Tag: news

Krugman Snaps, Tweets Trump Will Turn America Into “All Out Kleptocracy Like Russia Or Ukraine”

Just a few days after his latest tweetstorm attacking Donald Trump, the NYT house economist was once again unleashed on Twitter lashing out, only this time he took aim not only at president-elect Donald Trump but also his campaign, contradicting Ray Dalio’s optimistic assessment of America under a Trump administration, instead predicting that Trump would turn the US into an “all-out kleptocracy, along the lines of what happened in Russia or Ukraine.”

The Keynesian expert took aim at Trump’s still to be finalized public and private infrastructure plan, and suggested that instead of boosting public spending it would “be largely about privatizing public assets.” His allegation is that instead of infrastructure investments, the upcoming spending spree would convert public assets into private projects: “His transition team is basically all lobbyists and his infrastructure plan, such as it is, sounds as if it’s going to be largely about privatizing public assets” Krugman tweeted.

Krugman also accused Trump that the inclusion of lobbyists within his transition team shows that he “won’t separate himself from his business interests.”

His conclusion “In short, we’re almost surely looking at all-out kleptocracy, along the lines of what happened in Russia or Ukraine. Strange, isn’t it? After all, it’s not as if we’ve just empowered the same people who stole all those assets abroad.”

Ironically, it was the public’s revulsion to America’s existing kleptocracy – the one in which Wall Street firms and corporations courtesy of free Fed money – successfully and without consequences transferred trillions of assets from the middle class to their own offshore accounts, while leaving others foot the bill, most notably those who guarantee America’s nearly $20 trillion in public debt, that ultimately cost Hillary the presidency and led to Trump’s ascent. Maybe one of these days Krugman will entertain his twitter followers with a just as angry tweetstorm on “cognitive dissonance.”

 

And then, for good measure, Krugman also elucidated that he does not really understand how the US electoral college system works.

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The Catastrophic Consequences Of Peak Oil Demand

Submitted by Zainab Calcuttawala via OilPrice.com,

With OPEC’s 2016 World Oil Outlook now grimly forecasting that peak oil demand could become a reality in just over a decade, and natural gas and renewables chomping at the bit to cannibalize commodity market growth, it may be good for the environment, but the trade-off will be global instability on a catastrophic level.

The dynamics of the rush to adopt natural gas and renewable energies – launched by the landmark climate change agreement signed in Paris last year – was about protecting our planet. But without an effective back-up plan, resource-cursed nations such as Venezuela, Libya, Nigeria and Iraq—among others—will not survive this evolution and economic destabilization and sociopolitical instability would irrevocably change the geopolitical landscape. Destitution spells disaster in this scenario.

Weening off ‘Black Gold’? Not in our Lifetime, and not Without Repercussions

Hundreds of trillions of dollars have been spent worldwide over the past century to develop technologies for the safe transport and use of “black gold,” which, in turn has built energy-driven economies on practically every single continent, aside from Antarctica.

Venezuela, Libya, Nigeria and Iraq are the first nations that come to mind when compiling a list of oil-dependent states, mostly because of their current plights caused by the two-year oil price crisis, as well as the political instability, civil war, domestic militancy and terrorism threats that each country faces, respectively.

Chronically low prices compromise the ability of oil-addicted economies to tackle domestic unrest, which was brought about by stinted revenues in the first place.

If OPEC’s predictions on the imminent-ness of peak oil prove to be true, underdeveloped producers that have not yet planned for a fossil fuel-free world will inevitably face sociopolitical collapse. As oil demand spirals downward, the world’s major exporters are expected to ramp up output in order to profit as much as possible before the commodity becomes a relic of the past.

And, as we know from the state of current markets, the bigger the glut, the sadder the prices.

The four countries mentioned earlier, along with Algeria, represent the nations most vulnerable to the global abandonment of oil. But even Mexico, which has invited public and private actors to set up a sophisticated governmental hedge against depressed prices for the next year, will see its economy falter when there’s no market left to hedge.

Sovereign Wealth Fund or Bust

The Gulf nations have amassed a vast amount of fuel wealth over the past few decades. Wielding their financial-savvy as an economic shield, the countries have stored the revenues in sovereign wealth funds that invest internationally, paving the way for post-oil revenue streams. This starkly contrasts with the situation in Venezuela and Nigeria, both of which are on the hunt for billions in lost—as in nowhere to be found—profits.

On the other end of the spectrum, European producers—especially Norway and France, as well as the United States and Canada—enjoy diversified economies that subsidize fossil fuel, but do not play a direct role in its extraction or distribution. In this group of states, it is the private companies that weather the bulk of the losses in a market downturn.

Of course, these governments must still provide the unemployment benefits entitled to workers who are fired during a downturn, and budget specialists must maintain a plan to navigate lower tax revenues from domestic oil majors, but overall, their public sectors remain far more insulated from the volatilities of the oil sector than those nations with mammoth nationalized firms.

These are just the domestic implications of the end of the oil era. Foreign policies, especially of the world’s biggest superpowers, have long revolved around energy needs.

Balances of Power, Oil Friends and Foes

Control over oil has shaped major aspects of the United States’ relationship with Russia and the Arab World. The OPEC-led Arab Oil Embargo of 1973 – protesting the sale of arms to Israeli military forces by Western states – caused massive fuel shortages in the U.S., leading Congress to ban the export of domestically produced oil. The prohibition ended just last year, four decades later.

Still, the U.S. elects to import oil from the bloc’s de facto leader, Saudi Arabia, rather than turn to its eternal foe, Russia. Cold War anxieties from the 1980s – fresher in the minds of the American electorate than the Arab-Israeli wars of the 60s and 70s – steer leaders away from fuel trades with President Vladimir Putin.

Europe has been seeking new natural gas partners after Russia, which provides the continent with a quarter of its gas supplies, seized Crimea and supported the oppressive Syrian government.

Donald Trump’s selection as U.S. president-elect could change the country’s dynamic with Russia. Trump has famously praised Putin for his “leadership,” but it’s far too soon to measure the wildcard’s willingness to pursue stronger ties with Russia.

Can Natural Gas Save the Vulnerable?

For many nations, the next big environmental step after oil is natural gas. When we compare a list of countries with the largest proven oil reserves with the same list for natural gas deposits, a bunch of the same countries appear in the highest positions, albeit in a different order.

Venezuela boasts the largest oil reserves in the world, but it stands in eighth place on the natural gas list. Saudi Arabia, Russia, the United Arab Emirates, Iran and Nigeria take positions in the top 10 for both commodities as well.

The overlap in major players in the oil and natural gas markets says there will certainly be some continuation as demand shifts from one commodity to another, even as Canada, Libya and Iraq will find themselves as losers longer-term, in the absence of a push for renewables (the trio is included in the oil top 10, but disappears in the natural gas list).

Turkmenistan will see new prominence as natural gas gains popularity. As the only country not to appear on in the top 20 positions of the oil reserves list, but present at 4th place in the gas deposits list, the central Asian nation is due for more geopolitical love in the coming decades.

The former Soviet republic currently exports two-thirds of its gas to Russia’s Gazprom.

Turkmenistan’s reserves will add to Russia’s international political leverage as countries all over the world develop the infrastructure to support liquefied natural gas in their oil-based economies.

As the 103 countries that have ratified the United Nations-led change agreement meet at the COP22 conference in Marrakesh this week, the world inches closer to making a carbon-neutral world possible, but careful consideration of the geopolitical ramifications should also be made.

The domestically fragile oil producers – which more closely resemble an oil-soaked house of cards than stable nations – will need major economic attention as renewables and natural gas become the new energy standard.

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Welcome to the Fight Against Unchecked Power

You may have heard of whataboutism—the practice of rejecting criticisms of a regime on the grounds that other regimes do bad things too. Well, whataboutism has a cousin. Call it wherewereyouism: the impatient disdain that libertarians start to feel right after an election, when many members of the newly disempowered party suddenly rediscover the virtues of limiting government power.

It’s an understandable feeling, and I’m prone to it myself. (Back in 2009, when the Tea Party protests started taking off, my initial response was: “Why weren’t you marching when Bush was pushing through TARP?”) To an extent, it’s not just understandable but valuable. As liberals watch Donald Trump take control of a presidency whose powers grew greater while Obama was in office, making the executive branch an even vaster and less accountable maze of surveillance and secrecy and unilateral punitive action, it’s a fine time to seize the teachable moment: “You see? YOU SEE? Now will you listen when we warn you what could happen?”

But eventually you’ve got to reach out and work with those chastened fair-weather friends of freedom. I don’t mean the hacks who gave us Hillary Clinton. (They don’t seem all that chastened, and they’re not even fair-weather friends.) I mean rank-and-file activists, legislative backbenchers, or anyone else who has suddenly learned how it feels to look at the government and feel dread. We don’t know yet whether the worst names being floated for a Trump cabinet will actually land there, but even if we’re spared the horrors of David Clarke at Homeland Security or John Bolton at State, it’s clear that Trump’s presidency will be terrible on a host of issues, particularly where police powers are concerned. And since the number of Americans who are consistent defenders of civil liberties is pretty small, obstructing or rolling back bad policies will require coalitions.

Some of this month’s born-again dissidents will learn their lesson and be more skeptical of the state even after Trump makes his exit; some will be back to cheerleading executive authority as soon as President Michael Bloomberg wants the right to call in drone strikes against black-market Big Gulp dealers. But as long as any of them are willing to stand against Trump when he tries to take new powers—or to abuse the powers his predecessors bequeathed him—I say welcome to the fight.

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Risk Parity Funds Are Crashing But RBC Warns ‘Spillover Event’ Hasn’t Happened Yet

It's ugly out there in Risk-Parity (RP) fund land as losses on bonds outweigh gains on stocks as correlations normalize (and volatility drops) echo the plunges experienced during 2013's Taper Tantrum. However, as RBC notes, adjustments to the leverage mechanism with RP strategies means, despite the carnage already, we may not have seen the cross-asset-class spillover yet.

The Trump Tantrum in RP stratgies is accelerating rapidly but remains less than the Taper Tantrum for now…

 

But while this looks disastrous, RBC's Charlie McElligott notes that adjustments in the Risk-Parity (RP) frameworks means that we have nto yet seen the big spillovers that many are expecting…

Risk-Parity fund performance (not great) definitely a talking-point right now, with regards to folks asking “when is the potential risk-asset / equities deleveraging going to ‘kick-in’?” as forced by the terrible fixed-income performance of late. 

 

If grossly oversimplifying key inputs as ‘leveraged USTs,’ ‘stocks’ (SPX) and’ inflation-protected securities’ (TIP ETF), the funds simply aren’t getting relief from their asset mix.  The trick here from speaking with my good friend Max Nelte in RBC GELP Structuring is that during prior periods of stress (i.e. the original Taper Tantrum in ’13) some of these funds will have shifted their traditional volatility ‘trigger’ for their leverage / risk mix to a more duration-adjusted measure, which in turn will dampen their leverage allocation, and thus, asset allocation (post-leverage).

 

So, we still might not get that ‘expected’ cross-asset ‘spillover’ which we’ve seen in prior (read: smaller) ‘rate tantrums’ of the recent past in this ‘immediate’ period.

 

 

That said, further performance challenges within fixed-income / EM / commodities and lack of a significant enough boost from equities and inflation-products may dictate a larger / more significant questioning of allocation size into RP strategies from real money investors, as there certainly looks to be a potent cocktail brewing for investors to redeem from the strategy if the struggle were to continue further.  Simply needs to be monitored further…as do ALL bond fund flows, especially.

And the last time bond-stock correlation collapsed from such a positive extreme, things did not end well…

 

 

Finally, RBC's Charlie McElligott shows his LOL CHART OF THE DAY:

EQUITY FACTOR MKT NEUTRAL PERFORMANCE % MTD SHOWS INSANITY OF CURRENT QUANT ROTATION SINCE ELECTION:

 

Considering the scale of factor mkt neutral AUM, the leverage inherent in these strategies and the factor overlays at various other monstrous ‘long only’ asset managers…I’d say ‘this’ is behind a lot of the performance pain out there for fundamental managers.  

 

 

The rotation in ‘size’ alone, with Russell 2000 (small cap) outperforming SPX (large cap) by 7.1% MTD, is just gutting funds who’ve been crowded into large cap (tech, for instance) due to scale issues – even those who might have had the sector selection correct.

 

And the end of the day – it’s still a ‘factor’ world… even if the nascent change from monpol to fiscal policy does in fact make a MASSIVE-difference with regards to prospects for active management going-forward (with the eventual removal of Central Banks as the determining input in asset pricing / removal of volatility suppression).
 

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Interview with Rand Paul: ‘I Can’t Support Anybody to Be Our Secretary of State Who Didn’t Learn the Lesson of Iraq’

PaulSen. Rand Paul implored Donald Trump not to pick Rudy Giuliani or John Bolton to run the State Department and suggested he would be inclined to vote against their confirmation.

In an interview with Reason, Paul described Bolton and Giuliani as representatives of “the most bellicose interventionist wing of any party” and the antithesis of the restrained foreign policy platform Trump ran on. The selection of either man would be a serious betrayal of Trump’s supporters, who wanted a clean break from the rabid interventionism of the past GOP administration.

“I can’t support anybody to be our Secretary of State who didn’t learn the lesson of the Iraq War,” said Paul.

After dropping out of the GOP presidential race, Paul focused on his own re-election to the Senate, and didn’t offer Trump much in the way of vociferous support. But like many other libertarians, Paul found something to admire in Trump’s stated opposition to neoconservatism.

“I don’t think anybody believed that he was going to be libertarian on foreign policy, but there was at least a glimmer of hope that he would be less of an interventionist than Clinton,” said Paul. “The things he says unscripted on the campaign trail were much less hawkish than Hillary Clinton.”

That was a fair assumption, given Hillary Clinton’s extreme hawkishness. Sen. Clinton was a key supporter of the Iraq War. And though she later regretted that vote, Secretary of Clinton repeated the error—and then some—when she pushed the Obama administration to intervene in Libya. The U.S.-backed ousters of Saddam Hussein and Muammar Gaddafi have destabilized the entire Middle East and contributed to the rise of ISIS.

But Trump’s leading secretary of state candidates—Bolton, especially—have embraced all of Clinton’s worst foreign policy blunders and would push the federal government to do even more. Indeed, Bolton has made public his support for taking the country to war with Iran.

Paul described Bolton as “unhinged.”

“It concerns me that Trump would put someone in charge who is unhinged as far as believing in absolute and total intervention,” he said.

Bolton would have almost no chance of getting Paul’s support, unless the former U.S. ambassador to the United Nations repudiated virtually everything he stands for. Giuliani would face a similarly uphill battle to persuade Paul, he said.

As Reason’s Brian Doherty noted, Paul could make trouble for an unacceptable secretary of state pick. Paul sits on the Senate Foreign Relations Committee, which is currently split 10-9. If he voted with the Democrats, he could certainly send a message—though this would not prevent the full Senate from voting to confirm, according to The Washington Post.

When asked to name a suitable alternative, Paul pointed to Sen. Bob Corker—who is also on Trump’s short list—as a better choice.

“I would say, while not being libertarian, [Corker] is more of a reasonable, realist kind of person,” said Paul. “I think he would be less likely to say tomorrow we need to drop bombs on Iran.”

In any case, it’s unsettling that Trump was so immediately tempted to choose unrepentant hawks to run his State Department—especially considering that he owes the neoconservative wing of the Republican Party very little. Most neoconservatives abandoned Trump and supported Clinton, Paul noted.

“[Bolton and Giuliani] don’t represent even the mainstream of foreign policy,” said Paul.

It’s too soon to say whether Trump will betray his non-interventionist supporters. But the possibility of a Bolton or Giuliani running the State Department is truly frightening, and libertarians should be grateful that Paul was willing to speak up in defense of principle. We can only hope it makes a difference.

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Death Threats & Other Market Signals

Via ConvergEx's Nicholas Colas,

Markets now swing on two anchors. 

  • One is “Before Trump” – those financial estimates and economic assumptions that existed before November 9th, 2016.
  • The other is “After Trump” – the earnings growth and concurrent inflation that capital markets are now baking into asset prices. 

 

Today we offer up a snapshot of “BT” expectations for corporate fundamentals in the form of pre-election analysts’ estimates for future revenues and earnings.  From the high flying Dow Jones Industrial Average, we find that analysts were already looking for average revenue growth of 4.5% for 2017 “Before Trump”, but little expansion in Q4 (just 1.6%).  As for the S&P 500, pre-election estimates from FactSet show expected revenue/earnings growth of 5.5%/11.4%.  Importantly, Industrials, Financials and Materials (3 winning sectors post-election) all showed lower expected revenue growth than the index on average. 

 

We’ll be looking for earnings revisions to support the recent moves; at least earnings expectations were low enough that incremental revenues will, in fact, help support upward revisions.

“I know where you live.  I know where you work.  You’re going to get what’s coming to you.  You’re going to die. I promise.” 

If you worked as a sell side analyst in the 1990s, you probably heard a similar message on your work voicemail at some point (and probably more than once).  I covered the auto stocks back then, and many workers in that industry felt Wall Street was forcing management to close U.S. factories in order to satisfy our financial expectations.  As one analyst that got quoted in their local papers, they figured it was partially my fault.  The fear they hoped their message would elicit (and it certainly did) was payback for the fear they felt over losing their jobs.  Fair enough – I never took these calls personally. 

It wasn’t just me – tech sector analysts got their share of public ill-will during and after the tech bubble in the 1990s. Downgrade a favorite high flier while markets were stilling rising?  Or stay on the bus too long after the bubble began to burst?  You were pretty sure to walk into the office and have your share of 2am voicemails forecasting your impending demise. 

I haven’t heard such stories from friends in the business in many years, however, probably for the simple reason that sell-side analysts don’t really have the public profile they used to enjoy.  Higher sector correlations to the market and the trend to passive investing have limited their impact on market psychology.  In their place, Fed-watching macro analysts have taken their turn in the spotlight.

Equity market price action since the U.S. election last week shows the fortunes of the single-stock analyst may be about to change.  Over the last 5 days, Large cap Industrial stocks are up 8.6%, Health care equities are +5.7% and Financials are 14% higher.  The S&P 500 is only up 3.8% over the same timeframe.  Investors are trying to pick winners and losers again – an interest we haven’t seen in a long time. 

Stocks always move ahead of actual changes in their fundamentals, so these gains are simply the market’s best guess about the future earnings impact of a Trump presidency.  Changes in corporate and personal tax rates, infrastructure investment, alterations to the regulatory structures around Financial Services and Health Care…  At this point markets are enjoying the anticipatory sizzle of the steak that is making its way to our table.

To get a sense of just how much upside these sectors – and other presumed winners in a Trump presidency might enjoy – we first need to look backward to the last pre-election expectations for corporate fundamentals.  A few points here:

  • The November 11th edition of FactSet’s weekly Earnings Insight report is probably worth printing out and taping to your wall for the next 6 months. It is the last full survey of analysts’ revenue and earnings expectations for Q4 2016 and 2017 that in practical terms excludes the results of the U.S. election.  You can find it here: http://ift.tt/2etrQVp
  • The most important takeaway is that analysts were looking for 5.9% revenue growth for the companies of the S&P 500 in 2017, and 11.4% earnings growth. That is the benchmark to use in assessing all future changes in expectations.  Simply put, if the rally is to have a solid foundation eventually earnings estimates have to rise from these levels.  It may not happen in a week, or even a month, but earnings estimates need to start rising if for no other reason that interest rates have already started to track higher.  Valuation math is clear on this point: if rates rise, earnings need to increase or stocks fall.

  • As for individual sectors, several of the groups with recent outsized gains are also the ones where analysts had been most aggressively cutting estimates over the month before the election. Expected 2017 earnings growth for the Industrials, for example, was 7.7% in October.  Last week, it was 4.3%.  A month ago analysts were looking for 10.3% earnings growth for 2017 in the Health Care sector; now that number is 8.8%.
  • As for revenue expectations, Financials and Industrials have two of the lowest expected increases of any S&P 500 sector next year. As of the latest FactSet report, these are just 2.7% and 1.8%, respectively.  Only Telecomms have a lower expected sales growth for 2017, at 1.4%.
  • Since the Dow Jones Industrial Average is actually the favorite child of the current rally, we also included in the attachment to this note our usual assessment of analysts’ revenue expectations for next Q4 and next year. The upshot is largely the same as the prior analysis.  Analysts are clearly still worried about current fundamentals, cutting Q4 revenue growth expectations to 1.6% over last year (down from 3.1% expectations last month).  Expectations for next year are for 4.5% revenue growth, down from 4.8% last month.

All this comes down to one word: leverage.  Not financial leverage, though…  Operating leverage. 

Prior to the election, investors didn’t believe there was much operating leverage available in corporate America.  Slow revenue growth, slow inflation, slow wage growth, slow earnings growth.  That was the recipe for next year. 

Now, expectations for better economic growth have markets scrambling to find companies with the operating leverage (read high fixed costs and high incremental margins) to show outsized earnings growth as a result.  It isn’t just that infrastructure spending will help Industrial companies; the magic here is that prior to the election no one expected much from this sector, and their high fixed costs meant that was a rational to be wary of any real upside.  Post-election, cyclical exposure and high contribution margins are a feature, not a bug.

Now, it is up to analysts and investors to parse out the future and determine if markets have run too far with this theme, or not far enough.  All we know is that U.S. stock prices expect more growth than they did a week ago.  And the more they rise, the more they expect.

 

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Donna Brazile Slams CNN, Blames Former Employer For “Ripping Me A New One”

It has been a tough few weeks for interim DNC chair Donna Brazile: after resigning from CNN earlier this year after WikiLeaks published hacked emails that showed Brazile tipping off Clinton’s campaign in advance to at least two questions that Hillary Clinton would be asked at upcoming town hall events, yesterday hundreds of Bernie Sanders DNC delegates launched a campaign demanding her resignation.

As we reported, executive director of Progressive Democrats of America, Donna Smith, said that “the DNC chair must reflect the base of the Democratic Party and the mission for which this party long stood. Clearly, when the party leadership failed to conduct itself impartially during the primary season and then failed to defeat the Republican candidate who is the most dangerous demagogue ever elected to the presidency, it is time for Donna Brazile’s resignation.”  Smith added that “the DNC must either change or it will die. And that change starts with Ms. Brazile’s prompt resignation.”

Refusing to put party first and allowing for a smooth transition, the delegates’ message fell on deaf ears, and instead of contemplating how to pivot away from her failed political career into something more productive, Brazile went after her former employer CNN at an event at a women’s college in Virginia Monday, blaming them for “ripping me a new one” instead of allowing her to defend herself after it appeared she tipped off Hillary Clinton’s campaign to town hall questions.

“CNN never gave me a question,” Brazile said at a talk held at Hollins University, according to The Roanoke Times. “I wish CNN had given me some other things, like the ability to defend myself rather than ripping me a new one.”

Brazile did not deny the allegations that she had emailed two questions in advance, but she said she “never got on Clinton’s campaign airplane or prepped the candidate for any of the debates,” according to the Roanoke Times. She also derided WikiLeaks, which leaked the damning emails, by repeatedly calling the organization WikiLies. Brazile’s lack of empathy toward the organization that exposed her questionable practices and cost her the CNN job, is understandable.

When the network cut ties with Brazile permanently, it said the company was “completely uncomfortable” with the revelations and asserted that it had not provided questions to Brazile in advance.

As reported previously, according to the hacked Wikileaks emails, Brazile forwarded at least two questions to Clinton. One was centered on the Flint water crisis, with a woman suffering from lead poisoning asking the candidates what they would do to help the situation. Another one revolved around the death penalty.

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House Republicans Unanimously Re-elect Paul Ryan As Speaker

If there was any speculation about the fate of House speaker Paul Ryan following his acrimonious relationship with Donald Trump over the past few months, that can now be forgotten because moments ago House Republicans unanimously reelected Ryan as speaker for the next Congress.

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