leave the European Union, according to its chief executive. Hiroaki Nakanishi, who is also chairman of the Japanese industrial giant, said he discussed with Philip Hammond, the Foreign Secretary, last month how a British exit from the EU could be made “feasible”. (http://bit.ly/1UBiNwd)

– Sky has backed the bid to merge Three with rival mobile operator O2 as Brussels competition watchdogs prepare to lay out their problems with the takeover. The European Commission is due to issue Hutchison with a formal statement of objections on Tuesday stretching to hundreds of pages. (http://bit.ly/1UBiUYA)

Sky News

– An investment firm owned by the taxpayer-backed Lloyds Banking Group is in advanced talks to buy CitySprint, one of Britain’s biggest same-day delivery companies. LDC has entered exclusive talks to buy CitySprint even as technology giants such as Amazon and Uber seek to exploit their distribution networks to win business held by traditional courier firms. (http://bit.ly/1UBj1nf)

– Britain’s first new high street bank in more than 100 years has warned investors that an exit from the European Union could damage its prospects. In a copy of a circular to shareholders issued this week, the start-up lender said it faced “risks associated with a vote to exit the EU”. (http://bit.ly/1UBjg1q)

The Independent

– The pay gap faced by black workers widens the more qualifications they obtain, according to research revealing the challenges faced by ethnic minority Britons pursuing professional careers. Black graduates leaving university earn an average of 23 per cent less than their white counterparts, the new analysis by TUC shows. (http://ind.pn/1UBjp51)

 


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