Trump Preserves the Export-Import Bank

When early drafts of the Trump budget started to circulate after the inauguration, the Export-Import Bank—one of Washington’s most notorious corporate-welfare programs—was among the agencies destined for the chopping block. Now the actual budget is out, and the bank has been spared the ax. The Washington Examiner‘s Tim Carney reports that this “follows many reports from congressional fans of Ex-Im that Trump had been persuaded to love the agency, which primarily subsidizes Boeing sales.” (Barack Obama underwent a similar transformation, denouncing the bank as “little more than a fund for corporate welfare” while he was running for president but fighting to preserve it once in office.)

The budget plan does have some good news for foes of corporate handouts. Carney points out that the Overseas Private Investment Corporation (which “subsidizes U.S. companies that want to set up business overseas, such as a Ritz Carlton in Turkey or a Wendy’s in the Republic of Georgia”) is still slated to go, as are the U.S. Trade and Development Agency and the money allocated for the Manufacturing Extension Partnership. The Community Development Block Grant Program, also marked for death, has a long history of funding officials’ business cronies, as my colleague Scott Shackford noted earlier today. And there are other corporate subsidies that will be cut, including several at the Department of Energy.

But the biggest hub of crony capitalism in Washington is the military-industrial complex. And that, alas, is set to expand: Trump wants to give the Pentagon a $52.3 billion spending spike. I’m glad for any small victories against the corporate state, but in the grand scheme of things they’re getting swamped.

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Why Isn’t Vault 7 Getting More Attention? New at Reason

Last week Wikileaks finally released its much-hyped “Vault 7” data detailing the CIA’s arsenal of hacking tools. The first tranche, consisting of 8,761 documents and attachments from an “isolated, high-security network” in the CIA’s Center for Cyber Intelligence, reveals important information about the federal spy body’s intrusion techniques, alliances with other government bodies, and internal culture from 2013 to 2016.

These new details alone would be explosive, writes Andrea O’Sullivan, but the media’s relative lack of interest in these major revelations makes this story even more curious. The CIA’s hacking toolkit, while not surprising to those in the security community, should be downright paranoia-inducing for most Americans. According to the Vault 7 documents, the CIA can hack into most consumer devices, rendering even the strongest encryption techniques useless.

View this article.

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Wall Street Sees Zero Chance Trump’s Budget Passes

After claims by both democrats and republicans that Trump’s “skinny” budget proposal is dead on arrival, Trump’s nemesis, John McCain chimed in and said that in its current form the Trump budget simply won’t pass the Senate.  “It is clear that this budget proposed today cannot pass the Senate,” the Armed Services Committee chairman said in a statement. The Arizona senator added that as lawmakers work on funding the government, they must come up with a deal “that provides sufficient funds to rebuild the military.” Trump’s budget included $603 billion for total defense spending, which includes money outside of the Pentagon, plus an extra $65 billion in overseas contingency funding that is not subject to budget caps.

However, while for most other members of Congress the funds being allocated to the military are grotesquely too much, for McCain they are not enough, and the senator argued that the baseline budget for repealing the 2018 fiscal year needs to be at least $640 billion and that lawmakers should start working on defense funding for the rest of the current fiscal year, which expires at the end of September.
“Failure to do so will only lead to more political dysfunction that has inflicted such harm on our men and women in uniform over the past six years,” he said. 

The House passed a defense appropriations bill last week to fund the department through the end of the 2017 fiscal year. Any push by Republican defense hawks to increase military spending would likely hit roadblocks in the Senate, where Democrats are demanding equal increases in defense and non-defense spending. Lawmakers have until April 28 to pass legislation funding the government and avoiding a shutdown.

Yet while McCain had his own reasons to declare the Trump Budget DOA, most on Wall Street also agrees, which is why it made virtually no impact on markets – and especially defense stocks – when it was unveiled overnight. Instead, as analysts noted, the priorities outlined weren’t a surprise to anyone who paid attention during the campaign, and those proposals will likely have trouble making it through Congress unscathed, analysts said. Here are some sellside opinions:

CAPITAL ALPHA (Byron Callan)

  • “Fat chance” for the “skinny budget” as the fiscal year (Oct. 1) will likely open under a continuing resolution, with Congress wrestling over defense, non-defense discretionary spending, borrowing and taxes
  • Sees 10% odds of budget passing Congress
  • Proposal sets up “yet another” period of uncertainty for defense spending, while cuts to infrastructure spending appear at odds with administration rhetoric

COWEN (Chris Krueger)

  • Document offers even less detail than expected, with no mention of tax reform or health care repeal/replace; that means it’s back to watching the healthcare “saga” and potential April 28 government shutdown
  • Budget process will begin once those are resolved

EVERCORE (Terry Haines)

  • Trump’s budget is “a nonstarter,” as Congress is likely over the next six months to approve budget/appropriations that continue pattern of spending for the past 4 years (stable, with small increases for both defense, domestic spending)
  • Investors should understand any president’s budget submission is “inherently a political document”; Congress isn’t bound to follow it

COMPASS POINT (Isaac Boltansky)

  • At this point, the document is more messaging than actual policy, but the message is important nonetheless, Boltansky says in email to Bloomberg
  • Budget signals Trump’s campaign promises – especially the America First framework – will continue governing his policy positions

HEIGHT SECURITIES (Peter Cohn)

  • Trump’s ~50-page, $1.15t budget is less than half the size of initial documents submitted by prior incoming administrations
  • Budget adds ~$54b to defense-related accounts within regular spending caps, plus another $77b for Overseas Contingency Operations (OCO)
  • Domestic program cuts exacerbated by need to pay for increases for Dept. of Homeland Security, including $2.6b for Mexico border wall, $1.5b for detention/transportation/removal of undocumented immigrants (may help private prison cos. CXW, GEO)
  • Proposal accompanied by supplemental request for $33b of defense funds
    • $13.5b for procurement, including Apache (BA), Blackhawk (LMT) helicopters, F-35 (LMT), F/A-18 (BA) fighter jets, DDG-51 destroyer (GD, HII)
    • $2.1b for R&D efforts, including missile, air defense (RTN)
  • Supplemental funds likely “a tough sell” with Democrats given non-emergency designation

Source: Bloomberg

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EURUSD Jumps After ECB Hints At Rate Hike

Having surged after The Fed hiked rates ‘dovishly’, EURUSD is surging- bouncing off 1.07 the figure – after ECB Council member Nowotny told Handelsblatt that a “rate increase may be on the way.”

The European Central Bank (ECB) could be heading away from loose monetary policy in a different manner than the U.S. Federal Reserve, Ewald Nowotny, the Austrian ECB council member, told Handelsblatt in an exclusive interview.

 

The American model was to finish bond purchases first, but this model might not transfer well to Europe, said Mr. Nowotny, who also serves as the Austrian National Bank governor. All interest rates also wouldn’t have to be increased simultaneously nor to the same extent, he added. 

 

“The ECB could also raise the deposit rate earlier than the prime rate,” Mr. Nowotny said.

And EURUSD’s early weakness is erased…

 

Bund Futures are under pressure on the news (as the TSY-Bund spread narrows).

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Trader Warns: “Yields & The Dollar Have Much Further To Fall”

The initial reaction to the Fed was big. But, as Bloomberg's Mark Cudmore notes, there’s much more to come still as the message was about as dovish as could have been envisioned, given it was accompanying a rate rise. Cudmore had argued that long-end yields would fall after the Fed hike, and while an 11 basis-point drop in 10-year Treasury yields on Wednesday might seem significant, he notes it’s not in the context of what happened at the meeting.

Apart from lower commodity prices, solid but not exceptional economic growth, and a lack of runaway inflation, much of my anticipation of a dovish market reaction was based on the fact that the market was very much positioned the other way.

 

But Yellen didn’t just disappoint the extremely hawkish hopes — she genuinely wasn’t hawkish at all. Of course, she couldn’t be outright negative on the economy and inflation given the Fed was tightening policy — but she went as far as she could in that direction.

 

Notably, near-term risks to the economic outlook still “appear roughly balanced,” rather than skewed to the upside as some had anticipated. The Fed emphasized it’s targeting a “sustained” return to 2 percent inflation, rather than just reaching that target.

 

Yellen also reiterated that the benchmark rate will persist for some time below levels that are expected to prevail in the longer run, with “gradual” hikes still the plan.

 

Not only did the median dot plot not rise above 3 hikes in 2017, but the average barely rose. Only five dots showed more than three hikes this year — the exact same as there were in December. Four hikes weren’t even a near miss — it wasn’t even on the radar of the majority.

 

 

And there was no discussion of the central bank balance sheet either. That was only a tail risk but it’s yet another point lacking for the hawks.

 

Everything about this meeting that could surprise dovishly, managed to do so.

 

U.S. yields and the dollar have much further to fall as a result.

 

And given the extreme positioning, we suspect Cudmore may be right…

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Trump Budget Ends Subsidies for Rural Airports, Promisng $175 Million in Savings

Every year, taxpayers buy hundreds of tickets on otherwise empty flights from places like Ely, Nevada; Lewistown, Montana; and Paducah, Kentucky.

Those vacant seats are bought, at a cost of about $200 million annually, by the federal government as a way to subsidize twice-daily service to 175 rural airports that airlines may not otherwise choose to serve. President Donald Trump’s first budget plan, released Thursday, would do away with those subsidies by shutting down the federal government’s Essential Air Service program.

“EAS flights are not full and have high subsidy costs per passenger,” the White House budget proposal states. “Several EAS-eligible communities are relatively close to major airports, and communities that have EAS could be served by other existing modes of transportation.”

Eliminating the EAS is one part of an overall $2.4 billion budget reduction for the Department of Transportation proposed Thursday by the White House. Other budget savings would come from reducing subsidies for Amtrak, eliminating some local government grant programs, and privatizing the nation’s 14,000 air traffic controllers.

It’s hard to find any proposal in the budget that makes more sense than cutting the Essential Air Service program, which is anything but essential.

The EAS program has it roots in the deregulation of the airline industry in the late 1970s. Before deregulation, carriers were required to serve smaller, rural airports in order to obtain government permission to operate. After deregulation, the federal government created the Essential Air Service program to subsidize those rural routes so airlines would continue to serve them even without being required to do so. It was supposed to be a 10-year program to help those regional airports transition into the new deregulated air market.

More than 35 years later, it’s still with us, another testament to the permanence of temporary government programs.

The Department of Transportation says there are 115 airports in the lower 48 states (and another 60 in Alaska) receiving subsidies through the program. Any airport more than 70 miles from another commercial airport is eligible for subsidies, which are capped at $200 per passenger. Airports in the EAS program get at least two round trips a day with 30- to 50-seat aircraft—although sometimes those planes have as few as nine seats, as Reason has previously reported—to nearby hub airports. Without the EAS subsides, the department says, those communities “would not receive any scheduled air service.”

But those supposedly far-flung places won’t be cut-off from the rest of world if the EAS program were shuttered. In fact, many of them aren’t so far-flung at all, and some might find better, more cost effective ways to get people where they need to go if the subsidies were killed.

For example, the airport in Hagerstown, Maryland, gets subsidies through the EAS program, even though it’s less than a 90 minute drive from there to Dulles International Airport. Taxpayers pay more than $800 to subsidize each and every departure from Jonesboro Regional Airport in northern Arkansas, despite the airport being less than 70 miles from Memphis, Tennessee. It would be more cost effective to reimburse travelers leaving from Jonesboro or Hagerstown for the cost of fuel and mileage to drive to the larger airport.

Those two aren’t unique. In all, 38 of the 153 airports subsidized through the EAS program are within 150 miles of another, larger airport. A 2011 report published by the The Reason Foundation (which publishes this blog), the Natural Resources Defense Council, the American Bus Association, and Taxpayers for Common Sense found that 79,000 one-way flights leave those 38 airports year, carrying 615,000 passengers who pay $70 million in fares. The federal government’s subsidies for those flights totals nearly $60 million.

Replace those flights with a bus service to shuttle passengers to larger, nearby airports could save $89 million annually, the report found. Yes, buses don’t travel as fast as places, but the average trip would be only 45 minutes longer on the ground than through the air, the study found.

That’s fine for the EAS airports near bigger cities, but what about the rest? A 2009 report by the Congressional Budget Office suggested that states and local governments could pick up the tab for airport subsidies if they were truly essential to the local economy. In many places, such service might not be needed at all—or the number of flights could be reduced from two-per-day to perhaps a few flights each week, depending on demand. Indeed, some EAS-eligible airports operate with fewer than five passengers per day, the Government Accountability Office found in 2011.

Trump’s budget, like all presidential spending proposals, is more of a political document than a fiscal roadmap. Congress gets the final say on federal spending, and, if history is any guide, we haven’t heard the last from the EAS program. President George W. Bush tried three times to reduce or eliminate funding for it during the mid-2000s, only to be rebuked each time by Congress. Funding for the program actually increased during the Obama administration, from about $136 million annually to the current level of $200 million.

Cutting back on those subsidies—or eliminating them entirely, as Trump proposes—makes a lot of sense, and could be done without cutting rural communities out of the nation’s transportation networks.

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Rand Paul Responds To “Unhinged” McCain

On the heels of yesterday's McCain meltdown exclaiming that Rand Paul "is now working for Vladimir Putin," the Kentucky Senator released a short statement…

"Currently, the United States has troops in dozens of countries and is actively fighting in Iraq, Syria, Libya, and Yemen (with the occasional drone strike in Pakistan). In addition, the United States is pledged to defend 28 countries in NATO. It is unwise to expand the monetary and military obligations of the United States given the burden of our $20 trillion debt."

And then appeared on MSNBC's 'Morning Joe' to explain…

he did not pull any punches (via RealClearPolitics)

GEIST: So, Senator, a little context around that. The vote was around putting Montenegro into NATO. What's your reaction to Senator McCain's characterization of your objection?

 

PAUL: You know, I think he makes a really, really strong case for term limits. I think maybe he's past his prime; I think maybe he's gotten a little bit unhinged.

 

I do think that when we talk about NATO, there can be a rational discussion about the pros and cons of expanding it. We currently have troops, combat troops, in about six nations. We have troops actively just stationed in probably a couple dozen others. We have a $20 trillion debt. And one of my favorite articles of the last couple years is one that talked about the angry McCains, and if they — if we put active troops and got involved in combat where McCain wants us to be, they put a little angry McCain on the globe, on the map. And it's virtually everywhere. So his foreign policy is something that would greatly endanger the United States, greatly overextend us. And there has to be the thought whether or not it's in our national interest to pledge to get involved with a war if Montenegro has an altercation with anyone.

 

There's also another argument, is that when you ask the people of Montenegro, only about 40 percent or slightly less are actually in favor of this. They are close to Russia, they're close to being sort of, like Ukraine, in the transition from Europe to Asia. Perhaps it would be good to be like Switzerland and be more neutral and trade with both.

 

So, there's a lot of considerations but to call someone somehow an enemy of the state or a traitor might be considered by most reasonable people to be a little over the top.

 

GEIST: But Senator, you just called John McCain unhinged. You said he was past his prime. Why do you think so many other senators have voted in favor of this measure if it's so crazy?

 

PAUL: I think that there is a bipartisan consensus that's incorrect that we should have the whole world be in NATO. For example, if we had Ukraine and Georgia in NATO — and this is something McCain and the other neocons have advocated for — we would be at war now because Russia has invaded both of them.

 

And so I think having former satellites or former parts of the Soviet Union is NATO is very provocative. And you have to decide in advance whether you're ready go to war. If you guys are ready to send a million troops into Ukraine and fight World War III, you're going to do it without my support because I think that's a really foolish notion.

 

GEIST: Do you think, Senator, places like Albania and Croatia then should have been allowed into NATO in 2009?

 

PAUL: I think it's a real debate how big NATO should be and whether or not it's more provocative than good. And there's also the debate that the president brought up throughout the campaign, and that is we seem to be paying for all of it. Whenever there's a war fought, our soldiers fight it and our dollars pay for it. And so the 45 soldiers that Montenegro has I think are hardly an asset to our national security. And, really, our decisions need to be about our national security. And so I just don't think it enhances our national security to have Montenegro part of NATO.

Paul makes a good point, and as Mike Krieger noted yesterday, the McCain outburst should alarm all Americans. McCain is accusing a fellow Senator of disloyalty and allegiance to a foreign power simply because he disagrees with him. It’s remarkably similar to what we saw Adam Schiff do a few months ago in an embarrassing interview with Tucker Carlson. It seems yelling “Russia” is simply the new strategy for clueless politicians when they can’t win an argument.

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Greeks Tried To Blow Up The IMF Too

Earlier today, German police reported that a militant Greek group called Conspiracy of Fire Cells claimed responsibility for the attempt to kill Germany’s finance minister Wolfgang Schauble with a package full of explosives that was mailed to the German Finance Minister. The parcel was mailed to Schaeuble from a post office branch in Athens but as discussed previously, was intercepted by the German finance ministry’s mail department. Luckily, nobody was hurt.

Unfortunately, today someone was hurt when a letter bomb exploded at the French headquarters of the IMF. And, according to a report by the AFP, “militant”, or otherwise, Greeks may have been responsible for this terrorist activity too, because as the French news agency notes, “fragments of Greek stamps found at Paris IMF letter bomb site: probe source.”

As Reuters, adds, a female employee of the IMF suffered injuries to her face and arms on Thursday when a letter bomb mailed from Greece and addressed to the world lender’s European representative blew up as she opened it, officials said. The letter, which had arrived by mail, exploded as it was opened by a secretary at the institution’s office in an upscale part of Paris.

The secretary, whose hearing was also affected, was receiving treatment but her injuries were not life-threatening, Paris police chief Michel Cadot told reporters. The blast caused little damage to the office.

A militant Greek group, Conspiracy of Fire Cells, claimed responsibility for a parcel bomb mailed to German Finance Minister Wolfgang Schaeuble on Wednesday, but there was no immediate claim for the Paris attack.

 

However, a Greek return address was on the envelope which exploded in Paris, Greece’s public order minister said in Athens. “French authorities just informed us that it was mailed from Greece,” Nikos Toskas told Ant1 Television.

 

The explosion was caused by a device that was fairly home-made, “like a big fire cracker,” police chief Cadot said. Asked if the head of the IMF’s European office had received threats, Cadot said: “There had been some phone calls in recent days but they don’t seem necessarily to be linked to this matter.”

 

The IMF has been involved in talks between Greece and its international creditors on disbursing new loans to Athens under a bailout program.

Alas, we have no more information as of this moment, so anyone asking if Greek terrorist passports were also found, or why the package wasn’t mailed by Russian hackers, will have to wait.

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Trumpocalypse Reality Check: Government Spending This Century Has Grown from $3.2 Trillion to $7 Trillion

How is the political class responding to a Donald Trump budget blueprint that utterly fails to cut spending even while including many dramatic regulatory-state cuts that Congress will never, ever approve? With about as much sober perspective as you would expect:

Here is a helpful reminder for that side of your universe busy losing their shit: During this woefully misgoverned 21st century of ours, with its sluggish economic growth and serially disastrous wars, panics, bailouts and stimuli, combined U.S. federal, state, and local government expenditures have zoomed from around $3.2 trillion in fiscal year 2000 ($4.5 trillion in today’s dollars) to north of $7 trillion this year, according to Christopher Chantrill’s useful aggregator USGovernmentSpending.com. During that time the U.S. population has grown from an estimated 281 million to 324 million, so even after adjusting for inflation, government spending has grown more than three times as fast as Census numbers.

And yet here is the type of headline we will be reading all season long: “Trump’s plan to dismember government.” That, from CNN on Tuesday, was no mere headline hyperbole—here’s the opening section from senior enterprise reporter Stephen Collinson:

President Donald Trump plans to dismember government one dollar at a time.

His first budget — expected to be unveiled later this week — will mark Trump’s most significant attempt yet to remold national life and the relationship between federal and state power.

It would codify an assault on regulatory regimes over the environment, business and education

Italics mine, for future death-metal band names.

No, fuck you, cut spending. ||| ReasonHere are three iron rules of political-class reactions to any whiff of budget cuts: 1) Every previous budget ratchet will be ignored, yet taken as the minimum acceptable baseline. 2) If even 1 percent of a to-be-reduced bloc of spending can be described as keeping granny from starving to death, that will be precisely how the whole bag of money is characterized. 3) It will all be about the president, even though the president writes no budgets.

This will be this century’s third sustained round of media histrionics about the supposedly “annihilating” effects of “savage budget cuts.” The first concerned the zombie-apocalypse of unsupervised skating and threatened (though never quite delivered) mass teacher-firings during the 2009-2010 state budget crisis. (Which was routinely blamed on brutal austerity instead of the massive spending run-up just before the financial bubble burst in 2008.) The second, in 2012-13, warned of the poisoned meat, reduced travel perks and a generation’s worth of lost science (no really) resulting from the totally modest and all-too-temporary budget sequestration.

After those two near-death events it’s a wonder that we still know how to breathe.

Trump’s military boost will almost certainly be approved. His 25 percent cut to the Environmental Protection Agency almost certainly will not. He’s a historically unpopular president currently risking what political capital he has on a deeply (and rightfully) unpopular Obamacare reboot; you think that the congresscritters who are currently fleeing constituent townhalls like rats from an ice floe are prepping themselves to face down the next few months’ of “Congress Rapes the Environment to Please the Rich” headlines?

The net result, in an era when Congress doesn’t even make budgets anymore and both parties are in thrall to debt denialists, is that the federal government during Trump’s first year in office is likely to spend and borrow even more than he’s proposing today. That is the real scandal, if one unlikely to break through the purple-faced rage of media hyperventilation.

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