Why Monetary Policy Will Cancel Out Fiscal Policy

Authored by MN Gordon via EconomicPrism.com,

Good cheer has arrived at precisely the perfect moment.  You can really see it.  Record stock prices, stout economic growth, and a GOP tax reform bill to boot.  Has there ever been a more flawless week leading up to Christmas?

We can’t think of one off hand.  And if we could, we wouldn’t let it detract from the present merriment.  Like bellowing out the verses of Joy to the World at a Christmas Eve candlelight service, it sure feels magnificent – don’t it?

The cocktail of record stock prices, robust GDP growth, and reforms to the tax code has the sweet warmth of a glass of spiked eggnog.  Not long ago, if you recall, a Dow Jones Industrial Average above 25,000 was impossible.  Yet somehow, in the blink of an eye, it has moved to just a peppermint stick shy of this momentous milestone – and we’re all rich because of it.

So, too, the United States economy is now growing with the spry energy of Santa’s elves.  According to Commerce Department, U.S. GDP increased in the third quarter at a rate of 3.2 percent.  What’s more, according to the New York Fed’s Nowcast report, and their Data Flow through December 15, U.S. GDP is expanding in the fourth quarter at an annualized rate of 3.98 percent.

Indeed, annualized GDP growth above 3 percent is both remarkable and extraordinary.  Remember, the last time U.S. GDP grew by 3 percent or more for an entire calendar year was 2005.  Several years before the iPhone was invented.

A Cornerstone Promise of the GOP Tax Reform Bill

But despite closing out the year strong, 2017 won’t be the year when annual U.S. GDP growth finally eclipses 3 percent.  By our rough calculations, annual GDP growth for 2017, using the Q4 estimate, comes out to 2.92 percent.  What to make of it…

Certainly, strong GDP growth is a cornerstone promise of the GOP tax reform bill.  Specifically, the promise is that resultant economic growth will pay for the tax cuts.  Yet based on the work of one group of number crunchers, the expectation that the U.S. economy will produce 3 percent economic growth in 2018 is wishful thinking.  The Tax Foundation, an outfit out of Washington, offered the following assessment:

“According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.  In 2018, our model predicts that GDP would be 2.45 percent, compared to baseline growth of 2.01 percent.”

To be clear, we don’t know what assumptions went into the Tax Foundation’s Taxes and Growth Model.  Does it factor in the latent effects of quantitative tightening?  Does it assume a total of 3 Fed rate hikes in 2018?  What about the flattening yield curve?

In short, will tightening credit markets offset any boost that tax cuts are expected to deliver to the economy?  In other words, will monetary policy cancel out fiscal policy?

Most likely it will.  Here’s why…

Why Monetary Policy Will Cancel Out Fiscal Policy

Plain and simple, the entire financial system and economy has become fully dependent on cheap and ever expanding credit.  Consumers, the federal government, and corporations have gone hog wild gorging on a decade of artificially suppressed, cheap credit.

Presently, American’s owe $3.8 trillion in outstanding consumer credit – some of which, no doubt, was used to purchase light up reindeer antlers.  Of this, more than $1.2 trillion of consumer spending has been borrowed into the economy over the last decade.  This is consumer spending that has been borrowed from the future into the present.

Similarly, over the last decade the federal government has borrowed and spent over $11 trillion, bringing the federal debt from $9 trillion to over $20 trillion.  That’s more than a doubling of the debt in just 10 years.

But that’s not all.  Corporations have been on a massive borrowing and spending binge too.  Total outstanding nonfinancial corporate debt has jumped from about $3.2 trillion in 2007 to over $6 trillion today.  Again, that’s a doubling of debt over the last decade.

What makes the growth of consumer, government, and corporate borrowing over this period so dangerous – in addition to its pure enormity – is that it was encouraged by the Fed’s artificially low interest rates.  The scale and magnitude of this cheap credit expansion is nothing short of a manic credit bubble.

The point is, as mentioned last week, we appear to be entering a period where the price of credit – specifically, interest rates – rise and, thus, credit contracts.  Naturally, this is occurring at the worst possible time; after everything and everyone has become wholly dependent on cheap, expanding credit.

As the Fed raises interest rates, borrowing costs become more expensive.  With respect to government debt, it will take a larger and larger share of the government’s budget to finance the debt.  This will reduce the funds that the government can spend elsewhere.  Similarly, with respect to consumers and corporations, increasing borrowing costs will subtract from spending and investment.

And this is precisely why monetary policy will cancel out fiscal policy.  And this is precisely why the cornerstone promise of the GOP tax reform bill will come up empty.  And this is precisely why we are all doomed.

And on that cheery note, we’ll conclude our ruminations.

Markets Are Unprepared For A Government Shutdown

Authored by James Rickards via The Daily Reckoning,

Will Republicans and Democrats agree on a budget, and avoid a government shutdown after midnight Friday?

I’d say the odds are 50/50. Actually, I put the odds of a shutdown at about 55%. There’s certainly enough substance here to be wary.

The government could shut down because of disagreements over defense spending, funding for Trump’s wall with Mexico, deportation of illegal immigrants brought to the U.S. as children (the “Dreamer Act” also referred to as “DACA”), funding for Planned Parenthood, funding for Obamacare (called “SCHIP”), disaster relief and more.

There’s not much middle ground between Democrats and Republicans on many of these hot button issues.

How would a shutdown affect the Fed’s plans to raise rates on the 13th?

If an agreement can’t be reached and the government does shut down, it’s very difficult to imagine that the Fed would go forward with its planned interest rate hike on Dec 13.

Meanwhile, markets are almost certain the Fed will raise rates. It’s already “baked into the cake.”

The euro, yen, gold and Treasury notes are all fully priced for rate hike. If it happens, those instruments won’t change much because the event is priced.

But we could see a violent market reaction if Janet Yellen stays put and doesn’t raise rates.

If the Fed doesn’t raise rates, gold could soar as the Fed passes on its best chance to raise rates and markets perceive that easy money is here to stay. Euros, yen and Treasury notes will also soar.

Of course, saying the government could shut down is different than saying the government will shut down. Again, I give it about a 55% chance at this point.

And there are lots of ways for things to go wrong.

Late last week the Commerce Department released the October PCE core inflation data. This is important because that’s the number the Fed watches. There are plenty of other inflation readings out there (CPI, PPI, core, non-core, trimmed mean, etc), but PCE Core year-over-year is the one the Fed uses to benchmark their performance in terms of their inflation goal.

The Fed’s target for PCE Core is 2%. The October reading was 1.4%. For weeks I’d been saying that a 1.3% reading would put the rate hike on hold, and a 1.6% reading would make the rate hike a done deal. So, the actual reading of 1.4% was in the mushy middle of that easy-to-forecast range.

What’s interesting is that the prior month was also 1.4%, so the new number is unchanged from September. That’s not what the Fed wants to see. They want to see progress toward their 2% goal.

On the other hand, the 1.4% from September was a revised number. It was earlier reported at 1.3% (the same number as August).

You can read this two ways. If you see the August 1.3% as a low, then you can say the 1.4% readings for September and October were progress toward the Fed’s 2% target. It’s a thin reed, but Yellen could use this to justify her view that the year-long weakness in PCE Core is “transitory.”

On the other hand, these 0.1% moves month-to-month are really statistical noise and may even be due to rounding. The bigger picture is that PCE Core is weak and nowhere near the Fed’s target. Another rate hike in December could be a huge blunder if it slows the economy further and leads to more weakness in PCE Core.

On balance, the PCE Core number is probably just enough (barely) to justify a rate hike. I’ve raised my probability of a December rate hike from 30% to just over 50% — 55%. That’s what analysts are supposed to do; they update forecasts continually based on new data. You can’t be stubborn about your analysis.

I’m not trying to be “in consensus” or “out-of-consensus.” I just want to get it right, and that means sometimes I’ll be in consensus. Other times, I won’t be.

But you should forget how the market is pricing the outcome. The Fed funds futures market has been off by orders of magnitude before. In mid-February 2017, the futures markets gave the odds of a rate hike in March at 30%.

I was giving 80% odds.

Within three trading days at the end of February, the market odds shifted from 30% to 80% before converging at 100% by the March meeting.

That does not mean I’ve got it right this time. But it does illustrate that the futures market does not always get this right — not even close.

And markets are being set up for a fall.

Bull markets in stocks seem unstoppable right up until the moment they stop. Then comes a rapid crash-and-burn phase.

Is there ever any warning that a collapse is about to happen?

Of course there is. Analysts warn about it all the time and provide mountains of data and historical evidence to back up their analysis. The problem is that everyone ignores them.

You can talk about the dangers represented by CAPE ratios, margin levels, computerized trading, persistent low volatility and complacency all you want, but nothing seems to slow down this bull market.

Yet there is one thing that can stop a bull market in its tracks, and that’s corporate earnings.

The simplest form of stock market valuation is to project earnings, apply a multiple and, voilà, you have a valuation. Multiples are already near record highs, so there’s not much room for expansion there.

The only variable left is projected earnings and that’s where Wall Street analysts are having a field day ramping up stock prices. Earnings did grow significantly in 2017 on a year-over-year basis, but that’s mainly because earnings were weak in 2016, so the year-over-year growth was relatively easy.

Now comes the hard part.

How do you expand earnings again in 2018 when 2017 was such a strong year? Wall Street just uses a simple extrapolation and says next year will be like this year, only better! But there is every reason to doubt that extrapolation.

Earnings are likely to fall short of expectations, which can lead to a correction. Once that happens, multiples can shrink as well. Soon you’re in a full-scale bear market with stock prices down 20% or more.

That’s without even considering a war with North Korea and all of the dangers others have already mentioned. This may be your last clear chance to lighten up on listed equity exposure before the bubble bursts.

Markets are creatures of manipulation by Fed policy changes, statements, forward guidance and the other prestidigitation of modern central banks. That’s what you get after 10 years of ZIRP, QE, tapering, QT, forward guidance, currency wars and musings about NIRP.

Shutdown or no shutdown, the Fed has painted itself into a corner and there’s no way to escape the room. That’s the larger story to keep in mind as Dec. 13 approaches.

Tune out the current sideshow and keep that in mind.

What Americans Spent The Most Money On In The Third Quarter

One month ago, when the BEA released its first estimate of the hurricane-impacted economy during the third quarter (which came in at a stronger than expected 3.0%)  we were surprised to report that according to the Department of Commerce, in the third quarter the biggest driver of marginal spending was car sales (technically Motor Vehicles and Parts), which increased by $15.6 billion to $463.5 billion. Which, as we said at the time and considering recent US and global automakers data, was paradoxical in light of the ongoing decline in overall sales in the second half of 2017, and it was far too early to expect the post-hurricane spending spree. It was also surprising because as Americans splurged on cars, they pulled back on gasoline purchases, which was the single biggest detractor to spending, subtracting a marginal $3.5 billion in PCE, to $283.6 billion.

 

In any case, we concluded by saying that "we now await for the revisions to this initial estimate over the coming two months, because something tells us that the auto spending spree will be thoroughly revised well lower."

One month later, when the BEA released its second Q3 GDP estimate, it appears we were right: the contribution from motor vehicles was indeed revised lower, but not nearly as dramatically as we expected, only from a marginal increase of $15.6 million to $13.5 million.

And yet, many other line items did see a downward revision, which means that something had to increase sharply to compensate for the downward revisions among other spending components. Sure enough, something did: the old faithful "plug" which has saved the US economy every quarter for the past 4 years: Healthcare, or as it is better known, Obamacare, because with Trump failing to repeal Obama"s signature health law, it means that Healthcare will merrily "contribute to GDP" for years to come, by being the single biggest marginal spending item for the foreseeable future.

Finally, for a comparison of how dramatically the contribution of "Healthcare" was revised higher, here is a chart showing side by side the change in spending among all key line items. One can almost hear the orders "from above" to make GDP 3% or higher at any cost when looking at this chart.

Airbus Takes On Boeing By Striking Deal For Bombardier Ownership Stake

Boeing"s battle to crush Bombardier has encountered an unexpected obstacle.

Bloomberg reports that Airbus SE has agreed to acquire a majority stake in Bombardier Inc.’s C Series program, which the Commerce Department slapped with a 300% tariff it ruled in Boeing’s favor in a complaint alleging Bombardier had benefited from anti-competitive government subsidies.

Under the terms of the deal, Airbus won’t pay a dime up front for the C-Series, but will begin assembling the technologically advanced by poor-selling jetliner in the US in what Bloomberg said could be an effort to circumvent the tariffs.  Airbus is adding another final assembly line for the C-Series at its factory in Mobile, Alabama, which will serve US customers and complement production in Canada, according to a company statement late Monday. However, Bloomberg says it’s unclear if the deal will allow the C-Series to avoid the tariffs.

It’s too soon to say if the new Alabama production line would enable the C Series to avoid U.S. tariffs. The duties were applied to C Series planes “regardless of whether they enter the United States fully or partially assembled,” according to a U.S. government fact sheet on the matter. Boeing said Airbus and Bombardier were just trying to get around the restrictions.

As part of the deal, Airbus will assume just over half of the interest in a partnership controlling the C-Series. Bloomberg says the European planemaker’s marketing muscle and production expertise boosts the viability of the all-new aircraft after more than $6 billion in development costs forced Bombardier to rely on government assistance.

The deal also thrusts Airbus into the middle of a trade spat between the two North American aerospace firms. In response to the Commerce Department’s ruling, Canadian Prime Minister Justin Trudeau canceled military equipment orders with Boeing, adding that they wouldn’t be reinstated until Boeing drops its complaint against Bombardier.

Boeing filed its complaint in April after Delta Air Lines agreed to buy 75 of the C-Series in a deal worth some $5 billion. Boeing alleged that the planes had been sold for “absurdly low prices.”

The dispute had crossed the Atlantic even before Airbus"s involvement. UK Prime Minister Theresa May said she personally lobbied President Trump to cancel the tariffs. Bombardier has a large factory in Belfast, a constituency that’s important to the conservatives, which employs 4,000 locals.

The Airbus deal is an embarrassing setback for Boeing, one analyst said.

“This is a program that has been waiting for a deus ex machina, and wow, it really got one,” Richard Aboulafia, an aerospace analyst at Teal Group, said in an interview. The deal casts Airbus as a global player while Boeing comes off as “a bit shortsighted and protectionist. It makes Boeing look like they’ve been playing tic tac toe against a chess master.”

Bombardier shares traded in Toronto climbed 15.7% on Tuesday after the deal was announced.

Trump and Canadian Prime Minister Justin Trudeau discussed the deal Monday evening in a phone call, according to a statement from Trudeau’s office that provided no details of the conversation.

Canadian Innovation Minister Navdeep Bains said the deal will face a review under the Investment Canada Act. But one unnamed government source told Bloomberg that it’s likely to be approved.

Assuming it is approved, the transaction would be expected to close in the second half of next year, at which point Airbus will own 50.01% of the C Series partnership. Bombardier will hold about 31% and the province of Quebec, which controversially invested $1 billion in the C Series after the cost overruns and delays, will own approximately 19%. Quebec will remain an investor in the C Series until at least 2023, said the province’s economy minister, Dominique Anglade.

Bombardier has rejected Boeing’s complaint, saying Boeing doesn’t have grounds to accuse Bombardier of unfair trade practices because Boeing doesn’t make a mid-sized jet comparable to the C-Series.

Unsurprisingly, Boeing criticized the deal, hinting that it could try to expand its complaint to include Airbus if the company tries to avoid the C-Series sanctions.

“This looks like a questionable deal between two heavily state-subsidized competitors to skirt the recent findings of the U.S. government,” Boeing, the world’s largest aerospace company, said in an emailed statement. “Our position remains that everyone should play by the same rules for free and fair trade to work.”

Of course, Airbus and Boeing are each other"s primary rival. By acquiring the ownership stake in the C-Series, Airbus is killing two birds with one stone. Embarassing and threatening Boeing, while acquiring new technology for cheap that could allow it to cater to a new kind of customer: Chinese airlines looking for more fuel-efficient planes.

UK Slams Tariffs On Bombardier: "This Is Not What We Expect From A Long-Term Partner"

It appears the Commerce Department"s preliminary ruling, issued late last night, to slap a 220% tariff on Canadian aircraft manufacturer Bombardier could trigger an all-out trade war between the UK and Canada (on one side) and the US (on the other) as public officials in the UK and Canada blasted the ruling and threatened retaliation should the sanctions, which still need to be approved by the US International Trade Commission, become permanent.

Earlier today, the Commerce Department ruled that Bombardier"s jets should face the levy because the company received anticompetitive government subsidies. The ruling comes after Boeing said the Bombardier C-Series jet would not exist without hundreds of millions of dollars in launch funding from the governments of Canada and Britain, or a $2.5 billion equity infusion from the province of Quebec and its largest pension fund in 2015. Boeing brought the complaint after Delta Air Lines agreed in April 2016 to purchase 75 C-Series jets, an order worth some $5 billion.

The preliminary ruling - which comes as the US, Canada and Mexico are holding their fourth meeting to renegotiate Nafta - has met with praise from Boeing, and criticism from virtually everybody else involved.

The UK, which does a brisk business with Boeing, is threatening to cut ties with the company if the decision against Bombardier is finalized. The reason? Bombardier has a large plant in Belfast, employing some 4,200 people in Northern Ireland, a region that the UK"s ruling conservative party relies on heavily for support. If Bombardier, which is already struggling, takes another hit, those people could lose their jobs, potentially threatening the conservatives" tenuous grip on power after losing their majority in snap elections over the summer, according to Reuters. 

UK Defense Minister Michael Fallon said in a TV interview today that the ruling could jeapordize Boeing"s business relationship with the UK government.

“This is not the behavior we expect from Boeing and it could indeed jeopardize our future relationship with them,” British Defence Secretary Michael Fallon told reporters in Belfast at a briefing in the historic Harland & Wolff shipyard, a few hundred yards from the Bombardier plant.

“Boeing has significant defense contracts with us and still expects to win further contracts. Boeing wants and we want a long term partnership but that has to be two way.”

“Boeing is an important investor in the United Kingdom and an important employer in the United Kingdom but we would prefer this kind of issue to be settled on a negotiated basis,” Fallon said.

“This is not the kind of behavior that we expect from a long-term partner and I’ve made that very clear to Boeing,” Fallon told reporters.

Britain recently ordered the Boeing P-8 maritime surveillance plane and a new fleet of Apache attack helicopters. Its armed forces have deployed Chinook helicopters, the C-17 transport plane and the E-3 Sentry airborne early warning and command post.

Meanwhile, British Business Secretary Greg Clark said on Wednesday he was confident he would be able to have the U.S. anti-subsidy complaint against Bombardier dismissed.

“We’ve been working very closely with the Canadian government to make it clear that this is a complaint that is unjustified,” Clark told Sky TV.

“What needs to happen now by the trade commission is that they look to see whether there has been any detriment to Boeing,” he added.

“There hasn’t been because this aircraft does not compete with Boeing so we’re confident that we will be able to demonstrate that and have this case dismissed.”

Threatening language aside, the Gaurdian points out that Boeing has substantial leverage should the UK act to curtail its business relationship with the defense contractor. Boeing employs or supports more than 10,000 jobs in the UK; any tit-for-tat retaliation could affect them.

Even the labor party, which isn"t politically dependent on Northern Ireland and thus has less of an incentive to care about the potential closure of a Bombardier plant there, has joined in the Boeing bashing. Labour leader Jeremy Corbyn has just told his party conference in Brighton that the tariffs imposed on Bombardier planes threaten “thousands of jobs”. He called on Prime Minister Theresa May to leverage her "special relationship" with the US to try and protect workers in Northern Ireland.

"Thousands of jobs are now at stake...a Prime minister is betting our economic future on a deregulated trade deal with the US might want to take a moment to explain how 220% tarifsf are going to boost our exports from this country."

Of course, once the ITC issues its ruling, the Trump administration will have the final say on tariffs. Will May"s relationship with the president be enough to save Bombardier? Or will Trump side with Boeing and spin the tariffs as a bid to protect US workers - throwing red meat to his base in the process?

What do you think?

Three Reasons Why Retail Sales Are About To Disappoint Bigly

On Friday the Department of Commerce will report August retail sales, a material report which all else equal, may influence whether the Fed proceeds with its plans to unveil balance sheet tapering in its upcoming FOMC meeting. However, as we discussed last week, the report, together with virtually all other high frequency economic reports, will be materially distorted by the destructive aftermath of hurricane Harvey (Irma"s impact will be felt in the September retail report).

While Goldman recently showed the historical impact of hurricanes and other natural disasters on virtually every economic data series...

... of particular interest in the coming days will be the biggest driver behind the US economy, namely retail spending, and specifically whether the recent natural disasters led to a sharp - and potentially sustained - slump. According to internal Bank of America credit and debit card spending data released as usual just days ahead of the official government report, there does appears to be a substantial adverse impact. The question is how much of this is secular, and how much is a continuation of recent weakness in retail spending. Further complicating matters is a seasonal quirk, with the August spending report coming at the peak "back to school" spending period, coupled with the recent Amazon Prime Day which led to further distortions in retail spending patterns.

As BofA"s Michelle Meyer calculates, retail sales ex-autos, as measured by BAC aggregated credit and debit card data, declined 0.1% mom seasonally adjusted in August, leaving the 3-month moving average tracking flat for the month. Consumers shifted spending to gasoline stations, which were up strongly in the month, owing in part to Hurricane Harvey.

After controlling for the increase in gasoline spending, retail sales ex-autos and gasoline declined 0.4%: one of the sharpest declines YTD, and a confirmation of the continuing divergence between BofA (blue line) which has hugged the flatline in recent months, and official government data, which while week, has demonstrated modest Y/Y growth.

According to Bank of America, there are three key factors influencing the data this month:

1. Hurricane Harvey;


2. the pull-forward of retail spending into July by Amazon Prime Day; and


3. back-to-school shopping.

In an attempt to isolate the influence of Hurricane Harvey which made Texas landfall on August 25, BofA first examined daily spending in Texas which shows that spending picked up in the days heading into the hurricane but remained depressed through the event and in the days after, as one would expect.

Meyer explains:

We estimate that the net reduction of spending in Texas sliced 0.1-0.2pp from the monthly growth rate of total retail sales ex-autos in August. We then dug deeper and looked at the impact by the type of spend which reveals that necessary items (food and gasoline) increased in the month while more discretionary items declined (Chart 2). We also measured spending by major region in Texas (MSAs) which shows significant decline in Houston but continued growth in regions not hit by Harvey (Chart 3)

The charts below provide further evidence that Harvey caused a net drag to spending in the areas hit directly. In contrast, there was trend-like growth in MSAs in Texas which were not directly impacted by Harvey.

However, it wasn"t just Harvey explaining the sharp drop in ex-gasoline sales. In addition to the adverse reginal impact from Harvey, August retail sales were also likely held
back by the strong success of Amazon Prime-day in July. BofA data shows that Prime Day pulled forward activity from August into July.

Finally, and perhaps most concerning, the third indication that retail sales are set to disappoint, BofA writes that while it did not find much of a story for the back-to-school season, its proxy for back-to-school sales showed growth of just 2.4% yoy, down more than 50% the 5.4% yoy pace last year.

This is a problem because according to the National Retail Federation"s annual survey, families were projected to spend approximately $29.5bn on back-to-school items which would translate to an 8% yoy increase from the prior year"s spending plans. Unfortunately, those spending plans have not translated to actual spending as expectations have once again overshot spending patterns as they did in 2011 and 2012 but were below in 2013-2015.

Finally, broken down by category, BofA finds that on a % mom basis, consumer spending declined in most categories in August with only food and beverage, gasoline stations and cruise showing an increase. As noted above, spending on food and beverage and gasoline stations likely saw a boost due to Hurricane Harvey as households stocked up on essentials.

BofA"s Bottom line: the weakness in August retail sales, already expected to come in at near stall-speed levels, is likely exaggerated by the hurricane and July prime-day.

The good news is that while Hurricane Irma may depress spending in September, retail sales typically bounce back after a natural disaster, suggesting upside into 4Q. Unless, of course, it forces an even greater decline in spending, as the following charts showing the secular decline in retail sales indicate.

VAR Shocks!

By Chris at www.CapitalistExploits.at

How much money can you lose on any given day according to an entire squadron of dynamic variable factors?

It"s called value at risk (VAR), and because every hedge fund, investment bank, prop house, and algo firm wants to assess their own risk — while at the same time sneakily wanting to know how the rest of the market is assessing and quantifying their own risk — the models are all built on much the same inputs and, as such, are basically mirrors of each other.

So, you see VAR models eventually conform to the very thing they"re designed to protect us against. You see they are mostly like milk bottles — exactly the same, and they"re used widely, because they"re widely used.

Understand? Good!

Back when I had more hair... actually any hair, and I didn"t have to do 200 bloody sit-ups everyday just to keep flab from attaching itself to my stomach like some unwanted starved leech, I worked for a firm who, in order to protect their anonymity, I"ll just call PMJordan.

Anyway, while working at Lucifer, I worked on a project with the quants who built these VAR models.

These were very, very smart people. They were so smart that normal people had difficulty communicating with them.

One guy, who I"ll call "Frenchie" (to protect the anonymity of his origins), could explain parabolic curve theory to you with exquisite detail while simultaneously solving math problems in his head in mere seconds. Problems, I might add, which I would need a spreadsheet, half an hour, and intense frowning to complete.

What solidified my faith in his planet-sized brain was the fact that he was so awkward and almost completely incapable of social engagements. After the head of Lucifer in the London office addressed him, he promptly gazed up, flinched awkwardly, and stared out the window. Clearly a genius.

And "Frenchie" wasn"t the only one, because quants just like him can be found across the investment landscape developing VAR models and staring into space while their brains whirr and click away. But still, with all this brain power VAR models continue to be proven crap.

VAR models never managed to help those caught off balance when the CHF broke, and they never helped those caught off balance with Brexit.

Part of the problem, I suspect, is that in order to develop them you need a whopping great data set. Clearly the statistics based on data over, say, 10 years is better than that of 5, 100 better than 50, and so on.

One of my team here at Capitalist Exploits HQ referred me to the work of one Paul Schmelzing. Schmelzing is a visiting scholar at the Bank of England from Harvard University where he concentrates on 20th century financial history and he wrote an excellent piece on the history of bond bubbles going all the way back to the 1285. THAT"s a decent data set!

Probably the most important takeaway from Paul"s work — for me at least — is that at no period in history has there ever been the sort of bat sh*t crazy central bank intervention in the bond markets we"ve enjoyed in the last decade or so. VAR models don"t account for this.

That quite literally means that this time it is different.

I nicked this chart from Paul"s work. It provides us a clear picture over hundreds of years and thus puts things into perspective very nicely.

So here we sit in 2017 with some interesting data points, namely that back in July of last year the peak in the bond cycle was reached. Remember when I ranted about how bonds were trading as commodities?

Well, that was just one month after the peak in bonds. When we had over $13 trillion in bonds trading at negative yields.

This was the lowest level the risk free rate has ever reached in sovereign bond market history in 800 years.

This is one of the most remarkable bond bull market in all of recorded history. Lucky us!

Does this sound crazy? I think so.

How we got here? Fiscal expansion - the flip side of the bond bull market. Here we have the FED (US), the BOE (UK), ECB (EU), and BOJ (Japan).

There are a few things that turn any market. In the bond market, there are 3 that come to mind:

1. Inflation is one of those things


2. Geopolitical events are another


3. Volatility is the third

Let"s look at all three.

Let"s take a look at unemployment rates — historically very closely tied with inflation. The second lowest rate since the late 60"s. Mmmm...

In the UK, we have to go back to the 70"s to find lower unemployment figures:

The EU is not faring as well but the trajectory and trend are clear:

And Japan? Same trend:

Where are you going with all this, Chris?

China just printed a 5.5% PPI number.

And over in the US....This just out from Bloomberg.

U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment, putting the economy on a stronger track, Commerce Department data showed Wednesday.

• Gross domestic product rose at a 3% annualized rate from prior quarter (est. 2.7%); revised from initial estimate of 2.6%


• Consumer spending, biggest part of the economy, grew 3.3% (est. 3%), most since second quarter of 2016 and revised from 2.8%


• Nonresidential fixed investment rose 6.9%, revised from initial increase of 5.2%


• Corporate pretax earnings rose 7% y/y; up 1.3% q/q

And... our sauerkraut-eating, beer-swilling friends are experiencing the highest rate of accelerating inflationary growth in the last 23 years:

Our pasty friends in the UK? Bam!

Ok, so now we have all of this taking place.

Inflation being not so benign... central bankers actually getting what they want... while geopolitical risks, which I don"t have time to discuss here today but have written about extensively, are far higher than the market is pricing. And almost nobody seems to be paying much attention to them!

The connection between the structural political breaks and how these affect and feed both central bank policies and market participants behaviour is, I think, one of the most critical elements that bond investors are not considering.

Remember, both inflation or geopolitical shocks can impact the bond markets negatively. And what about the third one?

Volatility. Well, take a look for yourself.

Given that the treasury market volatility index just plunged again, the answer is that there are still trillions of dollars out there that believe in reward free risk. Are those planet sized brains building VAR models going to get it wrong again?

Question

Cast your vote here and also see what others think

- Chris

"Take calculated risks. That is quite different from being rash." — George S. Patton

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Liked this article? Then you"ll probably like my other missives on

this topic as well. Go here to access them (free, of course).

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Meet Billionaire Kevin Plank: Maryland's Corporate Welfare King

Via StockBoardAsset.com,

A corporate cronyism scandal could be brewing out of Baltimore, Maryland this month involving Billionaire Kevin Plank (CEO of Under Armour). What is alleged per The Baltimore Post are Baltimore County Council members  supporting a ‘conditional grant in an amount up to  $ 2,000,000 to Under Armour, inc from the Maryland Department of Commerce pursuant to the Maryland Economic Development Assistance Fund’. The purpose of the grant is for the redevelopment of Tradepoint Atlantic (TPA) of Sparrows Point, where the 3,100 acre site use to be the home of the world’s largest steel producer called Bethlehem Steel.

In this case, Maryland’s economic development assistance fund is better known as ‘corporate welfare’. The article goes on to say,

someone please explain to me why Mr. Plank, who according to Forbes Magazine has a net worth around $1.74 billion, needs $2 million from us regular middle class taxpayers.  

After reading further into the article, it seems as Kevin Plank (CEO of Under Armour) has aligned himself with the so called ‘deep state’ of Maryland:

This debauchery not only involves Baltimore County, but also the state of Maryland and our local delegates who are deeply entrenched in TPA.  Several projects came up at the last meeting concerning the news in Annapolis and its impact on Baltimore County. What we heard from our delegation is more propaganda than reality. Once again, the issue of jobs (10,000 of them) was at the forefront of this gabfest. Blowing more hot air than facts, the delegation pontificated on the wind tunnel issue that TPA is pursuing.

Let’s take a closer look at that other Councilman’s checkered background. It is beyond me that Mr. Quirk, would even consider such taxpayer funded grants and loans with the current state of affairs with the county’s fiscal problems, which include decaying schools, lack of AC, and a wave of violence within that education system. Not to mention the crumbling roadways and a $200 million bond debt.  

Crossing into Baltimore City lines, Kevin Plank (CEO of Under Armour) has another real estate gamble valued at $5.5 billion called Port Covington located on 200 acres of Baltimore waterfront. The project is described as a ‘city with in a city’ for 10,000-15,000 new residents. This time around, the corporate welfare for the project is upwards of $660 million worth of tax incentives at the expense of the taxpayer.

So, where have we seen this story before? Yes, it’s Elon Musk whose companies, Tesla Inc. and Solar City Corp.  “hugely benefit from government grants, discounted loans, tax breaks, government incentives and the sale of environmental credits”.

This makes Elon Musk the Billionaire Welfare King of California and Kevin Plank the Billionaire Welfare King of Maryland.

Meanwhile, back in Baltimore, nearly 1/3 of black households have a zero net worth… The inner cities of Baltimore are an absolute mess after 50-years of democratic controlled leadership compounded with deindustrialization robbing the community of its wealth. There are nearly 46,800 vacant row homes in Baltimore City with a homicide rate that is doubled of Chicago’s and a homicide count higher than NYC.

In both Under Armour projects, Baltimore City and County Officials would rather provide a variant form of corporate welfare to Billionaire Kevin Plank (CEO of Under Armour), than spend it on the communities that need it the most. Something is wrong in America and it doesn’t smell right. We call this corporate cronyism and there is a scandal lingering….

In the video below, you’re about to hear an interview of two community leaders in Baltimore City, Maryland. The mainstream media is not allowed to share this with you, because it destroys the narrative that everything is awesome in Baltimore. This is a first hand account of what community leaders think about the corporate welfare of Under Armour in Baltimore and how they think public monies are being misallocated and are not reaching the communities that need it the most.

U.S. Restaurant Industry Stuck In Worst Collapse Since 2009

Shortly after we reported that the "restaurant industry hasn"t reported a positive month since February 2016", we can add one more month to the running total: according to the latest update from Black Box Intelligence"s TDn2K research, in July both same-store sales and foot traffic declined once again, and this time the slide was more pronounced, tumbling by -2.8% and -4.7% compared to declines of "only" -1% and -3% in June, respectively, in the process extending the stretch of year-over-year declines for the US restaurant industry to 17 consecutive months - the longest stretch since the financial crisis.

Source: @GS_CapSF

Sales rose in only 12 markets while declining in 183 with the Midwest - the worst region in the US - suffering a 3.6% and 5.2% decline in sales and traffic respectively, while even the best region, California", posted a decline in both sales (-0.7%) and traffic (-3.6%).

Source: TDn2K

Unlike last month, not even Black Box Intelligence"s TDn2K research tried to spin the data, noting that the "sales rebound optimism was short lived" as "July restaurant sales tumbled."

“July proved to be a tough month for chain restaurants,” said Victor Fernandez, Executive Director of Insights and Knowledge for TDn2K.

“Based on recent trends, we were cautiously optimistic that the tide was turning a bit, especially since brands were comparing against weaker comps in 2016.” But not so much any more.

According to Black Box, calculated on a two-year basis, sales in July 2017 were down -4.2% compared with July of 2015, in other words there has been no growth in over two years. The data is even worse for same-store traffic, which was down -8.7% for that same period. These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.

In light of the surprisingly poor monthly results, the consultant appear to have not only given up on any recovery in the restaurant sector, but are now extrapolating the weakness to the broader economy.

"While the economy keeps growing at a moderate pace and job gains remain strong, the consumer seems to be on vacation – literally and figuratively,” said Joel Naroff, President of Naroff Economic Advisors and TDn2K economist whose Industry Snapshot tracks sales at 27,000 restaurant units from 155 brands, generating $67 billion in annual revenue. That’s about 10% of total “eating and drinking places” revenues as tracked by the Commerce Department

“One of the clearest indicators that households are spending cautiously is the softening of big-ticket purchases. In July, for the eleventh month out of the last twelve, vehicle sales were below the rate posted the year before. Home sales, while still trending up, are now expanding at a decelerating pace.”

While food and alcohol sales were down, prices once again rose, with the the average amount per check rising 1.8% in July, which once again was not enough to make up for the decline in customer count, confirming that restaurants have little to no pricing power to even stay up with inflation. Black Box adds that the growth in check averages has slowed in recent months "as brands fight the tide of continuing traffic declines."

Check increases in 2015 and 2016 were largely an effort to maintain margins in the face of higher labor costs. The slowdown in check growth may be a combination of value platforms and increased deal activity aimed at increasing visitation frequency. It may also be recognition that top-line increases are under more scrutiny despite the potential impact to operating margins. Given that grocery prices have been dropping year over year, it is no surprise that restaurants have been compelled to review their value proposition

More troubling, Naroff pointed out something we first observed two weeks ago: the dramatic revision lower in the US personal savings rate, which wiped out $250 billion from what the Department of Commerce had previously calculated was a healthy personal savings backdrop:

“Households are currently maintaining their lifestyles by reducing their savings rate and that is likely restraining spending on discretionary goods. We may have to wait until the fall or early winter, assuming wage gains accelerate by then, to see any pick up in restaurant sales.”

Here, as Wolf Richter laconically adds, "everyone is waiting for wage increases for the lower 80% of the wage earners that will finally outgrow inflation. That’s all it would take to crank up the economy, and even the restaurant business. People have been waiting for years for these real wage increases. But it’s just not happening."

Furthermore, it goes without saying that the above assumption is a substantial problem for the roughly half of American households who have no savings in which to "dip" and fund discretionary purchases.

Meanwhile, as the vast majority of the US population struggles to make ends meet and digs into their meager savings, the far smaller group of high wage earners continue to spend generously at fine dininf establishments. Indeed, fine dining was the only segment up in July (0.4 percent) even as upscale casual was down fractionally. Still, the slowdown in fast casual sales noted in the past continued in July, as did softness for quick service. While much of fast casual’s headwinds are a result of rapid segment growth, the steady performance decline in lower PPA segments will be important to follow. Both segments outperformed the industry in 2015 and 2016, but trail through July of this year.

As reported last month, the pain among chain restaurants is due to a combination of factors, including:

• The surge of independent restaurants, from high-end to delis.


• “Grab-and-go” prepared foods available at every grocery store.


• VC-funded meal replacement kits, such as Blue Apron, one of the most anticipated IPOs this year that has now totally crashed.


• Convenience stores and food trucks

Meanwhile, as the government reported recently, June sales for "food service and drinking places" held at $56.0 billion, were flat with November 2016, a period of 8 months without growth. They were down 0.6% from January but still up 1.7% year-over-year. This weakness in nominal sales is also evident in the latest retail sales data which has been on a steady decline for the past two years.

... a fact corroborated by Bank of America"s internal spending data

Ironically, in addition to challenges from falling guest counts, the inability to pass through price increases, rising competition and declining overall spending, strong challenges continue to confront restaurants in both staffing and retaining enough qualified workers.   We say ironically, because as we showed after the latest jobs report, restaurant/fast food/waiter/bartender hiring remains the only strong spot in the US labor market. As the chart below shows, starting in March of 2010 and continuing through June of 2017, there have been 89 consecutive month of payroll gains for America"s waiters and bartenders, an unprecedented feat and an all time record for any job category. Putting this number in context, total job gains for the sector over the past 7 years have amounted to 2.4 million or over 14% of the total 16.7 million in new jobs created by the US over the past 89 months. Needless to say, these jobs fall within leisure and hospitality, that sector pays the worst wages, an average of $13.35 an hour, and $331.08 a week

And yet, according to BlackBox, restaurant operators are pessimistic regarding the difficulty of recruiting in the upcoming quarters. According to TDn2K’s People Report, 63 percent of companies reported an increase in difficulty recruiting qualified employees to staff their restaurants during the second quarter of 2016. Additionally, the expectations component of the index predicts continued job growth for the industry, with 47 percent of restaurant companies anticipating an increase in their number of hourly jobs. 42 percent reported an expected increase in their net number of restaurant management jobs.

As a result, retention continues to be a major challenge for the industry. Both restaurant management and hourly employee turnover increased again during June. However, the latest indicators may be hinting that increasing turnover rates are beginning to taper off. Still, even if turnover rates reach a plateau at their current levels, which is likely to be the best case scenario, they will remain at record high levels and continue to be a source of headaches for restaurant operators forced to keep raising wages to retain waiters and bartenders.

Putting it all together, we give the last word to Wolf Richter who summarizes the unsustainable situation as follows: "so credit card debt, at $1.02 trillion, has hit an all-time high. Auto loan balances, at $1.13 trillion, have far surpassed any prior all-time high. Housing costs are eating up an ever larger share of incomes. Healthcare costs are soaring. Households with kids in college are paying a big price. Many millennials, even those with good jobs, are buckling under their student loans, which have skyrocketed 164% over the past ten years to $1.45 trillion. And inflation-adjusted discretionary spending such as for restaurants by people at the lower 80% of the income scale is taking a hit. Something has to give. It’s the description of a messed-up economy."

Trump Warns Xi: Trade War With China Begins Monday

As if there weren"t enough geopolitical stress points in the world to fill a lifetime of "sleepy, vacationy" Augusts, late on Friday night President Trump spoke to Chinese President Xi Jinping and told him that he"s preparing to order an investigation into Chinese trade practices next week, according to NBC. Politico confirms that Trump is ready to launch a new trade crackdown on China next week, citing an administration official, a step that Trump delayed two weeks ago under the guidance of his new Chief of Staff Gen. Kelly, but now appears imminent. It is also an escalation which most analysts agree will launch a trade war between Washington and Beijing.

As Politico details, Trump on Monday will call for an investigation into China over allegations that the nation violated U.S. intellectual property rights and forced technology transfers, the official said. While it"s unclear how much detail Trump will get into in the announcement, administration officials expect U.S. Trade Representative Robert Lighthizer to open an investigation against China under Section 301 of the Trade Act of 1974. The ordering of the investigation will not immediately impose sanctions but could lead to steep tariffs on Chinese goods. Trump has expressed frustration in recent months over what he sees as China"s unfair trade policies.

As we discussed two weeks ago, Trump had planned to launch the trade investigation more than a week ago, but he delayed the move in favor of securing China"s support for expanded U.N. sanctions against North Korea, the senior administration official said.

The pending announcement also comes amid heightened tension between the United States and China, even after the Trump administration scored a victory in persuading Beijing to sign onto new United Nations sanctions on North Korea. Still, Trump has delayed trade action before, amid pressure from business groups and major trading partners:

Two Commerce Department reports examining whether to restrict steel and aluminum imports on national security grounds were expected by the end of June but have been bottled up in an internal review. Trading partners raised threats of retaliation and domestic steel users complained of being hurt by price increases and restricted supply.

The trade investigation will immediately strain relations between the U.S. and China as the two countries wrestle with the unpredictable situation over North Korea.  Should Trump follow through, the move will lay the groundwork for Trump to impose tariffs against Chinese imports, which will mark a significant escalation in his efforts to reshape the trade relationship between the world"s two largest economies. In other words, even if there is now conventional war announced with either North Korea or Venezuela, Trump"s next step is to launch a trade war against China.

"The United States government can, and does, work with countries to address serious concerns such as North Korea while also pursuing measures to address economic concerns, such as the theft of U.S. intellectual property," a U.S. National Security Council official said.

It wasn"t immediately clear how China would react to the move.

When reports of the potential trade investigation first emerged more than a week ago, China"s Commerce Ministry stressed the importance of U.S.-China trade ties and of resolving differences "through dialogue and consultation."

"We would like to emphasize that the Chinese government has always attached importance to intellectual property protection," a spokesman said. "The results are there for all to see."

Trump, who has been residing at his golf club in Bedminster, New Jersey, for the past week, plans to return to Washington on Monday to officially announce the trade investigation. The decision will not only take action against alleged Chinese violations of U.S. companies" intellectual property rights, but could also be perceived as an attempt by the U.S. government to crank up the pressure on Beijing to rein in North Korea. "I think China can do a lot more," Trump told reporters on Thursday. "And I think China will do a lot more."

As CNN adds, the trade investigation is expected to be only one part of a multi-pronged push by the Trump administration to counter perceived Chinese trade abuses.  The administration has been eyeing other moves to rebalance the U.S.-China trading relationship. But analysts have cautioned that Trump faces a huge challenge in his desire to significantly reduce the U.S. trade deficit with China, which last year stood at more than $300 billion. "Protection measures against some specific items, such as steel and aluminum, may gain political favors, but are not likely to be of much help to rebalance trade," economists at the Institute of International Finance wrote in a research note this week.

* * *

Meanwhile, as we reported previously, China state media signaled the nation would hit back immediately against any trade measures, as it has done in past episodes. This time around, the need to project strength domestically is compounded by the looming twice-a-decade leadership reshuffle that may further entrench President Xi Jinping’s power.

Chinese officials have mulled stemming U.S. imports should retaliation be necessary. Under a draft plan, soybeans have been singled out as the top product that can be dialed back, according to people familiar with the matter. Autos, aircraft and rare-earth commodities have also been identified as potential categories for restriction, the people said.

Still, Trump"s offensive comes at a very sensitive time for Beijing: just weeks ahead of the 19th Party Congress, when Xi Jinping wants everything in his economy to be perfect. "Ahead of the 19th Party Congress, the last thing that China will want is a trade war," said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. "It is also important that Beijing does not look weak in this context. As such, expect a cautious, proportional response."

Of course, ultimately the big question - as Bloomberg puts it - is whether the Trump administration is willing to risk a trade war as it ups the ante. The IMF warned last month that “inward-looking” policies could derail a global recovery that has so far been resilient to raising tensions over trade. The problem, for both the US and China, is that as Trump gets increasingly more focused on distracting from his numerous domestic scandals, he is likely to take ever more drastic action in the foreign arena, whether that means "hot war" with North Korea, or trade war with China.

“So far, it’s all been posturing, with little action,”’ said Scott Kennedy, a U.S.-China expert at the Center for Strategic and International Studies in Washington. “Pressure is building to do something, so the U.S. doesn’t look like a complete paper tiger.”

And while we await the formal announcement on Monday and China"s retaliation, below again is a breakdown of the biggest US state winners and losers if and when trade war with China breaks out, from "Winners And Losers When Trade War Breaks Out Between The US And China"

* * *

Who stands to lose - and win - if the U.S. takes aim at the unbalanced trade relationship with China? With total bilateral trade of more than half a trillion dollars a year, the list of potential losers is very long as Bloomberg analyzed recently. The most notable examples include:

• U.S. companies such as Apple Inc., which assemble their products in China for sale in the U.S., and those tapping demand in China’s expanding consumer market.


• U.S. agricultural and transport-equipment firms, which meet China’s demand for soy beans and aircraft.


• Manufacturing firms from the U.S. that import intermediate products from China as an input into their production process.


• Retailers including Wal-Mart Stores Inc. and the U.S. consumers that benefit from low-price imported consumer electronics, clothes and furniture.


• Other trade partners caught in the crossfire of poorly-targeted tariffs. On steel, for example, U.S. direct imports from China account for less than 3% of the total -- below Vietnam.

And while conventional wisdom is that the US has a chronic trade deficit with China - it does - the U.S. also runs a nearly $17 billion trade surplus with China for agricultural products. China consumes about half of U.S. soybean exports, America’s second largest planted field crop. Soybean farms are mostly located in the the upper Midwest (Illinois, Iowa, Indiana, Minnesota and Nebraska). The volumes are so significant that a spike in soybean exports was a noticeable contributor to GDP growth in the second half of last year as readers may recall. China is also a major buyer of U.S. aircraft, perhaps the only areas of manufacturing where the U.S. retains a competitive edge (though not for much longer). The U.S. also has an $8 billion dollar trade surplus with China in the transportation equipment category.

U.S. Trade Balance With China by Product

How about geographically?

It may come as a surprise that on a state-by-state basis, eight U.S. states are running surpluses with China, six of which supported Trump in last year’s presidential election, including West Virginia. In 2016, Louisiana registered the largest surplus, at 2.9% of the state’s GDP. Louisiana’s exports to China are likely inflated given that 60% of U.S. soybean exports are shipped through the Gulf coast. Washington state was second at 1.6% of GDP, largely due to aerospace exports.

Tennessee maintains the largest trade deficit with China at 6.5% of GDP, meaning tariff-induced increases in the price of imports could have the biggest impact on this state.

The biggest losers? Mississippi, Georgia, Illinois and  California, all of which maintain deficits at more than 3% of GDP.

For the sake of brevity, we will not discuss another, more troubling, aspect of conventional wisdom, namely that trade wars almost inevitably lead to real wars. Aside for the US military industrial complex, there are no winners there.

Desperate Americans Are Saving The Least Since The Start Of The Last Two Recessions

The last two times Americans were saving this little in order to maintain their lifetsyles, the US economy was in recession.

According to newly revised government data, Bloomberg reports that American households scaled back their pace of savings to the lowest level in nine years at the end of 2016 as the growth of their wages and salaries slowed.

The personal savings rate was 3.6% in the fourth quarter of 2016, down from a previously published 4.9%, according to somewhat dramatic annual revisions to gross domestic product and related data, released Friday by the Commerce Department. That’s the lowest reading since a 2.8% rate in the final three months of 2007, just as the U.S. was entering a recession.

The saving rate recovered somewhat in the first three months of the year, to 3.9% after a previously reported 5.1% . In the second quarter, it was little changed at 3.8%.

The lower fourth-quarter rate was one of the bigger changes in the government’s annual update of GDP, and paints a quite different picture from the "recovery" images put forward by the Obama administration.

Instead of recovery, as Bloomberg notes, the figures suggest that consumers were saving less to maintain their spending entering 2017. That’s significant because consumption accounts for more than two-thirds of gross domestic product, and the revisions may help explain some of the slowdown in first-quarter purchases.

US-Mexico Reach Sugar Trade Deal...There's Just One Problem

US Commerce Secretary Wilbur Ross announced Tuesday that he had reached “an agreement in principle” with his Mexican counterpart, Economy Minister Ildefonso Guajardo, on a new trade deal governing the trade of raw and refined sugar between the US and Mexico.

There’s only one problem: The US sugar industry has said it’s unable to support the agreement in its current form, according to Reuters.

Ross said that Mexico met nearly every request by the US sugar industry to fix problems with a 2014 sugar trade agreement.

"Unfortunately, despite all of these gains, the U.S. sugar industry has said it is unable to support the agreement in its present form," Ross said without elaborating on their objections.

Ross added that the agreement will now go through a final “drafting” stage during which he hopes the US sugar industry would come on board. He added that “it should be days, not weeks” before the final agreement is reached, Reuters reported.

The American Sugar Alliance said in a statement that the exiting agreement could allow Mexican producers to exploit a “loophole” allowing them to continue to dump subsidized sugar into the U.S. market.

“This loophole takes away the existing power of the U.S. government to determine the type and polarity of any additional sugar that needs to be imported and cedes that power to the Mexican government,” the Alliance said in a statement.

“We will work with Secretary Ross in the coming days to see if that loophole can be effectively closed so that the basic provisions of the agreement are not undermined and USDA can effectively manage the sugar program”

The "deal," in its current form, leaves Mexico’s overall access to the US market essentially unchanged: The biggest difference is that refined sugar must fall to 30% of overall imports from Mexico, down from a previous limit of 53%. Thanks to protections granted to the US sugar industry by Nafta, sugar prices in the US are higher than anywhere else in the world.

The US sugar industry late last year pressured the Commerce Department to withdraw from an agreement with Mexico that set a fixed system of prices and quotas on imported Mexican sugar. Mexico struck back in March by canceling export permits for sugar being shipped to the US, putting the squeeze on US refiners who were struggling with high prices and tight supplies.

Iowa Sen. Chuck Grassley said that the deal between Mexico and the US “bodes well” for Nafta talks. We imagine that"d be true...if the two sides can reach an honest-to-god agreement, not...whatever this is.

Trump Wants "Fast Decision" On Comey Replacement - Here Are The 11 Candidates

Donald Trump said he expects to make a "fast decision" on a replacement for fired FBI Director James Comey, perhaps before he departs the U.S. on May 19 for his first foreign trip as president. Trump said the candidates under consideration to lead the FBI - White House officials have identified 11 of them so far - are "outstanding people." He said most are "very well known" and of the "highest level."

As Bloomberg reports, the 11 candidates under consideration as a permanent replacement for Comey:

SEN. JOHN CORNYN

Cornyn is the No. 2 Senate Republican and a former Texas attorney general and state Supreme Court justice. He has been a member of the Senate GOP leadership team for a decade and serves on the Senate Judiciary Committee. In the aftermath of Comey"s dismissal, Cornyn said Trump was "within his authority" to fire him and said it would not affect the investigation of possible Russian ties to Trump"s presidential campaign.

REP. TREY GOWDY

The South Carolina Republican is best known for leading the congressional inquiry into the deadly attacks on a U.S. facility in Benghazi, Libya, a panel that oversaw a lengthy grilling of Hillary Clinton in 2015. A former federal prosecutor and state attorney, Gowdy was elected to Congress in the 2010 tea party wave and has focused on law enforcement issues. He originally endorsed Florida Sen. Marco Rubio for president before backing Trump in May 2016.

FORMER REP. MIKE ROGERS

Rogers is the former chairman of the House Intelligence Committee. He served Michigan in Congress for more than a decade before stepping down in 2015. Rogers worked for the FBI as a special agent based in Chicago in the 1990s and briefly advised Trump"s transition team on national security issues. His name was floated as a possible replacement for then-FBI Director Robert Mueller in 2013, and he received support from an association of FBI agents before President Barack Obama chose Comey.

RAY KELLY

Kelly was commissioner of the New York City Police Department for more than a decade, serving two mayors. In the aftermath of the 9/11 attacks, he created the first counterterrorism bureau of any municipal police department and oversaw a drastic reduction in crime. But Kelly also came under fire for his use of aggressive police tactics, including a program that spied on Muslims and a dramatic spike in the use of stop-and-frisk, which disproportionately affected non-white New Yorkers.

J. MICHAEL LUTTIG

Luttig, the general counsel for Boeing Corp., is viewed as a conservative legal powerhouse from his tenure as a judge on the 4th Circuit U.S. Court of Appeals and his time as a Justice Department lawyer. He was considered for two U.S. Supreme Court vacancies that went to Chief Justice John Roberts and Justice Samuel Alito. Luttig clashed with the Bush White House on a prominent terror case, rebuking the administration for its actions in the case involving "enemy combatant" Jose Padilla.

LARRY THOMPSON

A deputy attorney general under President George W. Bush, Thompson served as the department"s No. 2 from 2001 to 2003. Among his most high-profile actions was allowing Syrian-born Canadian citizen Maher Arar to be deported to Syria, where he was tortured, after being falsely named as a terrorist. Thompson also served as U.S. attorney for the Northern District of Georgia and held several high-level positions at PepsiCo.

PAUL ABBATE

Abbate is a senior official at the FBI, currently responsible for the bureau"s criminal and cyber branch. He previously led FBI field offices in Washington, one of the agency"s largest, and in Detroit. He"s been deeply involved for years in FBI efforts to fight terrorism, serving in supervisory roles in Iraq and Afghanistan and later overseeing FBI international terrorism investigations as a section chief. He"s been with the FBI for more than 20 years, and is one of the FBI officials who interviewed this week for the role of interim director.

ALICE FISHER

Currently a partner at the law firm Latham & Watkins specializing in white-collar criminal and internal investigations, Fisher formerly served as assistant attorney general for the Criminal Division of the Justice Department. Fisher faced resistance from Democrats during her confirmation over her alleged participation in discussions about detention policies at the Guantanamo Bay facility in Cuba. She also served as deputy special counsel to the Senate special committee that investigated President Bill Clinton"s Whitewater scandal. If selected, she would be the bureau"s first female director.

ANDREW MCCABE

A Duke-educated lawyer, McCabe was named last year as the FBI"s deputy director, the No. 2 position in the bureau, overseeing significant investigations and operations. Since joining the FBI more than 20 years ago, he"s held multiple leadership positions, including overseeing the FBI"s national security branch and its Washington field office. McCabe became acting director after Comey was fired, but has shown a repeated willingness to break from White House explanations of the ouster and its characterizations of the Russia investigation.

MICHAEL GARCIA

A former New York prosecutor, Garcia has served as an associate judge on the New York Court of Appeals — the state"s highest court — since early 2016. He served as the U.S. attorney in Manhattan from 2005 to 2008, and previously held high-level positions in the Commerce Department, the Justice Department and the Department of Homeland Security.

JOHN SUTHERS

A former U.S. attorney and Colorado attorney general, Suthers was elected mayor of Colorado Springs in 2015. He is widely respected among state law enforcement and many Colorado Democrats. Suthers was inspired to become a prosecutor after he spent part of an internship in the Colorado Springs district attorney"s office watching the trial of a gang of soldiers convicted of killing various citizens, including actor Kelsey Grammer"s sister, during a crime spree in the 1970s.

Four candidates - Texas Sen. John Cornyn, acting FBI Director Andrew McCabe, attorney Alice Fisher and judge Michael Garcia - have interviews scheduled Saturday.

Right now, John Cornyn is the front-runner at the bookies (but marginally)...

Trade War, Round 2: Boeing Accuses Bombardier Of Dumping Jets; Canada Retaliates

Just days after the US Commerce Department imposed duties averaging 20% on Canadian softwood lumber, accusing Chinese timber companies of getting an unfair government subsidy, on Thursday round two of the trade war between the US and Canada broke out when Boeing asked the U.S. Commerce Department to investigate dumping, subsidies and unfair pricing for Canadian planemaker Bombardier"s new CSeries airplane, a competitor to the Boeing 737, confirming that the trade tensions between the two neighboring countries are set to get far worse.

Specifically, the Chicago-based aerospace giant has asking the International Trade Commission to rule that it has suffered injury to its business at the hands of Bombardier and to recommend that the Commerce Department impose duties on the Canadian jet builder (amusingly, Boeing also complained about the very existence of Bombardier itself, a company which has been aggressively bailed out by the Canadian government as recently as October 2015, when in exchange for $2.5 billion in taxpayer funds, the company fired 7,000 Canadian workers).

In its petition, Boeing said that Bombardier, determined to win a key order from Delta Air Lines after losing a competition at United Airlines, had offered its planes to the airline at an "absurdly low" $19.6 million each, well below what it described as the aircraft’s production cost of $33.2 million. "Propelled by massive, supply creating and illegal government subsidies, Bombardier Inc has embarked on an aggressive campaign to dump its CSeries aircraft in the United States," Boeing said in its ITC complaint.

A comparable 737-700 model by Boeing has a list price of $83.4 million, with the new 737-MAX 7 priced at $92.2 million. While sales discounts from list prices are typically 40 percent to 50 percent in the industry, another question is just how much of that price is courtesy of the implicit taxpayer subsidy of the Ex-Im bank, but that is a topic for another post.

The spat between the two companies came to a climax in April 2016, whe Bombardier won the Delta order, its biggest yet, for 75 CS100 jets, worth an estimated $5.6 billion based on the list price of about $71.8 million.  And now that Trump has given the green light to challenge Canadian trade competitors, Boeing is certainly not wasting time.

In its complaint against Bombardier, Boeing argued that the CSeries program would not exist without hundreds of millions of dollars in launch aid from the governments of Canada, Quebec and Britain, nor the abovementioned $2.5 billion equity infusion from Quebec in 2015.

Boeing wasn"t finished: the company also took a shot at European rival Airbus, which it accuses of benefiting from similar "unfair" government subsidies in a long-running dispute before the World Trade Organization.

“Evidently taking a page out of the Airbus strategy book, Bombardier has blatantly and intentionally demonstrated its goal of muscling its way into the U.S. aviation market by offering its heavily subsidized planes at cut-rate pricing,” Boeing said.

A Commerce Department spokesman told Reuters that the petition would be given "a thorough review" and further comment was premature.

In recent week, Commerce Secretary Wilbur Ross has taken swift action to protect the U.S. steel and aluminum industries from foreign competition, launching national security investigations that could lead to import restrictions. An investigation could lead to duties on the aircraft to offset any below-cost pricing or any subsidies deemed unfair.

Shortly after the complaint was filed, the Canadian government issued a statement objecting to Boeing"s allegations and noted that the CSeries has many U.S. suppliers, including for engines, and supports thousands of U.S. jobs. "The Government of Canada will mount a vigorous defense against these allegations and stand up for aerospace jobs on both sides of the border," it said. Full statement below:

The Government of Canada today made the following statement regarding the filing of a petition by Boeing Aerospace Corporation with the United States Department of Commerce, alleging the dumping of Bombardier aircraft in the United States market:

"The Government of Canada objects to the allegations made by Boeing. We are confident that our programs are consistent with Canada"s international obligations.       

"The aerospace industries of Canada and the United States are highly integrated and companies on both sides of the border benefit from this close partnership. For example, many C Series suppliers are based in the United States and it is projected that more than 50 percent of the components for the C Series, including the engine, will be supplied by American firms directly contributing to high quality jobs in that country. The C Series is a great example of how the North American industrial base can develop and produce a globally competitive product with industry-leading clean technologies.

Bombardier also has a significant presence in the U.S. across its aerospace and transportation divisions, directly employing more than 7,000 workers. In addition, the company works with more than 2,000 suppliers headquartered in states across the country thereby generating thousands of well-paid, high-tech American jobs.

"The Government of Canada will mount a vigorous defence against these allegations and stand up for aerospace jobs on both sides of the border."

Curiously, Bombardier’s chief executive conceded the company had been “aggressive” on pricing in order to win, and sources familiar with the deal pegged the discount closer to two-thirds off the nominal list price. It added that it was reviewing the petition and structures its dealings to ensure compliance with all relevant laws.

* * *

In a separate development, Premier Christy Clark of British Columbia, wrote a letter to Canadian Prime Minister Justin Trudeau Wednesday asking him to ban coal shipments from the U.S., sending shares of US coal giant Cloud Peak Energy (among others) tumbling. According to Bloomberg, Clark"s demand was in response to Trump"s lumber tariffs. Trudeau said he would consider the request "carefully and seriously." Some context: a little over 6 million metric tons of U.S. thermal coal were shipped through the port of Vancouver in 2016.

Needless to say, it would be especially absurd if as a result of Trump"s Canadian tariffs, it is the US coal mining industry - the one which the president vowed to reincarnate - that suffers the most.

And now, we sit back and wait for round three in the increasingly hostile trade wars between the US and its peaceful northern neighbor.