Tag: news

By EconMatters

We discuss the Tesla new Powerwall home energy storage unit, Solar Energy, early adoption of technology mistakes, and the bankruptcy curve that Elon Musk is tightrope walking in this video. A broad economic analysis proves that all solar purchases to date have been poor investment choices.

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While the 'deplorable' half of America was greatly relieved when Donald Trump pulled off his establishment-upsetting victory, there is another group of Americans that may be even more pleased. Goldman Sachs' top executives had over 1 million stock option grants due to expire worthless next week, but thanks to an unprecedented spike in the stock since the election, Bloomberg reports Lloyd Blankfein and friends have cashed out, selling hundreds of millions in stock in the last week.

As Bloomberg details, just last week, it looked like more than 1 million stock options granted toGoldman Sachs Group Inc.’s top executives and directors would expire out of the money.

The awards, granted with strike prices of $199.84 at the end of 2006, a solid year for bank stocks, were set to expire on Thanksgiving eve. But on Nov. 7, the night before Americans voted, they closed at $181.48, meaning it wouldn’t make sense for executives to exercise them.

 

Then Trump pulled off an upset victory and Goldman Sachs surged 16 percent through Thursday, allowing executives to exercise the options and sell shares to lock in gains. The stock closed at $209.63 on Thursday and traded for as much as $212.07 this week, the highest since July 2015.

Phew… that was lucky!!

 

So while the mainstream media proclaims the surge in bank stocks as heralding a new dawn in everything-is-awesome-ness for America, we note that insiders at Goldman Sachs sold $205 million of stock since Nov. 8, company filings show.

That’s three times more than the group has sold in any month for at least five years, data compiled by Bloomberg show.

Not a bad week for Cohn, Blankfein, and Viniar…

 

For a sense of how 'odd' this massive surge in Goldman stock is, we note that the credit markets were entirely unimpressed…

 

So what happens at the end of next week, when these options mature and the magical bid holding Goldman stock above $199.84 disappears? (see credit chart above…)

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Submitted by Alasdair Macleod via GoldMoney.com,

Hayek’s The Road to Serfdom described how personal freedoms are progressively eroded by the state in the name of the common good.

His warning is more associated with totalitarianism and dictatorships, than modern democracies, but the statist attitudes he warned about still apply today and lead to the same loss of personal freedom and increase of state control. In the main, the serfs are patient and tolerant of their masters, but in a democracy, the establishment behind the state risks being challenged. And that has happened twice this year, first with Brexit and now with Trump in America.

We can be certain that the establishment in Britain and America will reinvent itself. Theresa May is not out to change the world, but is adapting to the new realities. Donald Trump is still mostly an unknown quantity, but the initial impression is one of appalling economic ignorance, dressed up as the new Reaganomics. He proposes substantial tax cuts and state-directed infrastructure spending “to make America great again”. But unless tax cuts and infrastructure commitments are made in lock-step with reductions in government spending, which seems extremely unlikely, the outcome will be to stimulate latent price inflation to a surprising degree.

The starting point for “Trumpenomics” could hardly be worse. The level of debt in both the government and private sectors is too high to be sustained already, and from this elevated base it is proposed to print and borrow much more. Payment for this profligacy can only come from credit creation, as banks mobilise and gear up on their excess reserves at the Fed to buy government bonds. The accumulation of latent fiat money since the financial crisis will at last be applied to driving up prices on Main Street, instead of mainly on Wall Street as heretofore. The status quo has concealed enormous economic and monetary distortions, the unwinding of which will have unexpected consequences for prices.

Private sector wealth and savings have already suffered considerable dilution from decades of the Fed’s monetary policies. Significant numbers of the American population are finding it hard to make ends meet, and have been in financial difficulties for many years. Accelerated government deficit spending is an added malevolent influence, which can be expected to drive up prices of ordinary goods, all other factors being equal. While Keynesians believe in economic stimulation, the reality is an added round of monetary debasement will increase the impoverishment of the “deplorables” who voted for Trump. It will turn out to be a destructive Keynesian policy additional to existing policy mistakes.

For the moment, with the stock market roaring on the prospects of all this lovely stimulus, no one seems that worried. But already, we see the US Treasury market falling rapidly, with 10-year Treasury prices down roughly 8%, a catastrophe for investors who have bought into the Yellen put. The dollar has also risen against other currencies, reflecting the attractions of higher dollar yields. And at the same time, commodity prices are roaring. The chart below, which is a composite of industrial raw materials, illustrates this problem.

The surge in raw material prices is not widely appreciated. For now, higher raw material prices are expected to be absorbed by retail businesses, as Mark Carney stated at Tuesday’s UK Parliamentary Treasury Committee meeting. It’s a case for the three wise monkeys. But only so much can be absorbed by margin compression before customers pay up, or retailers shut shop and manufactures scale back production. Welcome to the new great America.

We are now seeing term rates rising and the purchasing power of the dollar, measured in industrial materials, falling significantly before any stimulation from Trump’s accelerated deficit spending. He’s too late and will only aggravate a bad situation. The reason commodity prices are rising is mainly due to stockpiling by China, which plans its own infrastructure boost. Instead of only the largest country measured by global trade looking to spend on infrastructure development, in addition we will have the largest country measured by GDP looking to do the same. The timing of Trump’s planned spending-spree could hardly be worse, from a price-inflation perspective.

The rise in the dollar against other currencies is also creating destructive chaos. The reserve currency everyone has borrowed is rising in value against local currencies, leading to a scramble for cover, and a shortage of dollars in the interbank markets. These difficulties should not be underestimated, being extremely costly for indebted businesses in emerging markets and in the Eurozone. The rise in dollar term-rates also exposes the ECB’s and Bank of Japan’s monetary policies as being entirely wrong. It has led to substantial falls in the euro and yen against the dollar, and massive additional losses on bond investments denominated in these currencies.

Europe

The EU and the ECB have been badly affected by the Trump surprise. Suddenly, Brexit looks like a prescient move, with the UK likely to get a better trade deal with an Anglo-Saxon partner, than originally thought. Other nations could well have their own serf-driven rebellions, with many elections and referendums due in the next year. Furthermore, Trump is likely to reduce America’s NATO commitment in a new policy of détente with Russia. The political situation has suddenly become very dicey, and the economic situation has just become worse as well.

The ECB has for the last eight years successfully contained a systemic banking crisis, involving variously Ireland, Cyprus, Greece and Portugal, with real threats from Italy, Spain and even Germany. To maintain the value of the collateral and investments held on bank balance sheets, the ECB has reduced interest rates and elevated bond prices by buying large quantities of debt in the market. It is a policy that has worked so far, because exogenous threats were also contained. This is no longer the case, and Eurozone bond prices have been exposed as considerably more overvalued than US Treasuries, given prices that imparted negative yields to German bunds. The effect of further bond price falls on bank balance sheets could well be catastrophic.

Today, the obvious weak point in the financial system is Italy. Italy faces a constitutional referendum on December 4th, which has been postponed from October. The vote is an attempt by Matteo Renzi, Italy’s Prime Minister, to reduce the Senate’s power. In effect, the power lost to the Senate will be transferred to the executive. Originally, Renzi pledged to resign if the referendum went against him, but recently he appears to have backed away from this commitment as the chance of failure has increased. Italy matters, because it is on the verge of a major banking and economic crisis and the serfs smell a constitutional rat.

The weakness of Italy’s banking system is no secret, but commentators miss the underlying point, that the fundamental problem is with the economy. Non-performing loans in the banking system are officially recognised at 18% of GDP. But the public sector is 52% of GDP, which means that NPLs are over 40% of private sector GDP, bearing in mind that this is where NPLs are confined. And it is a fair bet that the NPL problem is worse than officially recognised. So even if the banks are successfully restructured or bailed out, it is unlikely to resolve the underlying economic malaise.

Trumpenomics has just made the ECB’s bailouts considerably more difficult, because as well as non-performing loans, the banks have massive mark-to-market bond losses to absorb as well. Furthermore, the ECB will almost certainly have to raise interest rates more than the Fed, particularly if the euro continues to weaken against the dollar, as seems likely. That is where the crisis will hit, and probably not before long.

In conclusion, Trumpenomics as proposed (though it is obviously not yet in its final form) will lead to accelerating price inflation, accompanied not by better conditions for the “basket of deplorables” as Hillary Clinton described Trump’s supporters, but their further impoverishment through the realisation of the wealth-transfer mechanism of price inflation. Stagflationary conditions are already on the cards, but as a matter of simple economics it is being accelerated further by Trump’s intended plans. The black swan event, the unforeseen consequence, is likely to bring forward the political and economic disintegration of Europe and the euro area, through a falling currency and collapsing bond prices. Welcome to The Donald’s world. The serfs never win, as Hayek recognised.

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After months of disappointments for Chris Christie, once one of the Republican Party’s brightest stars, the New Jersey governor was virtually assured a position in a Donald Trump administration. As one of the first big-name politicians to endorse the Manhattan billionaire, Christie had earned Trump’s gratitude the pundits predicted. And then everything fell apart.

Among the top political stories in the week of Trump’s election, was that just a few months after being denied the VP slot, Christie suffered another public humiliation when he was demoted as Chairman of Trump’s presidential transition team, and was replaced by VP Mike Pence.

Thanks to a Politico report, we learn the details of the embarrassing phone call in which Trump “ripped” into Christie, before removing him from his transition team.

In the phone call, “Trump expressed his worry about the recent conviction of two of the governor’s former top aides, who had accused him of knowing more about the shutdown of the George Washington Bridge than he let on. Was more damaging information to come, Trump wondered?”

Trump and his top aides were most concerned about two issues, according to nearly a dozen people briefed on the process: Christie’s mismanagement of the transition, and the lingering political fallout of the Bridgegate scandal.

Trump was also unhappy with the number of lobbyists that Christie had on the transition team, as well as his choice to fill the staff with his own friends and loyalists.

In the days following the election, Trump expressed deep frustration about how Christie was handling the transition. In particular, he vented about how the governor had loaded up the team with lobbyists, the very class of people Trump had campaigned against, with his calls to “drain the swamp” in Washington. The president-elect also noticed that Christie had stocked his team with old New Jersey friends and allies.

 

There were other issues. Once the dust settled from their surprise win, the Trump team noticed that Christie had done little to vet potential administration picks or to dig into potential conflicts of interests. With Democrats eager to pounce on any early mistake, it was an oversight they simply couldn’t afford.

Additionally, Christie was reportedly deeply disliked by Trump’s son-in-law, Jared Kushner, who has become an influential advisor on the Trump campaign:

In the months to come, Kushner, a 35-year-old New York City real estate mogul who grew up in New Jersey, would become a bigger problem for Christie, arguing forcefully against Trump making the governor his running mate. Christie, a former U.S. attorney, became convinced that Kushner was retaliating over his 2004 prosecution of Kushner’s father, Charles.

 

Still, while they never became close, Kushner and Christie agreed to work together. At several points, according to two sources, Trump took steps to forge a warmer relationship between them — apparently without success.

 

Kushner’s allies say the idea that he’s out for personal vengeance, promoted in several recent stories, is simplistic and overblown. Rather, they argue, the Trump son-in-law has more substantive concerns — viewing the governor as badly damaged following the Bridgegate affair. And in the days following the election, Kushner told others in Trump Tower that Christie oversaw a messy, lobbyist-filled transition operation that simply needed to be cleaned up.

By Thursday of last week, Trump was telling aides that he was ready to make a change.

* * *

How is Christie faring now and what are his future prospects?

In recent days, Christie’s advisers have reached out to him to see how he’s holding up. He’s fine, he’s told them. It was only a matter of time that the transition process would be taken from him once the election was over. On Thursday, during an appearance in Atlantic City, Christie waved off talk about his career prospects — and criticized reporters for “prognosticating” about his future.

 

“I know all of them have taken inordinate concern, just in the last 10 days or so, about my future. All of them have become, you know, employment counselors,” he added. “I have every intention of serving out my full term as governor — I’ve said that from the beginning.”

Christie’s advisers speculate that the governor might exit politics entirely when his term expires in January 2018. Some of them suggest that Christie, an avid sports fan, could take a job as a sports radio host. He is an occasional guest caller to WFAN, the popular New York City-based sports talk station. To some, it’s far too early to write him off. “He’s the most interesting politician I’ve seen since Bill Clinton,” said former New Jersey Gov. Tom Kean, a Christie mentor. “He’s got an enormous set of skills.”

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While relations between Russia and the US may finally be on the mend following a phone call between Putin and Trump, in which the Russian leader expressed hope for a reset and renormalization of the current “unsatisfactory” bilateral relations between the two countries, treatment of Russia in Europe remains on the downswing. The latest example of this took place on Friday when military aircraft with Swiss fighter jets shadowed a Russian government aircraft over the European country, Russian Foreign Ministry spokeswoman Maria Zakharova said Saturday.

As a result, Moscow asked the Swiss government for an explanation for the deployment of fighter jets to meet a Russian special flight airplane carrying journalists, and Alexander Fomin, the director of the Russian Federal Service for Military-Technical Cooperation to a summit of the Asia-Pacific Economic Cooperation (APEC) in Peru, saying it is particularly concerned by how perilously close the warplanes shadowed it.

In a broadcast on the Rossia 24 TV channel, Russian Foreign Ministry spokeswoman Maria Zakharova issued the following statement: “I will stress one more time that a rather close distance, to which these fighter jets had approached [the Russian plane], has caused serious concerns of the passengers of the Russian aircraft. We have not left unnoticed the media reports on the issue and our embassy in Switzerland has already requested explanations of the Swiss side. We are expecting the explanations and will respond in an appropriate manner after we will receive them.”

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— ?????????? ?????? (@RusEmbSwiss) November 19, 2016

Switzerland said later on Saturday that close encounter had been just a “routine check.” The Swiss Defense Ministry confirmed that the Swiss jets flew alongside the Russian plane for seven minutes, adding that it was one of the checks that are usually conducted around 400 times a year to double-check the identity of planes belonging to foreign governments, as reported by Reuters.

“It’s like police patrols in the street checking a car to make sure it wasn’t stolen,” a Swiss Defense Ministry spokesman told Reuters.

Russia Special Flight Unit Sukhoi Superjet 100-95 (RA-89040)

According to Sputnik, Andrey Kolesnikov, editor-in-chief of the Russian Pioneer magazine, wrote on Facebook, “We are flying to Peru, to APEC CEO summit […] Flying through Switzerland. At some point, the plane with the delegation and the journalists is blocked from three sides by three fighter jets. […] These are fighter jets of the Swiss Air Force.”

Kolesnikov expressed amazement that the fighters were flying close enough to be what he considered a threat to the flight. The jets seemed to be almost at arm’s length, and the aircraft identification numbers, as well as the pilot’s faces, could be plainly seen, according to the journalist.

Others on board had a similar reaction: Dmitry Smirnov, correspondent for Komsomolskaya Pravda newspaper, wrote on his Facebook page, “We are flying to Lima with gusto: passed above Switzerland with convoy of two F-18s with ammunition load.”

The captain of the escorted Russian aircraft asserted that accompanying Russian aircraft has become routine.

The Swiss jets pulled away when the Russian plane reached the Swiss border. Western fighter jets regularly chase Russian warplanes in international airspace. Accompanying Russian passenger aircraft, however, is something new.

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Via Jesse's Cafe Americain blog,

Apparently lax and/or incompetent regulation of systemically important banks by bureaucrats, central bankers, and politicians may not be just a recent American phenomenon.

As we read this, it could imperil the soundness of the financial system in Europe as well, as is still apparently the case with The Banks in the states, despite assurances to the contrary.

Golem XIV asks some very good questions in the article below, recently posted on his blog here.

Whistleblowers Testify in EU Parliament

 

Yesterday a very high-powered panel of international banking whistleblowers met and told their stories in the European parliament.  The questions raised were important. Among them was the Irish Whistleblower, Jonathan Sugarman, who when UniCredit Ireland was breaking the law in very serious ways reported it to the Irish regulator.

 

He related how he was not only ignored by his bank, the Irish regulator but also all the major political parties.   He then pointed out that the Irish regulator claims that it always – and it is the law after all –  informs the regulator of the home country of banks which have subsidiaries in Ireland, about any serious problems.

 

In the case of UniCredit that would mean the Italian Central bank would have been told that Italy’s largest Bank was in serious breach of Irish law in ways that could endanger the whole banking system. The head of the Italian Central Bank at the time was a certain Mr Mario Draghi.

 

Mr Sugarman suggested Mr Draghi should be asked point-blank of he did or if he did not know.

 

If he did not then the Irish regulator was at least incompetent, and may have lied, misled  and perhaps even broken Irish laws.

 

If he was told and did know, then Mr Draghi has serious questions to answer regarding his own dereliction of duty.

 

Surely not I hear you say.  Well perhaps someone might ask him? Or is he above the law?

 

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Related: Studies Show Fed Stress Tests Merely 'a Placebo'

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By the SRSrocco Report,

The world is sitting at the edge of a massive deflationary cliff.  Even though Central Banks are desperately trying to keep the world’s financial assets from plunging down into the great depression below, signs suggest they are losing the battle.

One critical sign is the peak and decline of International Reserves.  Hugo Salinas Price has been keeping an eye on International Reserves for quite some time.  In his recent article, A Reversal In The Trend Of International Reserves, he stated the following:

International Reserves peaked on August 1, 2014, at $12.032 Trillion dollars, and as of October 28, 2016 they stood at $11.066 Trillion dollars.

 

International Reserves stood at about $10 Trillion in 2011, but the rate of growth slacked off; the weekly increases in Reserves (which Bloomberg used to publish every Friday) stalled and became smaller, week by week. As mid-2014 came around, the increases were quite small. It was clear that the trend was for ever-smaller increases, and that could only mean that finally there would be no increase, which would be immediately followed by decreases in the total of International Reserves held by Central Banks. That is exactly what took place.

Here is a chart of International Reserves from Hugo Salinas Price’s article:

Hugo Salinas Price explains in the article, “that the increases of International Reserves take place when the Reserve Currency issuing countries effect payments to the rest of the world.”  Basically, countries such as the United States that run trade deficits, exchange fiat money or Treasuries for goods from other countries.  This shows up as an increase in International Reserves.

Now, what is important to understand about the chart above is the timing of the PEAK & DECLINE of International Reserves.  I had an email exchange with Mr. Salinas on what I believe was the leading factor in why the International Reserves peaked and declined.

When I went back and looked at a five-year price chart of a barrel of oil (West Texas), I found a very interesting coincidence:

The price of a barrel of West Texas Crude fell below $100 starting at the beginning of August, 2014…. TO THE DATE.  Even though the oil price had traded between $85-$100 over the past three years, it averaged over $95.  However, by the end of 2014, it had fallen by more than half.

This had a profound impact on International Reserves as the low oil price gutted the energy-commodity-goods producing countries.  These are the countries that hold the majority of International Reserves.  So, as the price of oil continued to stay below $50 a barrel, these countries had to sell Bonds and acquire cash to fund their own domestic account deficits.

Thus, the peak and decline of International Reserves occurred right at the same time, the peak and decline of high oil prices.  THIS IS NO COINCIDENCE.

As Hugo Salinas Price’s chart above shows, the world has experienced massive asset inflation ever since President Nixon dropped the Gold-Dollar peg in 1971.  Furthermore, it isn’t a coincidence that the U.S. Debt went up in a similar exponential trend the same as International Reserves since 1971:

The reason for the massive increase in U.S. debt shown in the chart above was due to the falling EROI – Energy Returned On Investment of U.S. Oil & Gas.  When the United States enjoyed an EROI of 30+/1 (prior to 1971), its debt remained low… relatively speaking.  However, as the U.S. Oil & Gas EROI continued to decline, its public debt skyrocketed.  Part of this U.S. debt is included as International Reserves.

Basically, the United States (and other countries) could no longer afford to sustain their domestic economies with their own energy sources, so they had to import energy (commodities-goods) to continue business as usual.  These trade or account deficits resulted in the exponential increase of International Reserves.

Unfortunately, the peak and decline of International Reserves represents the POPPING OF THE MASSIVE INFLATIONARY ASSET BUBBLE.  This is due to the falling oil price as well as the rapidly declining net energy in a barrel of oil.

Mr. Salinas is one of the few spokesmen in the precious metals community that understands the dire implications of the declining global oil industry.  He translated my Big Trouble At ExxonMobil article in Spanish on his website: Toca a su fin la época de la gran industria petrolera americana. ExxonMobil tiene enormes problemas.

While the Mainstream media is completely clueless to the disaster currently taking place in the Global Oil Industry, most in the precious community are oblivious as well.  This is due to the fact that most analysts in the precious metals community have BLINDERS on.  They just rather focus on the direct impact of gold and silver, and nothing else.  This is quite a shame as ENERGY is the KEY.

Lastly, there seems to be a lot of discontent in the precious metals community since the price of gold and silver declined after the Trump Presidential election.  Not only was the election of Trump as the U.S. President a surprise to most, the negative market reaction on the precious metals prices was the opposite of what most anticipated.

That being said, I am not surprised to see that the many people have become disillusioned or distraught on falling gold and silver prices.  This is the FICKLE NATURE of the general public or the typical investor.  Few have the mental or intestinal fortitude to withstand going against the grain (mob).

A perfect example of this was shown in the movie, THE BIG SHORT.  The original investor (played by Christian Bale in the movie) had severe threats against him from his investors when it seemed as if the MBS Short trade was going against him.  Ultimately, the Big Short trade against Mortgage Back Securities paid handsomely.

On the other hand, the falling gold and silver price has not impacted me at all.  The reason for  that is my understanding of the Oil and Energy Industries.  Again, most people in the precious metals community still don’t understand the dire ramifications of the collapsing global oil industry, so they continue to focus on the GOLD & SILVER PRICE.  This can be quite frustrating.

So, if you are a gold and silver investor and want to continue to be frustrated by the paper price of the metals, please continue what you are doing.  However, if you want to understand why the precious metals will be one of the only safe havens in the future, please learn more about the energy situation which I will provide in future articles.

Lastly, if you haven’t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report. 

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In light of expectations that the Trump fiscal stimulus plan will unleash a new Golden Age for the US economy driven in part by the repatriation hundreds of billions in funds held offshore, yesterday we showed a disturbing analysis from Citigroup according to which the bank’s share-shrinker portfolio has risen sharply relative to the S&P following the US election. The implication was clear:as fas as the market is concerned, much if not all of the capital repatriated from overseas will be promptly returned to shareholders, and maybe much of the corporate tax cut as well. Citi’s troubling conclusion: “This doesn’t bode especially well for those who hope policy changes will encourage a significant pick-up in US company capex.”

Which means that far from being a boon to investment, the market’s assessment – at least as of this moment – is that much of the $1 trillion fiscal boost, touted in Friday’s Steve Bannon interview, will end up being returned to shareholders.

Overnight, Goldman chimed in with a similar forecast in which according to Goldman chief equity strategist David Kostin, in 2017, for only the second time in 20 years, stocks buybacks will account for the largest share of cash use by S&P 500 companies.

Specifically, Goldman expects that total capital usage will increase by 12% to $2.6 trillion with 52% allocated to investing for growth (capex, R&D, and cash M&A) and 48% to returning to shareholders. The only other time 48% of total cash was returned to investors was back in 2007 just ahead of the bursting of the credit bubble.

Where will the bulk of this buyback spending growth come from: Goldman, as Citi, predicts that tax reform legislation under the Trump administration will encourage firms to repatriate $200 billion of overseas cash next year and further forecast that a vast majority, or 75%, of the returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004. Of the $200 billion to be repatriated in 2017, Goldman sees $150 billion being used toward repurchases, or 20% of total buybacks. Meanwhile, organic investment will grow far less: capex will grow by only 6%, R&D by 7%, and cash M&A by 5%.

To summarize: of the $2.6 trillion in total cash spent by companies, the largest bucket, or 30% of the total, will be on stock buybacks; this is the highest portion of corporate cash allocated to buybacks since 2007.

This cash distribution is summarized in the chart below:

Here are the full details from Goldman:

We expect firms will increase cash spending allocated to investing for growth (capex, R&D, and M&A) by 6% to $1.3 trillion while cash returned to shareholders (buybacks and dividends) will rise by 19% to $1.2 trillion. A stabilization in oil prices will moderate the collapse in Energy spending while ex-Energy capex will grow by 7%. We project cash M&A spending will grow by 5% in 2017 following a 20% drop in 2016. Modest US GDP growth of around 2% and ex- Energy earnings growth of 6% will sustain the popularity of buybacks and dividends. We expect tax legislation will pass in 2H 2017 that will include a one-time tax on previously untaxed foreign profits. S&P 500 repurchase activity will benefit from an incremental $150 billion (20% of total) of buybacks given firms will direct a substantial amount of repatriated funds towards share repurchases.

1. Capex ($710 billion in 2017, +6% growth) and R&D ($290 1. billion, +7%) will increase in 2017. Downward pressure on Energy spending will be alleviated as oil prices stabilize. During the last 12 months, Energy has accounted for roughly 19% of total capex spending compared with 32% in 2014. Our commodities team expects Brent crude will remain above $50 per barrel and low domestic breakevens suggest modest 1% Energy capex growth in 2017 following a 20% plunge in 2016. In addition, Mr. Trump’s proposal to allow U.S. manufacturing companies to expense 100% of their capital investment in the first year would encourage additional capex, if passed. In contrast with capex, Energy only accounts for around 2% of total S&P 500 R&D spending, which has made aggregate R&D spending resilient to the sector’s downturn. Information Technology and Health Care have accounted for more than 70% of total R&D during the past 12 months.
2. Cash M&A ($335 billion, +5%) will increase in 2017 following a 20% plunge this year from the record level in 2015. Although 2016 has witnessed a robust volume of announced M&A deals ($1.4 trillion), cash spending on M&A accounts for only 55% of the total. Uncertain anti-trust policy positions and tax inversion related regulation under President-elect Trump pose a risk to our forecast volume of cash M&A activity.
3. Buybacks ($780 billion, +30%) will rise sharply in 2017. Our economists expect tax reform legislation will pass during 2H 2017. President-elect Trump and House Republicans have expressed support for a one-time tax on previously untaxed foreign profits as part of their tax reform proposals. We forecast that S&P 500 firms will repatriate $200 billion of their total $1 trillion of cash held overseas in 2017 and spend $150 billion of the repatriated funds on share repurchases. Managements generally remain committed to buybacks, which will benefit from 2% US GDP growth and ex-Energy earnings growth of 6%.
4. Dividends ($460 billion, +6%) should grow roughly in line with EPS for the next few years. Consensus forecasts imply that Financials and Health Care will grow dividends by 9% in 2017, the highest across all sectors. Our top-down earnings model forecasts S&P 500 dividends will grow at a compound annual rate of 3.6% during the next ten years, above the dividend swap market-implied growth rate of 2.3% (see Global Dividend Swap Monitor, October 26, 2016).

A breakdown of buybacks by sector:

Why is Goldman convinced that most of the repatriated foreign cash will be used to fund buybacks? The answer: tax reform as well ashistorical precedent.

We estimate that $150 billion out of $780 billion of S&P 500 buybacks in 2017 will be driven by repatriated overseas cash. Corporate tax reform will likely be a top priority for the Trump Administration. Our economists expect that tax legislation in 2017 will include a one-time tax on previously untaxed foreign profits. We forecast that S&P 500 companies will repatriate close to $200 billion of their $1 trillion of total overseas cash in 2017, which will be directed primarily towards share repurchases.

 

Under current policy, US-based firms may defer US taxes on profits earned by foreign subsidiaries until they are repatriated. Once repatriated, foreign earnings are taxed at the US federal tax rate of 35% minus a credit for foreign taxes paid. Rates in other OECD countries range from a low of 12.5% in Ireland to a high of 34% in France. The deferral of tax on foreign profits combined with the high US statutory tax rate incentivize firms to shift as much income as possible to low-tax jurisdictions and to avoid repatriating income generated in those countries to the US.

 

President-elect Trump and House Republicans have both expressed support for a one-time tax on untaxed foreign profits. In their “blueprint” of potential tax reform, House Republicans proposed an 8.75% tax on permanently reinvested overseas cash and a 3.5% tax on other untaxed foreign earnings. Mr. Trump also proposed similar tax reform during his Presidential election campaign.

 

Our Washington, D.C. economist Alec Phillips expects that tax legislation will likely pass in 2H 2017. The probability of significant legislative activity has increased as a result of single-party control for the first time since 2010, and Republican singleparty control since 2006. In addition, tax reform appears to be prominent on the policy agenda in 2017. We expect to see initial tax reform proposals around March or April and possible enactment during the second-half of the year.

The reason Goldman expect S&P 500 firms to repatriate $200 billion of their $1 trillion total overseas cash in 2017, is because it complies with historical precedent: US firms repatriated 10% and 20% of their total estimated overseas cash during the 3-month and 6-month periods, respectively, following the enactment of the Homeland Investment Act (HIA) of 2004. Given the firms’ forecast of tax legislation during 2H 2017, Goldman predict that S&P 500 firms will repatriate 20% of total overseas cash next year.

And, furthermore, since buybacks were the biggest beneficiary of the repatriation tax holiday in 2004, Goldman expects more of the same this time:

We forecast $150 billion of the total $200 billion of repatriated overseas cash will be allocated to share repurchases in 2017. Share buybacks were the biggest beneficiary of the repatriation tax holiday in 2004. One study estimated that between $0.60 and $0.92 of every $1 repatriated was spent on share purchases (“Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act” (2011), The Journal of Finance 66(3): 753-787). S&P 500 buyback executions rose by 84% in 2004 and 58% in 2005. There was also a jump in dividends in 2004 and sharp M&A growth in 2005, but the rise in buybacks following the tax holiday far exceeded any other increase in cash use

There is one big risk however, to Goldman’s estimate, as the bank itself admits: “Increased debt levels, policy uncertainty, and stricter enforcement of rules regulating the use of repatriated cash pose risks to our estimate.” Given that S&P 500 net debt/EBITDA is close to all-time highs, firms may choose to allocate a portion of repatriated cash towards debt reduction.

Just like comparisons of the Trump and Reagan ignore that debt/GDP under Reagan was 30% (compared to nearly 100% now), S&P 500 leverage was also significantly below average around the time of the 2004 tax holiday.

To be sure, the HIA of 2004 prohibited firms from using repatriated cash on buybacks in an effort to increase domestic investment but, as Goldman notes, “money is fungible.” Still, if a tax reform package passes in 2017 with a similar goal of boosting domestic investment but has stricter regulation of cash use, then capital spending may experience significant increases rather than buybacks.

Incidentally, over the past week, the market has shown little worry that Trump may limit what the repatriated funds will be used for, and has already priced in much of the expected repatriation-funded buyback bonanza, as the following portfolio baskets show.

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In short, absent a formal directive from the Trump administration on explicit “use of repatriation proceeds”, which curbs or outright limits the $200 billion or so in estimated repatriated proceeds, from being spent on buybacks (according to Goldman roughly 75% of the total amount will be used to pay shareholders) there will be virtually no benefit to the broader economy, and instead corporate shareholders will once again reap the benefits as they have for the past 7 years, a time in which they levered up their companies to all-time highs, with the vast majority of the newly raised debt used to fund, drumroll, buybacks.

 

via http://ift.tt/2frM2mY Tyler Durden