Wednesday, March 8, 2017

Today's Links

1--Atlanta Fed GDPNow Forecast Spirals Down in Amazing Manner

The model now forecasts GDP growth in Q1 of 1.2% seasonally adjusted annual rate. This means that if the economy continues to grow at this rate for the rest of the year, annual GDP growth would be 1.2%, which would be the worst since the Financial Crisis.

Today’s down-tick from yesterday’s GDPNow forecast of 1.3% growth was caused by the contribution of “inventory investment” to GDP – when inventories rise or fall – as reported this morning by the Census Bureau in its wholesale trade data release. According to this data, the contribution of inventory investment to Q1 growth fell from -0.72 percentage points to -0.79 percentage points..

Growth in real personal consumption expenditures fell from 2.1% to 1.8%.

  • Growth in real nonresidential equipment investment fell from 9.1% to 7.3%.
  • Contribution of inventory investment to Q1 growth fell from -0.50 percentage points to -0.72 percentage points.
  • The Atlanta Fed’s chart shows the 9-day plunge from 2.5% on February 27 to 1.2% today (red marks added)

    2--The insane and toxic conspiracy-mongering about Russia, glenn greenwald 


    this obsession with Russia conspiracy tales is poisoning all aspects of U.S. political discourse and weakening any chance for resisting Trump’s actual abuses and excesses. Those who wake up every day to hype the latest episode of this Russia/Trump spy drama tell themselves that they’re bravely undermining and subverting Trump, but they’re doing exactly the opposite.

    This crazed conspiracy mongering is further discrediting U.S. media outlets, making Washington seem even more distant from and irrelevant to the lives of millions of Americans, degrading discourse to the lowliest Trumpian circus level on which he thrives, and is misdirecting huge portions of opposition energy and thought into an exciting but fictitious spy novel – all of which directly redounds to Trump’s benefit. As Gessen puts it in the key sentence that ought to be pinned everywhere in neon lights:

    3--Russia: The Conspiracy Trap

    The backbone of the rapidly yet endlessly developing Trump-Putin story is leaks from intelligence agencies, and this is its most troublesome aspect. Virtually none of the information can be independently corroborated. The context, sequence, and timing of the leaks is determined by people unknown to the public, which is expected to accept anonymous stories on faith; nor have we yet been given any hard evidence of active collusion by Trump officials. . . .

    The dream fueling the Russia frenzy is that it will eventually create a dark enough cloud of suspicion around Trump that Congress will find the will and the grounds to impeach him. If that happens, it will have resulted largely from a media campaign orchestrated by members of the intelligence community—setting a dangerous political precedent that will have corrupted the public sphere and promoted paranoia. And that is the best-case outcome. . . . More likely, the Russia allegations will not bring down Trump....

    Russiagate is helping [Trump]—both by distracting from real, documentable, and documented issues, and by promoting a xenophobic conspiracy theory in the cause of removing a xenophobic conspiracy theorist from office...

    Meanwhile, while Russia continues to dominate the front pages, Trump will continue waging war on immigrants, cutting funding for everything that’s not the military, assembling his cabinet of deplorables—with six Democrats voting to confirm Ben Carson for Housing, for example, and ten to confirm Rick Perry for Energy. According to the Trump plan, each of these seems intent on destroying the agency he or she is chosen to run—to carry out what Steve Bannon calls the “deconstruction of the administrative state.” As for Sessions, in his first speech as attorney general he promised to cut back civil rights enforcement and he has already abandoned a Justice Department case against a discriminatory Texas voter ID law. But it was his Russia lie that grabbed the big headlines.

    4--Here’s all the times Trump has taken credit for stock-market gains

    5--A Taxing Problem for Investors --A corporate tax cut could provide a big boost to profits, but investors are expecting too much from it

    A corporate tax cut could provide a big boost to companies’ profits. The boost might not be quite as big, or come as soon, as investors think, though.

    Yes, the U.S. corporate tax rate, at 35%, is among the world’s highest. President Donald Trump and the Republican-led Congress aim to change that. Mr. Trump has proposed dropping it to 15%, while the plan that House Republicans drew up last June would lower it to 20%....

    So by how much would a tax cut juice corporate profits? The first thing to recognize is that few large public companies pay the statutory rate. By Goldman Sachs’s reckoning, the effective tax rate for companies in the S&P 500—which includes not just federal, but also state and local taxes—is 28%. Under the House plan, Goldman figures it would drop to 24%, boosting after-tax earnings by about 10%.

    That could make the stock market look significantly less rich. The S&P 500 now trades at about 18 times analysts’ expected earnings for 2016, according to FactSet. Raise earnings by 10% and that price/earnings ratio slips to a more reasonable but still expensive 16.4....

    For Goldman strategist David Kostin, the biggest sticking point on the tax cut is that investors seem to expect tax cuts to come into effect sooner than is likely. The brewing fight over House Republicans’ emerging health-care plan may take a big chunk out of the congressional calendar this year. Tackling health care first may not necessarily reduce the odds of an eventual corporate tax cut, but it does make it less likely to happen this fiscal year.

    Stock prices are supposed to be a reflection of expected future earnings. If investors are expecting too much from a corporate tax cut, and expect it to come too early, then prices will have to come down.

    6--ECB--No need for accommodation?

    The threat of deflation has passed, with headline inflation back at 2% for the first time in four years, although Mr. Draghi has pushed back against any temptation to declare the battle won.

    7--Japan’s Mistake of Negative Interest Rates-- Tokyo will miss its target of 2% inflation because of its own misguided policy

    It’s been almost four years since the Bank of Japan’s Governor Haruhiko Kuroda launched his signature quantitative and qualitative easing program (QQE). At the time, he was certain he could overcome Japan’s chronic mild deflation, with a target of 2% inflation within two years. Yet today the mission remains incomplete, with inflation well below 2%. What went wrong?

    QQE took aim at Japan’s monetary base through massive purchases of Japanese-government bonds, exchange-traded funds and real estate investment trusts. The annual pace of monetary-base expansion and bond purchases grew to around ¥80 trillion ($702.76 billion) in October 2014. As a result, the BOJ’s total assets swelled to about 90% of gross domestic product. The bank then added a negative interest rate in January 2016 and yield-curve control in September 2016.

    Overvaluation of the yen and undervaluation of stock prices were corrected. Yet real consumption exhibited only a moderate recovery after a hike in the consumption tax. Industrial production and export volume remained largely constant from 2013 to 2016, while real exports rose by 9% due to the increased export prices of higher-value-added goods.

    Today, Japan’s underlying inflation stands at about 0%, and inflation expectations remain well below 2%. Achieving the 2% price stability target is thus likely to take much longer than the BOJ’s anticipated fiscal year 2018..

    Second, currency notes in circulation as a share of GDP grew rapidly after the interest rate went negative, reaching as high as 20% in 2016. But this was because, faced with a rock-bottom deposit rate, households preferred to hoard their cash at home. Retail deposits and cash are also three times larger than household loans: The negative interest rate appears to have made households gloomy...

    Given that achieving 2% inflation remains in the distant future, the BOJ should make the monetary easing framework more sustainable so that adequate monetary accommodation can be maintained for a longer period. The European Central Bank opted to do this in December. Central banks engaging in unconventional monetary policy are at a turning point

    8--Why the Bull Market May Die Under Trump -- As the bull market hits its eighth anniversary, the Trump administration might regret celebrating the rally too soon

    The Trump administration hasn’t been shy about taking credit for the market’s postelection rally. Perhaps it should be.
    The S&P 500 is up 12% on a total-return basis since Nov. 8, the latest leg of a big bull market that has shown little evidence of slowing down.
    In just the past few weeks, President Donald Trump has blasted four tweets mentioning the stock market’s gains. And Treasury Secretary Steven Mnuchin acknowledged late last month that the market was acting as the administration’s economic report card. “This is a mark-to-market business, and you see what the market thinks,” Mr. Mnuchin said on CNBC.

    It is easy to say that when prices are going up. It is much more difficult when everything turns south.
    This week marks the bull market’s eight-year anniversary, the second-longest on record. Since the March 2009 bottom, the S&P 500 has surged more than 300% including dividends. Profits are higher, but valuations are far richer than eight years ago. The sheer magnitude of the gains and duration of the bull market alone warrant skepticism about what comes next. Maintaining similar momentum over the next four or eight years won’t be easy....

    In all cases, the stock market followed the performance of the economy. Mr. Trump has also inherited an extraordinarily long economic expansion. Even if the president can keep the economy growing, the market might only produce modest gains. If the economy slows, it will be nearly impossible for Mr. Trump to finish his term in the black.
    It isn’t about how you start, but how you finish

    9--No longer any doubt: The CIA's fingerprints are all over the Russia hacking story

    ...there are now fresh reasons to doubt the Official Narrative that Russia “hacked” into Democratic emails in a covert operation intended to throw the U.S. election to Donald Trump.

    The gauzy allegations of Russia “hacking” the Democrats to elect Donald Trump just got hazier with WikiLeaks’ new revelations about CIA cyber-spying and the capability to pin the blame on others, reports Robert Parry.

    WikiLeaks’ disclosure of documents revealing CIA cyber-spying capabilities underscores why much more skepticism should have been applied to the U.S. intelligence community’s allegations about Russia “hacking” last year’s American presidential election. It turns out that the CIA maintains a library of foreign malware that could be used to pin the blame for a “hack” on another intelligence service....

    Besides the 1984-ish aspects of these reported capabilities – Orwell’s dystopia also envisioned TVs being used to spy on people in their homes – the WikiLeaks’ disclosures add a new layer of mystery to whether the Russians were behind the “hacks” of the Democratic Party or whether Moscow was framed.
    For instance, the widely cited Russian fingerprints on the “hacking” attacks – such as malware, associated with the suspected Russian cyber-attackers APT 28 (also known as “Fancy Bear”), some Cyrillic letters, and the phrase “Felix Edmundovich,” a reference to Dzerzhinsky, the founder of a Bolsheviks’ secret police – look less like proof of Russian guilt than they did earlier.

    Or put differently — based on the newly available CIA material — the possibility that these telltale signs were planted to incriminate Moscow doesn’t sound as farfetched as it might have earlier.

    A former U.S. intelligence officer, cited by The Wall Street Journal on Wednesday, acknowledged that the CIA’s “Umbrage” library of foreign hacking tools could “be used to mask a U.S. operation and make it appear that it was carried out by another country…. That could be accomplished by inserting malware components from, say, a known Chinese, Russian or Iranian hacking operation into a U.S. one...

    Dubious Forensics
    Another problem with the U.S. intelligence community’s assessment is that the forensics were left to private contractors working for the Democrats, not conducted independently by U.S. government experts

    As Sam Biddle wrote for The Intercept, “Would a group whose ‘tradecraft is superb’ with ‘operational security second to none’ really leave behind the name of a Soviet spy chief imprinted on a document it sent to American journalists? Would these groups really be dumb enough to leave cyrillic comments on these documents? Would these groups that ‘constantly [go] back into the environment to change out their implants, modify persistent methods, move to new Command & Control channels’ get caught because they precisely didn’t make sure not to use IP addresses they’d been associated [with] before?
    “It’s very hard to buy the argument that the Democrats were hacked by one of the most sophisticated, diabolical foreign intelligence services in history, and that we know this because they screwed up over and over again.”..

    That reinforces the suggestion from WikiLeaks’ associate, former British Ambassador Craig Murray, that the emails purloined from Hillary Clinton’s campaign chairman John Podesta originated from U.S. intelligence intercepts and were then leaked by an American insider to WikiLeaks, not obtained via a “hack” directed by the Russian government....

    Binney, in an article co-written with former CIA analyst Ray McGovern, said, “With respect to the alleged interference by Russia and WikiLeaks in the U.S. election, it is a major mystery why U.S. intelligence feels it must rely on ‘circumstantial evidence,’ when it has NSA’s vacuum cleaner sucking up hard evidence galore. What we know of NSA’s capabilities shows that the email disclosures were from leaking, not hacking.”...

    After Comey’s move, Clinton’s poll numbers cratered and she seemed incapable of reversing the trend. More generally, Clinton faced criticism for running an inept campaign that included her insulting many Trump supporters by calling them “deplorables” and failing to articulate a clear, hopeful vision for the future

    10--The problem with Trump's plan to bring home billions in overseas cash

    Donald Trump promises that his tax cuts will prompt U.S. companies to bring home the trillions of profits they have stashed overseas -- and then invest the money in American jobs and plants.

    "Some people say there are $2 trillion dollars overseas, I think it's $5 trillion," he said during the campaign. "By taxing it at 10% instead of 35%, all of this money will come back into our country. We will turn America into a magnet for new jobs -- and that means jobs in our poorest communities."
    The five companies with the most cash overseas -- Apple (AAPL, Tech30), Microsoft (MSFT, Tech30), Google (GOOGL, Tech30), Cisco (CSCO, Tech30) and Oracle (ORCL, Tech30) -- have about $500 billion in foreign accounts, according to a report last week from credit rating agency Moody's. Trump met with the heads of all five companies Wednesday as part of his technology summit. ...

    The rest of corporate America likely has about $784 billion in cash, according to Moody's. They're all stashing the funds abroad in order to avoid relatively high U.S. corporate tax rates.
    But when companies have been granted tax breaks in the past, very little cash ended up returning to the U.S.
    And some experts argue that companies are more likely to use any cash they do bring home to pay down debt, buy back shares or hike dividends. All of those moves would help boost a company's share price, and increase the value of stock and options given to top executives. But they won't do anything to build new factories or create jobs.
    Instead of using overseas funds that would be heavily taxed in the U.S., Apple, Microsoft, Cisco and Oracle have all gone deeply into debt in the last five years to do share buy backs, boost dividends and make acquisitions, Moody's says.
    It estimates the debt at those four companies has grown by more than 400% since 2012 to $259 billion. Apple alone has added $90 billion in debt.
    Much of that low-interest rate debt is coming due soon, which Moody's says makes it even more likely that any cash that does come back would be used to pay it off.

    In 2004, when Congress passed a repatriation tax break, it tried to encourage jobs investment by restricting how they could spend the money. Instead, companies simply opted not to repatriate the cash at all.
    Only 843 of 9,700 companies with overseas subsidiaries brought cash back home in 2004, according to the IRS. And the companies that brought back cash in 2004 ended up cutting 21,000 jobs instead of hiring more people, according to a 2011 Senate committee report.
    "There is no evidence that the previous repatriation tax giveaway put Americans to work," said then Sen. Carl Levin, the Michigan Democrat who was chaired the Senate committee that issued that 2011 report. "There was substantial evidence that it instead grew executive paychecks, and propped up stock prices

    11--Don't Celebrate Trump's Tax Holiday

    Serious conservatives acknowledge the weakness of profit repatriation as a tool to create jobs. The conservative Heritage Foundation said that a repatriation tax holiday would "have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation." The RedState blog said that tax holidays for repatriation "may be good for Washington's coffers and executive boardrooms, but the claims of job creation are without merit."...

    Indeed, back in 2004-05 a similar tax cut was tried, and it failed. It "created almost no jobs," said RedState. That proposal had provisions to force companies to invest cash domestically in order to qualify of the tax cut, but companies figured how to work around the restrictions.

    Most disturbingly, repatriation tax cuts will kill the jobs of ordinary Americans even as they raise incomes for senior corporate officers and investment bankers. Since companies don't have enough internal growth opportunities to absorb billions of dollars, the dollars will be used for two main purposes: repurchasing shares and buying up other companies. At least that's what many corporations are telling investors. Merger and acquisition activity typically destroys jobs as companies consolidate operations and lay off redundant staff. The share repurchase activity drives up the stock price, helping investors and senior executive whose pay is closely tied to the stock. Neither of these transactions do much for job creation, other than perhaps increasing the need for pilots who fly private jets and gardeners who care for landscaping at luxury vacation homes

    12--No, Trump’s Tax Cuts Won’t Pay for Themselves

    Deficits Expected
    All four of the groups concluded Trump's tax plan would fail to pay for itself. Projected deficits ranged from $2.6 trillion (in the most optimistic estimate from the Tax Foundation) to more than $10 trillion for Moody's.
    That is not to say all of the analysts agree on everything. The Tax Foundation finds Trump's plan will still boost annual GDP growth to as much as 2.7% over the next decade -- vs. the 1.9% growth the CBO has predicted as a baseline -- despite a much larger budget deficit. That's because the Tax Foundation's analysts believe the U.S. can safely borrow to patch budget shortfalls without pushing up interest rates.
    That position, however, is a minority one. Both the Tax Policy Center and Moody's take the opposite tack, and see any deficit increase as boosting rates and therefore putting a drag on GDP growth -- potentially defeating the stated purpose of rejuvenating the economy. (The two government researchers, the CBO and the JTC, haven't scored Trump's plan specifically. But they also tend to view deficits as ultimately raising interest rates.)

    13--The return of Voodoo economics-- Republicans Disagree on How—and Whether—to Pay for Tax Cuts

    A fight is brewing among congressional Republicans over whether a planned tax overhaul should pay for itself.
    The plan favored by House Speaker Paul Ryan (R., Wis.) and Senate Majority Leader Mitch McConnell (R., Ky.) aims to be revenue-neutral: Lowering taxes without increasing the deficit—though their math comes with some caveats.
    But President Donald Trump hasn’t signed onto that budgetary straitjacket, and some lawmakers are sympathetic to the idea of dumping the revenue-neutral goal

    14--Who Benefits From Donald Trump's Tax Plan?

    15--Trump’s deregulation of banks will unleash the financial fire next time

    A decade later, the global financial system has in some ways become safer as a result of these efforts. In other ways, however, the structure has not changed much — and may even have become more vulnerable. But, instead of completing the reform process, policy makers on both sides of the Atlantic seem determined to undo most of the measures underpinning what progress has been achieved...

    Second, the funding of banks shifted away from debt and toward equity. More than one prominent bank before the crisis had less than 2% of its funding from equity — meaning that it was more than 98% financed by debt. That does not happen today.
    Third, there are now restrictions on the activities of the largest banks. The so-called Volcker Rule prevents proprietary trading — a form of in-house speculation — by United States-based banks. In other countries, bank supervisors have become more skeptical about supposedly sophisticated risk-taking. Caution is in the air.

    Unfortunately, all of these achievements may prove ephemeral. Powerful people want to remove restrictions on banks in the U.S. and the United Kingdom. For example, the Volcker Rule can be expected to come under great pressure from Goldman Sachs and its many alumni now serving in senior U.S. government posts.

    Gary Cohn, a former Goldman Sachs president and chief operating officer who now heads President Donald Trump’s National Economic Council, says that we should reduce capital requirements (meaning allow more debt and less equity funding at banks) in order to boost the economy. This is exactly what happened in the early 2000s. If Cohn gets his way, the consequences will be similar: disaster...

    — by buying assets on the cheap at the bottom of the cycle, for example, or expanding market share — it seems reasonable to suppose that they are less likely to favor caution. Reed made precisely this point in speaking to the suitability of Steve Mnuchin — a former Goldman Sachs executive vice president — as Treasury secretary:
    ”An individual who made his fortune aggressively foreclosing on his fellow Americans does not possess the right values, in my view, to be our Treasury secretary. Based on his record, I am not convinced Mr. Mnuchin is capable of draining the swamp, and I fear he may end up further rigging the system in favor of the 1% at the expense of working-class Americans.”

    But the Senate confirmed Mnuchin, which suggests that we are about to come full circle. As James Kwak and I documented in our book “13 Bankers,” financial deregulation in the 1980s and 1990s led to a real-estate boom in the early 2000s; that set the stage for the 2008 financial bust, which in turn gave rise to a new wave of reform in 2010 and after. The reforms were serious; but they did not go far enough, and they can be rolled back without much difficulty.
    The Trump administration is poised to do exactly that.

    The big banks will get bigger. Capital levels will fall. And reasonable risk-management practices will again become unfashionable. Powerful people do well from booms and busts. The rest of us can expect deeper inequality and more crisis-induced poverty

    16--BIS Warns Central Banks Won’t Have Answer for Next Crisis

    If you think that the central banks can bail themselves out of the financial crisis, the Bank for International Settlements (BIS) says think again.
    In a recent article from the Telegraph, BIS asserts that central banks have ‘backed themselves into a corner’ by repeatedly cutting interest rates in order to stimulate flagging economies.

    Cladio Borio heads the monetary and economic department at BIS. He described central bank actions as “fumbling in the dark in search of new certainties.”
    “Rather than just reflecting the current weakness, they may in part have contributed to it by fueling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates. In short, low rates beget low rates

    These low interest rates have in turn fueled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.” 

    17--A Warning From the B.I.S.: the Calm Before the Storm?

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