Wednesday, March 1, 2017

Today's Links

Margaret Kimberley:

“There can be no resistance, no resurgent progressive movement if the Democrats and their wretched history aren’t cast away for good.”

1--O'Hanlon on Nato expansion --more war propaganda

We do not owe the Russian strongman any apologies for the enlargement of the 28-member North Atlantic Treaty Organization to date—it has added 12 members, including three former Soviet republics, since the Cold War. Nor should we abandon democratic friends like Ukraine and Georgia to Russian domination. But we need a better way to help them.

Yet Russians do not see the situation this way. Whether or not most see NATO as a physical threat, many do see it as an insult—a psychologically and politically imposing former enemy that has approached right up to their borders. Russia’s declining population and weak economy when contrasted with those of NATO states—roughly a $1.5 trillion gross domestic product and fewer than 150 million people, versus a combined NATO total of $40 trillion with 900 million—contribute to the mentality of embitterment and perhaps some paranoia.

2--Trump’s speech outlines plans for class war at home and war abroad

3--Today's "must read"-- Syria - Erdogan's Lost Bet - Trump Likely To Follow A Cautious Strategy

(Reason to hope?)  In my opinion Trump's more belligerent remarks on Syria, on safe zones and military escalation, are rhetoric. They are his negotiation positions towards Russia and Iran. They are not his policies. Those are driven by more realistic positions. Obama balanced more hawkish views supported by the CIA, Hillary Clinton and the neoconservatives against reluctance in the military to engage in another big war. Trump will, even more than Obama, follow the Pentagon's view. That view seems to be unchanged. I therefore do not believe that aggressive escalation is the way Trump will go. Some additional U.S. troops may get added to the Kurdish forces attacking Raqqa. But any large move by Turkish or by Israeli forces will not be condoned. The big U.S. invasion of Syria in their support will not happen.

4--Freedom Rider: Liberals Expose Themselves , Margaret Kimberley, excellent as always

Donald Trump’s policy on the deportation of undocumented people will surely result in great suffering. Ramping up the U.S. police state is always dangerous. But it should not be discussed without pointing out that more than 2.5 million people were deported during the Obama administration, more than under any other president. He may have talked a good game and said “Sí se puede,” but it didn’t keep anyone from being kicked out. Obama proved that if the presentation were slick enough anything would be acceptable to the media and to the masses they deliberately misinform.

5--Dow closes above 21,000 as stocks post best day of 2017 after Trump's speech- The Trump Bump continues

The Dow advanced about 300 points with Goldman Sachs contributing the most gains and closing above 21,000 for the first time. The 30-stock index first closed above 20,000 on Jan. 25.
The S&P 500 climbed 1.4 percent, with financials rising 2.8 percent to lead advancers, and briefly broke above 2,400 for the first time. The index closed above 2,300 for the first time on Feb. 9...

lifting March rate hike expectations were remarks from New York Fed President William Dudley, who told CNN International on Tuesday that he sees a rate hike in the "relatively near future," adding that the case for tighter monetary policy has become more compelling.
"I disagree with those who think the Fed doesn't matter anymore in terms of their influence in the context of a debt to GDP ratio that has never been higher and market valuations that are historically very rich," said Peter Boockvar, chief market analyst at The Lindsey Group.
"Changes in fiscal policy are welcome for the economy but I lean towards monetary policy in being more impactful on markets in the shorter term time horizon," he said.

6--Treasury Rally Bites Into Reflation Trade-- Yields log first monthly decline since summer, as investors await more clarity from Trump

The 10-year Treasury yield has fallen from 2.6% in mid-December, which was the highest since September 2014. The yield closed at a record low of 1.366% in early July....

Many investors are now questioning the trades, which consist primarily of buying stocks and selling bonds in expectations that growth and inflation will pick up....

U.S. stocks did even better. The Dow Jones Industrial Average logged a total return of nearly 5% in February through Monday, according to FactSet. The Dow closed Tuesday at 20812.24, declining 0.1% after 12 consecutive record closes

(The Dow Jones Industrial Average has soared more than 1,300 points so far this year and closed at a record of 21115 on Wednesday. Bond prices, too, are rising, driving down the yield on the benchmark 10-year Treasury note to 2.458 on wed virtually unchanged from 2016 from 2.446% at the end of 2016. Yields fall as bond prices rise.

7--Former Regulators Warn Against Financial Deregulation-- ‘Now is not the moment to relax or to retreat,’ Systemic Risk Council tells G-20 leaders

A group of former senior regulators and academics is warning against efforts to deregulate the financial system, issuing a statement Monday that argues financial institutions today are even more at risk of losses during an economic downturn than in the past.
“Now is not the moment to relax or to retreat,” says the document from the Systemic Risk Council addressed to officials from the world’s major economies. The group’s statement comes as officials in the U.S. and Europe are reviewing their regulatory regimes.
The council says governments and central banks today have less firepower to deal with a crisis, due to high levels of government debt and loose monetary policies.

Far from being a moment to relax” core financial overhauls, the group writes, policy makers should consider adopting even stricter capital requirements for banks to address this dearth of firepower: “Simply put, the financial system reform program was not calibrated for our present predicament—namely a world in which productivity growth has proven elusive, the debt overhang has increased, and macroeconomic stimulus capacity is stretched.”
The council is led by Paul Tucker, former deputy governor of the Bank of England, and includes other former senior regulators from the U.S. and Europe who were involved in negotiating global regulatory accords after the 2008 financial crisis.
Their defense of the rules they helped write won’t change any existing policies, but it will give ammunition to policy makers who want to fight off attempts to roll back the current regulatory regime.

Discussions about a regulatory rollback are already under way in the U.S., where President Donald Trump has called for a broad review of regulations, as well as in Europe. The Basel Committee on Banking Supervision, a group of global regulators, has recently had trouble reaching an agreement related to bank capital rules.
The banking industry and some policy makers say postcrisis rules haven’t struck the right balance between safety and economic growth, holding back lending in economies that need it.
The Systemic Risk Council statement says that if policy makers do dismantle parts of the postcrisis regulatory regime, they should consider adopting even tougher policies elsewhere to maintain the same level of safety.
In the U.S., for instance, some Republicans are talking about curtailing the government’s ability to take over and unwind, or “resolve,” a failing bank. “We believe that dismantling resolution regimes would need to be met with materially higher equity requirements,” the council says.
It also recommends that every country maintain a government entity in charge of watching over the entire financial system.
The council also says key risks identified after the 2008 crisis remain unaddressed. For instance, regulators lack clear policies about so-called shadow banks that aren’t regulated as tightly as banks, but pose similar risks.

"We—and I—are absolutely not saying there is a high chance of a recession in the next year, or the year after that. But eventually one is going to come,” Mr. Tucker said in an interview. “We may get lucky. It may not come for 10 years, and maybe the whole reform program will be completed by then. And maybe more importantly, the macroeconomic arsenal will have been replenished by then. But it might not. We might get unlucky.”

8--Stocks are Frothy, but There’s No Bubble -- Stocks have soared but except for valuation there are few signs of a bubble. That doesn’t mean the market can’t fall.

Stock valuations are looking bubbly. But nothing else about the stock market is.
The rally in stocks since the election of President Donald Trump has taken valuations from expensive to extraordinarily dear. The S&P 500 now trades at about 18 times expected earnings, according to FactSet, putting it at its loftiest level in more than a dozen years. As a percentage of gross domestic product, the value of U.S. stocks is approaching the peak hit in early 2000.
It is the sort of situation that can get you thinking the market is getting frothy. But other than paying high prices, investors aren’t behaving at all the way they typically do during bubbles...

Another bubble tell: Leverage. When irrational exuberance take hold, investors buy more stock using borrowed money in hopes of magnifying their gains. Margin debt is up, but as a share of the stock market’s value it has remained steady. In the dot-com bubble, it shot higher.
Rich Bernstein of Richard Bernstein Advisors, who as a Merrill Lynch strategist was deeply bearish during the dot-com bubble, argues the current rally is rational. “When has Washington ever talked about tax cuts and fiscal stimulus when the economy is as healthy as it is today?” he asks. “You don’t have to get a big package to make this thing take off.”

9---The stock market is setting the bar higher and higher for President Donald Trump. Investors had better hope he clears it.

Trump Faces the Tyranny of High Expectations --Every day stocks go up, investors are pricing in greater success for president’s agenda

With stocks rocketing to new highs on Wednesday in the wake of Mr. Trump’s speech before Congress Tuesday night, it is worth recounting what has happened this week to spur the rally.
There was a big shift in perceptions about when the Federal Reserve will raise rates after New York Fed President William Dudley said in a television interview that the case for tightening “has become a lot more compelling.” That carries a lot of weight, since Mr. Dudley’s views on the economy are closely allied with Fed Chairwoman Janet Yellen’s. The chances futures markets assign to a rate increase at this month’s Fed meeting jumped to about 70% from about 35% before Mr. Dudley’s interview aired.

But even as the Fed looks more likely to raise rates, the economic data are looking a little less inspiring. February spending figures and January construction figures released Wednesday morning were weaker than expected. While the stock market soared, economists were cutting their expectations for first-quarter growth in gross domestic product. J.P. Morgan Chase cut its estimate from 2% to a 1.5% annual rate.
A more hawkish Fed plus a softer economy hardly seem like the recipe for a rally, but then there was Mr. Trump’s speech. Even though he remained light on policy specifics, the president’s less combative rhetoric was seen as making it easier for him to push through his spending and tax-cut plans. If he succeeds, the profits boost for companies might be big enough to justify the high prices investors are now paying for stocks.

But each time stocks go higher, investors are raising the stakes on what Mr. Trump must accomplish. The policy he and congressional Republicans hammer out will have to offer companies substantial benefits. And moves that could damage profits, such as tariffs and trade restrictions, will have to be held in check.
If Mr. Trump’s eventual policies aren’t the stuff of investors’ dreams, or don’t get passed at all, the stock market could become a nightmare.

10--Bank Lending Signals Caution -- President Donald Trump’s erratic style could be to blame for the recent slowdown in lending growth

Lending growth has recently been slowing in the U.S., a potentially ominous economic signal. Policy uncertainty under President Donald Trump may be partly to blame.
Total loans and leases by U.S. commercial banks are currently rising at an annual pace of about 5%, based on weekly seasonally adjusted data from the Federal Reserve. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016.
The deceleration has been broad-based across business, real estate and consumer lending and is at odds with the idea of a stronger economy and rising sentiment. The slowdown has been particularly stark in commercial and industrial lending, which was growing at around 10% in the first half of last year, but is now up just 5.7% from a year earlier....

Indeed, corporate debt issuance in January was up by 43% from a year earlier, according to data from the Securities Industry and Financial Markets Association. However, this number may be somewhat misleading since it comes off a low base in the year-earlier period, when global markets were in turmoil.
The other, more worrisome explanation is that political uncertainty is causing companies and banks to put off big decisions until the outlook for trade and tax policy is clearer. The lending slowdown began showing up clearly just before the election last year.
If uncertainty persists, caution on the part of lenders and borrowers could become a growing drag on the economy.

11--A New Way to Look at Crazy Stock Valuations -- Valuations have been inflated by a collapse in profits for oil companies

The S&P 500 stands at almost 18 times estimated operating earnings, the highest forward PE ratio since 2004 and a figure which was higher before that only during the late 1990s dot-com bubble and its aftermath....

The practical issue is more worrying. Even without energy, valuations are pretty high. Stocks were expensive two years ago and are still expensive today, with valuations high compared with most of history. Investors are pricing in a lot of good news for earnings, notably U.S. corporate tax cuts, and not a lot of bad news.

The main explanation for pricey shares is the same as it was two years ago, too. Low interest rates tend to lead to higher valuations, since the same future profits are worth more when discounted back into today’s money. Profit margins are elevated by cheap debt, and investors think that will continue.
The Federal Reserve may have started raising U.S. interest rates, but it has barely kept up with the rise in inflation, and investors expect money to remain easy pretty much forever.

12--Russia will continue to dominate EU gas market

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