A recent American Economic Association survey revealed that almost half of female economists have claimed to be the target of gender discrimination, with many also reporting assault and harassment. The survey was sent to more than 45,000 current and former AEA members.
48% of women reported discrimination based on sex and 22% reported bias for their marital status or caregiving responsibilities, according to a Bloomberg report. The survey included more than 9,000 current and former members of the AEA from November to February.
85 members reported assaults by other economists or students and 179 members reported attempted assaults. 405 had run-ins with “unwanted attention” from peers. The survey also documented racial discrimination, showing that 27% of black respondents claimed they were discriminated in promotion decisions and 23% claimed bias in teaching assignments. More than 33% of black respondents claimed they were discriminated against with regard to compensation.
The head of the AEA circus act, including President Ben Bernanke, flanked by intellectual heavyweights Janet Yellen and Olivier Blanchard wrote in a letter: “Many members of the profession have suffered harassment and discrimination during their careers, including both overt acts of abuse and more subtle forms of marginalization. This is unacceptable.”
They continued: “It’s important to weed out harassment and discrimination but it’s likewise essential to take action to widen the pipeline of women and minorities entering the field and to help those already in the field to advance professionally.”
The group plans on expanding on steps taken last year to combat harassment, including adopting a code of conduct and creating a discussion forum. The group will also approve a formal vetting process to ensure that executive committee members and others, such as journal editors, comply with the code of conduct.
At a meeting in January, Yellen said that the group needed to “think about” how professional sanctions could be placed on academics with a known history of past misconduct.
Maybe once they are done, they should publicly shame them by forcing them to admit that gold is money.
Is Bitcoin doomed to failure? It is not hard to find commentary on the internet indicating that Bitcoin is bound to fail. The authors invariably point to aspects of Bitcoin’s implementation today and argue that the current state is not consistent with success.
I take these comments about Bitcoin as comments about private cryptocurrencies more generally and will treat them that way.
It is hard to foresee Bitcoin’s future.
Ken Olsen said that “there is no reason for any individual to have a computer in his home” in 1977. It is easy to square that statement with computers of the day. Few would have found it worthwhile to have a computer in a dedicated computer room at a controlled temperature of about 65 degrees with backup power to avoid catastrophic damage. The statement is ridiculous in light of the computers in many people’s pockets today. A Samsung S8 is over 20 times more powerful than supercomputers of that day.
Many aspects of Bitcoin and cryptocurrencies more generally are likely to change in the coming decades. There is no reason to think that innovation in cryptocurrencies stopped with the creation of Bitcoin. There are issues. But it is not a large stretch of imagination to imagine some or all of them will be resolved in various ways.
It is fair to say that cryptocurrencies are not obviously likely to replace, for example, the dollar used in transactions in the United States given reasonably good monetary policy, a point made byWill Luther, for example. There is no obvious gain to people in the United States from changing to a different currency to buy groceries. A currency has to have problems such as hyperinflation in Venezuela for cryptocurrencies to become viable for use on a regular basis. Cryptocurrencies also are a good way to circumvent capital controls.
That said, it also is true that the current incarnation of Bitcoin has issues if it is to become a currency in common use anywhere. “Scalability” is a term that summarizes many of these issues. The number of separate transactions on Bitcoin’s blockchain is quite limited. The maximum number of Bitcoin transactions is currently capped at about 400,000 per day. This is trivial compared to the number of transactions that Visa processes, about 150,000,000 per day.
The amount of electricity used in Bitcoin’s proof-of-work mining algorithm is as much as some small countries use. A further substantial increase in electricity use would be a large increase in the demand for electricity worldwide.
Both of these things are problems remaining to be solved.
While increasing the size of blocks in the blockchain would be one way to solve the problem of the number of transactions, that would create a massive blockchain copied by millions of users, which would require a huge amount of storage space given current technology. Maybe digital storage space will continue to dramatically fall in price. Maybe transactions will occur on sidechains off the main blockchain. Maybe transactions will occur in institutions similar to today’s cryptocurrency exchanges. These exchanges already have far more trades than cryptocurrency blockchains. Maybe something else will arise. We don’t know today what solutions entrepreneurs will come up with. If we did, they would exist now.
Electricity use requires a different solution. Mining — the proof of work used in Bitcoin — is a way to reach consensus on the state of the blockchain. New mechanisms for resolving issues such as this arise frequently. For example, new auctions have been designed to divvy up the spectrum for use by smartphones. One possible replacement known today for proof of work is proof of stake. Proof of stake is a method of reaching consensus based on the ownership of the asset, not the use of resources to win a contest. Innovations are quite likely.
Two recent articles claim that Bitcoin is doomed to fail because of other issues related to mining. Both are wrong.
One article by Atulya Sarin nicely lays out an argument for a death spiral, an argument that also can be found elsewhere. A lower price for Bitcoin lowers the return from mining, so miners suffer losses and stop mining. Eventually it does not pay to mine. The problem with this simple statement of the argument is that it is based on the total expenditure by miners including mining equipment. Some purchases of mining equipment that were profitable when the price of Bitcoin was above $10,000 would not be made today. But the payments for the equipment are sunk costs that cannot be avoided by no longer mining. If using the mining equipment generates revenue greater than the cost of running the equipment, it will be kept in use. This revenue may not cover the cost of the purchase, but that cannot be helped.
A better version of the argument made by Sarin is that changes in the difficulty of mining are made roughly every two weeks and are determined so that the previous blocks would have been found at the rate of one every 10 minutes. If the price of Bitcoin falls far enough, it may pay to withdraw from mining and wait for the difficulty to decrease. All miners might withdraw because the electricity cost of mining is greater than the value of the new bitcoins awarded. This argument ignores the transactions fees paid by holders of bitcoins though, which would increase to compensate the smaller number of miners. Production of bitcoins might decrease, and validation of transactions might take longer in the short term, but mining will continue as long as there is a demand for transactions, in part because transactions fees can increase.
Another article, by Kevin Dowd, argues that there is a fundamental flaw in mining, namely that it is a natural monopoly. This recent article is a short summary of an argument made earlier, which I addressed in a blog post at the time. In short, bitcoin mining is a game that can be won or lost when there is competition. There is a risk of losing the race to create a new block. If there were only one miner, the game could only be won and there would be no risk. Therefore, a single miner or a big mining firm has an advantage because the larger the miner, the less risk of losing.
There is a disadvantage, though, to having a mining monopoly. A monopoly in a cryptocurrency would destroy or radically change the cryptocurrency because a major selling point of cryptocurrencies is the impersonal, somewhat anonymous aspect of transactions. Someone buying or selling a cryptocurrency need not trust anyone else involved in the transaction, including miners. If a monopolist was doing the mining, it would be very important to trust them. Requiring such trust would radically alter the basis of cryptocurrencies and possibly kill it. Everyone other than a possible monopolist has an incentive to avoid a mining monopoly even if the possible monopolist doesn’t see it that way. And miners do prefer not to obtain a monopoly, at least sometimes. Bitcoin mining firms have reduced their capacity when they have gotten too close to having a dominant share in mining. Even absent voluntarily limiting mining capacity and mining, there are other ways to limit miners from having too big a share of new blocks.
Recent developments in mining of Ethereum Classic illustrate how a miner’s share of the market can be limited. A version of the natural-monopoly problem short of a complete monopoly is called a “51 percent attack”: a miner has more computing power than the rest of the network and can alter the consensus achieved to create gains for himself at others’ expense. The cryptocurrency Ethereum Classic has had an actual 51 percent attack based on concentrated computing power in the hands of one miner. The short-term solution has been to increase the time to finalize transactions. One possible long-term solution is to alter the rules for accepting blocks. In short, innovations will occur to adapt to the problem and impose costs on miners who have too large a share of mining.
There is no reason to think that cryptocurrencies will disappear. They are useful now for some things. While hardly perfect, Bitcoin and similar cryptocurrencies in existence now have no fundamental flaw. Moreover, cryptocurrencies will change in unexpected ways to become increasingly useful to people.
New Jersey’s attorney general on Friday sued a California “ghost gun” company that ships 80% completed assault rifles and pistols to buyers who don’t need a background check by simply completing the remaining 20% of the gun at home, reported Bloomberg.
The civil lawsuit against U.S. Patriot Armory claims the company sold an AR-15 80% Pistol Kit to a special agent after receiving a cease-and-desist letter to halt sales in New Jersey.
New Jersey Attorney General Gurbir Grewal, said the complaint is the first in the country by a state against a ghost gun manufacture.
“New Jersey law is clear, ghost guns are illegal in our state,” Grewal said.
“Since U.S. Patriot Armory decided to ignore our laws and advertise and sell ghost guns to New Jersey residents, I’m taking action. We’re filing the first state civil enforcement action against a ghost gun company to demand penalties and to get an order blocking New Jersey sales. This is my message to the entire ghost gun industry: If you continue selling dangerous and unlawful weapons into our state, we will come after you in court, just like we did against U.S. Patriot Armory today.“
These weapons are known as ghost guns because there are no serial numbers engraved on the frame. Buyers of the incomplete weapon legally bypass background checks and registration regulations.
The lower receiver, which by law is legally considered a gun, can be completed from an 80% receiver without filing government paperwork or identity checks. The remaining 20% of the work can be completed using a standard drill press.
YouTube video describes the process of ghost gun building
California-based U.S. Patriot Armory did not respond to Bloomberg’s requests for comment.
The complaint also seeks a court order instructing U.S. Patriot Armory to include a disclaimer on its website warning that ghost guns are illegal in the state. Residents face five years in prison for purchasing ghost guns, and ten years if it’s an assault rifle, Grewal said.
State governments are frightened that criminals and or even terrorist are acquiring untraceable AR-15 ghost guns. In the next several years, states are expected to band together to outlaw these weapons.
It would be easy to write a story about Venezuela’s energy problems and, in it, focus on the corruption and mismanagement that have taken place. This would make it look like Venezuela’s problems were different from everyone else’s. Taking this approach, it would be easy to argue that the problems wouldn’t have happened, if better leaders had been elected and if those leaders had chosen better policies.
I think that there is far more behind Venezuela’s financial and energy problems than corruption and mismanagement.
As I see the story, Venezuela realized that it had huge oil resources relative to its population, back as early as the 1920s. While these oil resources are substantial, the country misestimated how high a standard of living that these resources could support. To try to work around the issue of setting development goals too high, the country chose the path of distributing the benefits of oil exports in an almost socialistic manner. This socialistic approach, plus increased debt, hid the problem of a standard of living that could not really be supported for many years. Recent problems in Venezuela show that these approaches cannot be permanent solutions. In fact, it seems likely that Venezuela will be one of the first oil-exporting nations to collapse.
How the Subsidy from High-Priced Exported Oil Works
Oil is a strange resource. The cost of oil production tends to be quite low, especially for oil exporters. The selling price is based on a world oil price that changes from day to day, depending on what some would call “demand.” The difference between the selling price and the cost of extraction can make oil exporters rich. In a sense, this difference might be considered an “energy surplus” that is being distributed to the economies of oil exporters. The greater the energy surplus being distributed, the greater the quantity of goods and services (made with energy products) that can be purchased from outside the country with the hard currency that is made available through the sale of oil.
In fact, the existence of such a profitable resource tends to crowd out development of other, less profitable, enterprises. Thus, Venezuela has tended to be a country whose economy revolves around oil. There is a small amount of agriculture and quite a bit of services, but for the most part, the goods used by the economy must be purchased from outside the country. Furthermore, nearly all of the revenue that is available to purchase these goods comes from the sale of oil exports. Thus, the economy tends to follow the fortune of oil sales.
Figure 1 shows a rough estimate of the benefit that Venezuela’s oil exports have provided in inflation-adjusted US dollars. Based on this approach, the per capita benefit from oil exports seems to have peaked very early, in about 1981.
Figure 1. Venezuela per capita value of oil exports, calculated by multiplying Venezuela’s year-by-year quantity of oil exports by the price in 2017$ of oil, and dividing by estimated population. Both price and quantity determined using BP 2018 Statistical Review of World Energy. Population based on 2017 United Nations middle estimates.
The people of Venezuela did not realize that the amount of benefit that oil exports would provide would start falling very early. Instead, leaders set their sights on living standards that would be affordable if the level of subsidy that the economy could obtain from oil exports were to remain as high as during the 1973 to 1981 period.
Figure 2 shows how much energy the population, on average, consumed over the 1965 to 2017 period. This figure shows that energy consumption per capita rose dramatically between 1973 and 1981. In this way, citizens were able to benefit from the huge rise in per capita oil export revenue, shown in Figure 1.
Figure 2. Energy consumption per capita for Venezuela, based on BP 2018 Statistical Review of World Energy data.
This higher level of energy consumption meant that the economy readjusted in a way that added more goods and services using energy. For example, the economy added paved roads, airports, schools, electricity generating capacity and health care. People came to expect this higher standard of living going forward, even if the level of subsidy that oil exports had been adding was rapidly disappearing.
The way the amounts in Figure 1 “work” is that they depend both on the quantity of oil exported and the market price for that oil. If Venezuela’s oil exports are not rising quickly enough, or if the price of oil is not high enough, the level of oil subsidy fails to rise enough to support the economy. Also, rising population becomes an issue because as population rises, more homes, cars, electricity, streets, and other goods (requiring energy consumption) are needed. Because Venezuela must import practically everything other than oil, it must either (a) export an increasing quantity of oil per year, or (b) get an increasingly high price for the oil it exports, if it wishes to support its rising population at its chosen standard of living.
It became evident very early that Venezuela had set its sights on a living standard that was far higher than it could really support. In the period since 1965, Venezuela’s first debt crisis took place in 1982, as the subsidy suddenly started falling. Later debt crises occurred in 1990, 1995, 1996, 1997, 1998, 2004, and 2017. Clearly, as soon as the per capita subsidy started falling in 1982 (see Figure 1), Venezuela’s economy became very troubled. It could not really support its chosen standard of living.
How could Venezuela hide the problem of an unsupportable living standard for over 35 years?
I see three major ways the insupportable living standard could be hidden:
(a) Pushing the problem off into the future using added debt
Nearly everyone is willing to believe that oil prices will rise as high as is needed to extract oil resources that seem to be available with current technology. Would-be lenders are also willing to believe that oil resources can be extracted as rapidly as needed to support the economy. Given this combination of beliefs, Venezuela has had little difficulty adding more debt, even in periods not long after it has been forced to restructure previous debt.
Recently, the biggest lender to Venezuela has been China. With this arrangement, Venezuela has been able to obtain the economic benefit of part of its oil resources, before the oil has actually been extracted. Unfortunately, this arrangement makes Venezuela more quickly susceptible to the adverse impact of a downturn in oil prices. To make matters worse, the debt to China appears to include a provision that creates a lower repayment level (in oil) if prices rise, but creates a higher repayment level (in oil) if oil prices fall. This provision no doubt looked favorable to Venezuela, back in the time period when it was believed that oil prices could only rise.
As far as I know, Venezuela is the only oil exporting country that has used debt as extensively as it has. Some oil exporters, such as Saudi Arabia, have taken the opposite approach, setting aside reserve funds to use in the event that oil prices fall. Needless to say, Venezuela’s use of debt has tended to make its economy very vulnerable to restructuring or defaults if oil prices fall.
(b) Pursuing economic simplification
A complex economy is one that is set up, as much as possible, to keep up with growing technology. A significant share of expenditures go both toward making new capital goods and maintaining existing capital goods. There are considerable differences in pay levels, to make certain that those who are providing technical expertise are adequately compensated for their efforts. Business leaders also are adequately compensated for their contributions.
A much simpler economy, which is what most of the Venezuelan leaders have been aiming for, is an economy in which everyone gets a basic level of housing, transportation, and healthcare, but virtually no one gets very much. There is also not much investment in new technology and new capital goods because nearly all of the hard currency being obtained by selling oil exports is being used to purchased imported goods and services to support the basic level of goods and services (such as roads, electricity, education, and food) being provided to the many citizens of the economy. Since the external value of oil exports sets an upper limit on the quantity of goods and services that Venezuela can import, this leaves virtually no capacity to purchase imported goods and services needed to support new capital investment and research.
In Venezuela’s economy, the cost of both oil and electricity have been kept very low–below the cost of production. This helps keep citizens happy, but it also cuts off funds for new investment in these areas. This, too, is part of the simple economy approach.
One disadvantage of a simple economy is that the low wages for engineers and other professionals encourages these professionals to move to other countries, where compensation is more adequate. Another disadvantage of a simple economy is that it encourages bribery, because graft is a way of adjusting the system so that those who “can make things happen” are adequately compensated for their efforts. The simple economy approach also tends to discourage research and investment in new areas, such as natural gas production and improved methods of heavy oil extraction.
A simple economy can be kept operating for a while, but it quickly reaches limits in many ways:
The limited skill level of residents who have not emigrated for higher wages elsewhere makes the completion of complex projects, such as new electricity generation facilities, difficult.
The inadequate level of oil export revenue puts a limit on the amount of spare parts and other goods needed to maintain the infrastructure, such as electricity transmission.
As existing oil wells deplete, little funding (in hard currency needed for imports) is available to make investments in new wells for extraction.
Research on new techniques for oil extraction is also inhibited.
(c) Neglect of current systems becomes an increasing issue, as the lack of hard currency revenue from oil exports becomes a bigger issue.
Venezuela can, in theory, buy what it needs from abroad, but there is a limit to the total amount of goods and services that can be imported, based on the amount of hard currency funds it obtains from selling crude oil. If the price of oil falls, then Venezuela must, in some way, cut back on goods and services that it had previously supplied. One of the least obvious way of doing this is by cutting back on maintenance and repairs.
The recent long electricity outage in Venezuela seems to be at least partially related to neglect of usual maintenance activities. It seems that Venezuela’s state-owned electrical company failed to keep the brush cleared under electric transmission lines leading away from the very major Guri Dam. It now appears that one of the causes of Venezuela’s recent long electricity outage was damage to transmission lines caused by a brush fire within the Guri complex. This could perhaps have been prevented by better maintenance.
Figure 2 shows that energy consumption per capita has been falling, especially since 2011. This would suggest that standards of living have been falling. Needless to say, if Venezuela’s oil exports drop further, a further reduction in standard of living can be expected.
Why Is America Issuing Sanctions Against Venezuela’s Oil Company PDVSA?
On January 28, 2019, the United States imposed sanctions against Venezuela’s state oil company, PDVSA. The reasons given for these sanctions are the following:
To hold accountable those responsible for Venezuela’s tragic decline in oil supply
To restore democracy
To help prevent further diverting of Venezuela’s assets by Maduro, and thereby preserve those assets for the people of Venezuela
These reasons sound good, but I expect that the primary real reason for the sanctions was to try to take Venezuela’s oil production off line and, through this action, force oil prices higher.
World oil prices have been far too low for oil producers since at least 2014.
Figure 3. Historical inflation-adjusted oil prices, based on inflation adjusted Brent-equivalent oil prices shown in BP 2018 Statistical Review of World Energy.
Many people, thinking about the oil price situation from the consumers’ point of view, are completely unaware of the problem that low oil prices can cause for producers. Oil producers may not go out of business immediately because of low oil prices, but eventually the low prices will cause a cutback in investment, and thus production. Countries that have sold some of their oil production in advance, such as Venezuela, are especially vulnerable.
Figure 4. Venezuela’s energy production by type, based on data of BP 2018 Statistical Review of World Energy.
Figure 4 shows that oil production for Venezuela has been dropping for a very long time. Its highest year of production was 1970, the same early high year as for United States’s oil extraction. Natural gas is mostly “associated” gas, which is made available through oil production. Hydroelectric is small in comparison to oil and gas. Hydroelectric production has been generally falling since 2008.
There is a widespread belief among oil executives and politicians that reducing oil production will force oil prices up. I expect to see, at most, a brief spike in oil prices. The major issue is that the world economy is a networked system. Prices for oil and for electricity cannot rise higher than consumers, in the aggregate, can afford. If there is too much wage disparity around the world, the low wages of many workers will tend to hold oil prices down, because these workers cannot afford goods such as smartphones and automobiles made with oil and other energy products. These lower oil prices reflect the fact that the way the economy has been changing in ways that leave less surplus energy to distribute to oil exporters to operate their economies.
The way the networked economy works is determined by the laws of physics, whether we like it or not. As far as I can see, the end of oil extraction comes because oil prices cannot be raised high enough to make extraction profitable. Once oil extraction becomes unprofitable, oil exporting nations will start collapsing. Venezuela is the “canary in the coal mine” in this collapse process, because of the extensive use it has made of debt.
What If Oil Prices Can Be Forced Upward?
If somehow oil prices could be forced up by reducing Venezuela’s exports to practically zero, this would have a double benefit:
More oil from around the world, including the United States, could be profitably extracted, because oil resources that are more expensive to produce would suddenly become profitable.
Venezuela’s oil could be more profitably extracted.
If prices actually rise, and if the United States remains in control of the situation, the US could theoretically expand Venezuela’s oil production. Venezuela has the largest oil reserves of any country in the world. Its expected cost of production is relatively low, if the exports of oil are not expected to support essentially the whole economy. The cost of pulling the oil out of the ground in Venezuela seems to be about $28 per barrel, if we believe a 2016 estimate by Rystad Energy.
Figure 5. Cost of producing a barrel of oil and gas in 2016. WSJ figure based on Rystead Energy analysis.
The cost of supporting the entire economy with the revenue from oil exports is far higher. Figure 6 shows that back in 2013-2014, the cost of oil, including the subsidies needed to maintain the operation of the rest of the economy, amounted to about $110 per barrel. I would expect that with all of Venezuela’s debt, the real cost might be even higher than this.
If the US doesn’t plan to support all of Venezuela’s population with the export revenues from oil extraction, it can theoretically extract the oil more economically than the $110 per barrel price that is needed to support the whole economy. Thus, it could get along with a price closer to $28 per barrel.
Furthermore, the investment capabilities and technical expertise of the United States could, at least in theory, ramp up Venezuela’s oil production, if this is desired at some future date. Similarly, “non-associated” natural gas production could be ramped up, if desired, because this seems to be available, but has been neglected.
I expect that all of this development would be more difficult and expensive than a simple comparison such as this seems to suggest. The ultimate problem is that a whole economy needs to be in place to make the extraction possible. Even if a cursory examination suggests that substantial savings are possible, the cost associated with maintaining necessary support services would make the total cost of energy extraction much higher.
Venezuela seems to be the canary in the coal mine with respect to where oil exporters are headed. Other countries will want to push them out of oil production, so as to try to raise prices for themselves. Debt defaults and lack of availability of debt may also become issues.
One item of interest is the fact that in Venezuela, lack of oil revenues can adversely affect electricity supply. Thus, we should not be surprised if electricity supply fails at about the same time that oil production falls. Even electricity supply provided by hydroelectric plants seems to be at risk.
Another item of interest is how Venezuela’s attempt at even distribution of goods and services, using a somewhat socialistic approach is working out. This approach (which is now being advocated by some political candidates) seems to have some short-term benefits, because it tends to keep the population happy–almost everyone seems to have a minimum standard of living. But, over the long term, this approach leads to the loss of the ability to maintain today’s high-tech economy. This approach doesn’t prevent collapse either, because a lack of investment and expertise eventually causes important parts of the system to stop operating.
It was back in December when JPM’s quant Marko Kolanovic, who was especially bullish headed into the close of what proved to be the worst year for capital markets since the financial crisis, realized that his prediction would not pan out, and bizarrely blamed “fake media” and “specialized websites that mass produce a mix of real and fake news [and] often these outlets will present somewhat credible but distorted coverage of sell-side financial research, mixed with geopolitical news, while tolerating hate speech in their website commentary section” for somehow interfering with capital markets and preventing his optimistic view from being realized (one hopes the implication was not that said ‘specialized websites’ have more influence on markets than, say, JPMorgan).
Then, in January, something awkward happened: none other than JPMorgan itself appeared to be in the “fake news” business because the firm is explicitly warned that – according to various markets – just two months after we reported that “JPMorgan Sees 60% Odds Of A Recession In 2 Years“, the largest US bank now writes that “US equity, bond and commodity markets appear to be pricing in on average close to 60% chance of a US recession over the coming year.”
Since then recession odds have only risen, and soared in recent days following the inversion of the 3M-10Y curve, with the Fed Funds market now pricing in 69% chance of a rate cut by the Jan 2020 FOMC meeting, indicating that the bond market is now fully bracing for a recession.
But just one day before Friday’s historic yield curve inversion, the first since 2007, and one which has accurately predicted each of the six previous recessions, it was JPMorgan that once again made headlines when the same head quant published a report (arguably in response to a bearish note from Nomura’s Charlie McElligott) listing no less than six reasons why it is time to buy stocks among them:
The dovish Fed will lead to further market upside
The March Quarter-End Rebalance is nothing to be afraid of
Ignore the buyback blackout period
P/Es are not too high
Brexit risks are overrated
A US-China Trade deal will send stocks surging
Awkwardly, just one day later the S&P suffered its second biggest drop of the year, closing precisely at 2,800 a level it has now failed to break decisively above on five consecutive attempts.
But what is even more awkward for Kolanovic is that unlike the “fake news” media who correctly mocked his bullishness in late 2018, it was once again his very own firm, or rather one of his fellow JPMorgan strategists, that over the weekend published a report according to which a “bad omen for risky markets is resurfacing” (as in, don’t buy stocks), adding that “the window of opportunity for risky assets we highlighted previously might have temporarily closed.”
And, just like back in mid-December when one JPM analyst was calling for a sharp rally into year end while another warned of a growing threat of “disorderly transfer of risk”, this time too the purveyor of “fake news” (according to Kolanovic’ definition), is JPMorgan’s Nick Panigirtzoglou, author of the weekly Flows and Liquidity report, who late on Friday reminded JPM clients that last year he – correctly – argued that the inversion at the front end of the US yield curve, since it first emerged last April between the 2- and 3-year forward points of the 1m OIS rate, had been an important signal highlighting downside risk for equity and risky markets more broadly (to be sure, the view was so non-consensus it clashed not only with Kolanovic’s unbridled optimism, but also with the JPMorgan house view, which called for the S&P to hit 3,000 on Dec. 31, off by just about 500 points).
JPM’s cognitive “fake news” dissonance aside, Panigirtzoglou picks up where he first left off last April, and notes that the 1m US OIS rate 2y-1y forward spread “had been worsening since last April not only by turning progressively more negative, but also by shifting forward between the 1- and 2-year forward points since mid-November”, a worsening which continued up until the end of last year. With the Fed pivot starting in January, the 2- to 1-year forward spread of the 1m OIS rate had stabilized between -10bp and -20bp.
There was a silver lining: the Fed pivot and the resulted stabilization of the inversion at the front end of the US curve, created a window of opportunity for equity and risky markets during the current quarter.
However, in the aftermath of this week’s FOMC meeting when Powell shocked markets by doubling-down on an especially dovish policy for the near-term future, this 2- to 1-year forward spread declined further into negative territory.
This, contrary to what Kolanovic said just 4 days ago, to the “other” JPM strategist “suggests that this bad omen for risky markets is resurfacing.“
It also explains why instead of a powerful burst higher in risk assets, stocks plunged on Friday, just one day after the Fed’s latest dovish capitulation.
As Panigirtzoglou explains, “while it has taken place against a backdrop of weakness in economic data, such as the disappointments in not only the US but also the Euro area manufacturing PMIs on Friday, it also appears that the hurdle to reverse this inversion has been raised after the FOMC meeting.” In other words, as the respected JPM analyst writes, “an even bigger dovish shift in Fed policy, or evidence of a sustained recovery in economic data, could be needed going forward for the yield curve inversion to improve and for markets to stop transitioning again towards pricing in a higher risk of a Fed policy mistake or end-of-cycle dynamics.”
Incidentally, the best confirmation that the Fed’s decision was seen by the market as a policy error was observed in the 5Y-5Y forward breakevens, which cratered on Friday by the most since 2017.
Why is this a huge tell? Because as BMO’s rate strategist Jon Hill explained, “a classic dovish fed should push real yields lower and breakevens wider (more accommodative Fed = more economic activity and thus more inflationary pressure); we saw exactly that play out after the January FOMC as well as in the immediate aftermath to Wednesday’s meeting.However, [on Friday] we’re seeing both real yields and breakevens fall which is better described as a negative growth shock.” The best description, of course, is Policy error.”
As Hill concluded, “It’s been a key question as to whether the FOMC’s dovish pivot could avert a global synchronized slowdown” and according to the market today, the answer is now a resounding no.
So going back to Panigirtzoglou, the JPM “bad cop” strategist once again defies the always optimistic “good cop” Kolanovic, and warns that “the lesson from previous cycles is that equity and risky markets are unlikely to see a sustained recovery with the inversion at the front end of the US yield curve worsening.”
And then, just in case his optimistic co-workers miss the punchline, the Greek flows expert explains that “the worsening US yield curve inversion highlights, in our opinion, a risk that the window of opportunity for risky assets we highlighted previously in F&L might have temporarily closed.” This also presents a risk for a technical and positional puke, now that marginal buyers are once again net long:
As we noted last week, equity underweights have been largely covered and institutional investors are overall either at neutral or modestly above neutral. We also argued last week that the lack of equity buying by retail investors represents a vulnerability for equity markets in the near term, as it leaves equity markets at the mercy of institutional investors who are more sensitive to yield curve signals than retail investors.
Finally, to dispel any confusion about what his observation really means for risk assets, Panigirtzoglou explains that “the above represents what we see as a reemerging downside risk to the core view outlined in today’s J.P. Morgan [House] View” report, which – predictably – expects only continued upside in stocks.
And now we wait to see if Marko Kolanovic will stop scapegoating and bashing “specialized websites that mass produce a mix of real and fake news” as justification for his being repeatedly wrong in late 2018, and instead to do the right thing and explain to his readers why his very own colleague has a legitimate and credible reason to tell the same clients to sell, and why instead of delivering “fake news”, he is wrong.
Large, high-end homes across the Sunbelt are sitting on the market, enduring deep price cuts to sell.
That is a far different picture than 15 years ago, when retirees were rushing to build elaborate, five or six-bedroom houses in warm climates, fueled in part by the easy credit of the real estate boom. Many baby boomers poured millions into these spacious homes, planning to live out their golden years in houses with all the bells and whistles.
Now, many boomers are discovering that these large, high-maintenance houses no longer fit their needs as they grow older, but younger people aren’t buying them.
Tastes—and access to credit—have shifted dramatically since the early 2000s. These days, buyers of all ages eschew the large, ornate houses built in those years in favor of smaller, more-modern looking alternatives, and prefer walkable areas to living miles from retail.
The problem is especially acute in areas with large clusters of retirees. In North Carolina’s Buncombe County, which draws retirees with its mild climate and Blue Ridge Mountain scenery, there are 34 homes priced over $2 million on the market, but only 16 sold in that price range in the past year, said Marilyn Wright, an agent at Premier Sotheby’s International Realty in Asheville.
The area around Scottsdale, Ariz., also popular with wealthy retirees, had 349 homes on the market at or above $3 million as of February 1—an all-time high, according to a Walt Danley Realty report. Homes built before 2012 are selling at steep discounts—sometimes almost 50%, and many owners end up selling for less than they paid to build their homes, said Walt Danley’s Dub Dellis.
Kiawah Island, a South Carolina beach community, currently has around 225 houses for sale, which amounts to a three- or four-year supply. Of those, the larger and more expensive homes are the hardest to sell, especially if they haven’t been renovated recently, according to local real-estate agent Pam Harrington.
The problem is expected to worsen in the 2020s, as more baby boomers across the country advance into their 70s and 80s, the age group where people typically exit homeownership due to poor health or death, said Dowell Myers, co-author of a 2018 Fannie Mae report, “The Coming Exodus of Older Homeowners.” Boomers currently own 32 million homes and account for two out of five homeowners in the country.
Not Just the South
It’s not just big houses across the Sunbelt. It’s big houses everywhere. If anything, I suspect it’s worse in the north. There is an exodus of people in high tax states like Illinois who want the hell out.
Already big homes were hard to sell. Now these progressive states are raising taxes.
Millennials trapped in debt and cannot afford them
Millennials wouldn’t buy them anyway because tastes have changed.
Taxes are driving people away from states like Illinois
With trade-related news in a rare lull, fears about an imminent global recession appeared to be at the forefront of investors’ minds last week, as the Fed took a surprisingly dovish turn, which was accompanied by another apprehensive cut to its GDP forecasts, and a spate of weak industrial production data out of Europe (Where the Continent’s largest economy has likely already slid into recession) stoked fears that what has been one of the longest expansions in modern history might reach its disastrous conclusion before the end of the year.
Amid the vertiginous twists in US equities – amid a spate of single-stock narratives (Boeing’s continued troubles, the decline in Nike’s North American sales, bank stocks being hammered by the yield curve inversion) – President Trump’s comments about a possible tariffs compromise on Friday didn’t raise too many eyebrows.
But what he said, though the White House once again declined to elaborate, is still important. Because it once again inadvertently illustrated just how far apart Washington and Beijing are. Despite the optimistic rhetoric, it appears that a final deal remains bewilderingly remote.
And as Robert Lighthizer and Steve Mnuchin prepare to return to Beijing this week to continue talks with Liu He, another obstacle in the increasingly fraught negotiations appears to have emerged.
By all accounts, Beijing hasn’t dropped its demands that the US lift most – if not all – of its trade-war tariffs on Chinese imports – immediately as part of the final deal. And while issues ranging from enforcement to currency manipulation to Chinese structural reforms have yet to be resolved, when it comes to the latter of these, the Financial Times on Sunday offered a little more clarity about a particularly important issue: digital trade.
As Amazon searches for still more growth markets, and Apple pivots to being a “services”-focused company, America’s tech giants are insisting that China lower its barriers to competition for American cloud computing providers. Per the FT’s sources, the issue is expected to be one of the main topics of discussion during this week’s meetings.
According to three people briefed on the talks, China has yet to offer meaningful concessions on US requests that it end discrimination against foreign cloud computing providers, curb requirements for companies to store data locally, and loosen limits on the transfer of data overseas.
The impasse over digital trade is among the issues expected to be on the table when Robert Lighthizer, the US trade representative, and Steven Mnuchin, the Treasury secretary, travel to Beijing on March 28 for meetings with Liu He, China’s vice-premier and leading economic official. Mr Liu is expected to return to Washington the following week, and the two sessions combined could be pivotal for the fate of the talks.
With North Korea already acting up, it’s worth considering that Beijing might be pulling strings to exert more pressure on the US, now that the trade-deal impasse has persisted for months now. On a similar note, analysts and traders have long pondered how Washington’s war against Huawei might impact trade talks.
Now, thanks to the FT, we might finally have an answer: As one analyst pointed out, as long as Washington continues to discriminate against Huawei, Beijing will have no political wiggle room to compromise on opening its markets to US technology companies. Because how can Xi justify welcoming US technology firms to the mainland when Washington is doing everything in its power to keep Huawei out?
The tensions between the two countries over Huawei, the controversial Chinese telecommunications network company that has been attacked by the Trump administration as a security threat, could be problematic as well. “It doesn’t make sense for Beijing to give on this while we have this global campaign to block Huawei,” said Samm Sacks, a cyber security and China digital economy fellow at the New America Foundation. “Why on earth would China say: ‘Hey, let’s open up for more cloud services in China?,” she said.
However, she added the Chinese might be more open to compromise on data flows, given that some of China’s expanding global companies are looking for ways to transfer data abroad. On the US side, it is unclear whether the Trump administration will go out of its way to favour the agenda of big technology firms, given the political backlash in the US against them from both Republicans and some Democrats. However, in the renegotiation of Nafta with Canada and Mexico, Mr Lighthizer mostly secured what the US technology sector was looking for.
Silicon Valley remains a key component of corporate America, so failing to win it any gains could weaken the enthusiasm for any deal among some business leaders and politicians. “The US negotiators had better get as much as they can or the deal will be ripped apart,” said another business lobbyist following the negotiations.
The message isn’t particularly subtle: If Trump thought the Chinese would simply ignore his comment that Huawei (specifically, the criminal case against its CFO) could be used as a bargaining chip in the trade talks, he was sadly mistaken.
We imagine more will be revealed during the coming week.
Four time best-selling author Jim Rickards says the Fed “throwing in the towel” on rate hikes is signaling a big problem for the economy.
Rickards says, “The Fed was tightening to get ready for the next recession…”
“You need to cut interest rates somewhere between 4% and 5% to get out of a recession. How do you cut interest rates 4% if you are only at 2.25%? The answer is you can’t. You have to get to 4% before you can cut 4%, and that’s what the Fed was trying to do…
How do you raise rates in weakness to get ready for the next recession without causing the next recession that you are preparing to cure? That was the conundrum. I never thought they would get it right…
and, as of now, it looks like they didn’t get it right. Meaning, they tightened so much to get ready for the next recession they slowed the economy.”
Rickards says, “Bernanke painted them into a corner, and they can’t get out…”
“There is no escape from the room. By the way, one of the reasons gold is preforming so well, the Fed has proved that they can’t get out of this. They got into it, but they can’t get out of it because every time they try, they sink the stock market. They sink the housing market. They raise the specter of recession. They slow economic growth. They don’t want that. So, they sort of pause and maybe tiptoe back into it, but they really can’t get out of it.”
On gold, Rickards says, “People always say there is not enough gold to support commerce and trade and the money supply. I always remind them that is nonsense...”
“There’s always enough gold, it’s just a question of price. At the current level of around $1,300 per ounce, that’s too low… What price does (support commerce and trade)? So, if you take . . . supply and say back it by 40%, divide by 33,000 tons, that comes to $10,000 per ounce. Could it be higher? Sure…
…if you used a larger money supply, you would need a higher price. If you would use a larger percentage . . . that would be a higher price. If you do that math, you can get to $40,000 per ounce easily. I want to make this clear. These are actual calculations based on actual numbers that are publicly available for money supply. It’s not made up.
It’s not science fiction. It’s just a simple question. If you wanted to go to a gold standard today without causing deflation, given the amount of gold and given the amount of money, what would the price have to be? The answer on some very conservative calculations would be $10,000 per ounce. . . . The time to buy gold is when sentiment is low and people hate it. . . . So, the bull market is intact.
We are in the fourth year. Bull markets start off slow because of all the bad sentiment, but then they gather momentum. So, it’s still not too late to jump on this train, and my expectation is this will pick up…
The signal the gold market is getting right now is the Fed is throwing in the towel. . . . They made some headway, but it came at a high cost because they slowed the economy . . . and they can’t continue. . . . Now, they are going to be desperate for inflation, and that is very bullish for gold.”
Update 145pmET: President Trump has called for an investigation into the “illegal takedown that failed” – after Special Counsel Robert Mueller found that Trump and his campaign did not collude with Russia in the 2016 US election.
“It was just announced, there was no collusion with Russia. The most ridiculous thing i’ve ever heard. There was no collusion with Russia. There was no obstruction. None whatsoever. It was a complete and total exoneration,” Trump told reporters.
“It’s a shame that our country had to go through this. To be honest it’s a shame that your president had to go through this for – before I even got elected, it began. And it began illegally. And hopefully somebody is gonna look at the other side. This was an illegal takedown that failed, and hopefully somebody is going to be looking at the other side.“
President Trump called the investigation of him and his advisers “illegal.” That is not hyperbole. What the Obama FBI and DOJ pulled was worse than Watergate. AG Barr must now hold the dirty agents to account by impaneling a grand jury investigation of the investigators. #Spygate
Recall that Hillary Clinton’s campaign paid an opposition research firm, Fusion GPS – who paid a former UK spy, Christopher Steele, who compiled a bogus dossier using Kremlin sources, which was then used against Trump both at the federal level and in court of public opinion.
Also recall that Maltese professor (and self-admitted Clinton foundation member) Joseph Mifsud seeded Trump aide George Papadopoulos with the rumor that Russia had “dirt” on Hillary Clinton.
Papadopoulos would later drunkenly pass this information to Australian diplomat (and Clinton ally) Alexander Downer, whose report reached the FBI and launched operation crossfire hurricane.
The FBI would then employ at least one spy to “infiltrate” (spy on) the Trump campaign.
The only 2016 campaign that colluded with a foreign spy, Russian oligarchs, and Kremlin officials to interfere in the U.S. election was that of Hillary Clinton. https://t.co/Uj8HgnO5ih
After Special Counsel Mueller issued 2,800 subpoenas & 500 search warrants, the facts & truth are now clear: Trump & his campaign did not conspire or coordinate with Russia. So why did Comey, McCabe & Strzok launch the investigation in first place? Only 1 answer: TO SET TRUMP UP
Will a second special counsel be created to investigate “the other side” – now that the ‘plot’ has been exposed and Trump vindicated of collusion?
* * *
Update 130pmET: Less than hour after the release of the summary and the DoJ’s clearance of obstruction allegations, top Democrat, and chair of the House Judiciary committee, Jerry Nadler, has decided to call AG Barr for testimony…
“In light of the very concerning discrepancies and final decision making at the Justice Department following the Special Counsel report, where Mueller did not exonerate the President, we will be calling Attorney General Barr in to testify before the House Judiciary Committee…”
In light of the very concerning discrepancies and final decision making at the Justice Department following the Special Counsel report, where Mueller did not exonerate the President, we will be calling Attorney General Barr in to testify before @HouseJudiciary in the near future.
“It’s a complete exoneration of the president. It’s quite clear – no collusion -which kind of raises the question why did this all start in the first place? “
* * *
As we detailed earlier, lawmakers on Capitol Hill have received a four-page letter from Attorney General William Barr which concludes that “The Special Counsel’s investigation did not find that the Trump campaign or anyone associated with it conspired or coordinated with Russia in its efforts to influence the 2016 Presidential election.”
Of course, Rep. Jerry Nadler (D-NY) – who chairs the House Judiciary Committee (and has already fired up the post-Mueller “witch hunt”) notes that “while this report does not conclude that the President committed a crime, it also does not exonerate him.“
“The Special Counsel states that ‘while this report does not conclude that the President committed a crime, it also does not exonerate him.’”
Except – Barr sees no obstruction – writing in conjunction with Deputy Attorney General Rod Rosenstein that they “concluded that the evidence developed during the Special Counsel’s investigation is not sufficient to establish that the President committed an obstruction-of-justice offense.”
Mueller’s team of approximately 40 FBI agents issued over 2,800 subpoenas, executed “nearly 500 search warrants,” and “obtained over 230 orders for communication records. They also issued 13 requests to foreign governments for evidence and interviewed approximately 500 witnesses.
McCarthyism 2.0 ends with a whimper after:
-500 search warrants
-230 communication records
… found zero evidence of “collusion” and AG says the “report identifies no actions that in our judgement constitutes obstructive conduct.”
The summary of Mueller’s report released by Barr is a stunning rebuke of propaganda that the Democratic Party pushed for the past two years with their media friends at @CNN@nytimes@MSNBC & @washingtonpost.
While the full report could include damaging elements which don’t rise to the level of criminal charges, Trump is certainly projecting the “all clear,” tweeting on Sunday “Good Morning, Have A Great Day” – after hitting the links with musician Kid Rock on Saturday at Trump International Golf Club.
Both Democrats and Republicans have called for the full public release of the long-awaited report, which notably did not include any new indictments – sending Democrats into fits over the weekend as Republicans celebrated what appears to be a big win.
On Saturday, 18 state attorneys general joined together to urge the Justice Department to publicly release the final report.
“As the top law officers in states across the country, we strongly urge United States Attorney General Barr to immediately make public the findings of the Mueller investigation,” reads the statement. “The American people deserve to know the truth.”
17 AGs have joined our call to urge US Attorney General William Barr to release the Mueller report to the public.
It’s likely that Democrats want to see the entire report in order to pick up on any wrongdoing that may have occurred, yet did not rise to the level of a chargeable offense.
Reason for Republicans not to celebrate: Mueller report could include evidence that many voters would find damning but still conclude it was unlikely prosecutors could convince a jury of guilt beyond a reasonable doubt. Therefore, no further action.
While Mueller apparently did not find anything else that rose to the level of a prosecutable crime (or has handed off aspects of the investigation to federal prosecutors), journalist Paul Sperry notes that the Special Counsel investigation also failed to yield any indictments on the left.
Mueller found no fire to all the smoke collectively created by McCabe, Comey, Yates, Ohr, Page, Strzok, Brennan, Clapper, Schiff, Warner, Simpson, Steele, Jones, Winer, Shearer, Blumenthal, Sussman,Elias, Mook, Palmieri, Podesta & most of all, Hillary, who now must own her defeat
Even without knowing what’s in Mueller report, some on left are discounting it–Mueller was never main attraction, real action is Southern District of New York. But will they look at unprecedented SDNY action and ask, is this how things should be done? https://t.co/2txSIdcIPqpic.twitter.com/jI6n2rT27b
Venezuelan President Nicolas Maduro on Saturday said the country’s special forces have thwarted a plan to assassinate him, directed by the opposition’s leader Juan Guaido, reported Agence France-Presse.
“The North American imperialism wants to kill me. We have just exposed a plan to kill me, which was personally led by the devil’s puppet [Guaido],” Maduro told thousands of supporters in Caracas, noting that government prosecutors had made significant progress in investigating the “terrorist plot.”
Maduro claimed that Colombia was deeply involved in the assassination plot, and said that an unnamed Colombian paramilitary chief had been captured within the borders of the country “and is giving testimony.”
While AFP didn’t provide the Colombian paramilitary chief’s identity, we believe his name is Wilfrido Torres Góme, “one of the chiefs of Assassins entered x the far right from Colombia. Requested with code blue x Interpol x Homicide and killings,” Information Minister Jorge Rodriguez tweeted (Translated from Spanish by Microsoft).
Sobre denuncia anterior informamos que fue capturado jefe paramilitar de los más buscados de Colombia:Wilfrido Torres Gómez, alias Neco. Es uno de los jefes de sicarios ingresados x la ultraderecha desde Colombia. Solicitado con código azul x Interpol x homicidio y sicariato pic.twitter.com/ZK6V2FWn1q
The Maduro regime presented new evidence over the weekend of the alleged plot on state television, with Rodriguez stating that “hitmen” from El Salvador, Guatemala and Honduras had been recruited “using big sums of money” and were sent to Colombia ahead of “targeted assassination” missions.
Aquí las pruebas sustraídas del celular de Marrero donde queda evidenciada la acción Terrorista de la ultraderecha venezolana y sus amos del norte: https://t.co/kkYgls7f7S
Rodriguez said Guaido’s chief of staff, Roberto Marrero, was bankrolled by Washington and is one of the point men behind the alleged plot.
Marrero was arrested last week in his Caracas home, triggering an international outcry and demands from the Trump administration of an immient release. U.S. Vice President Mike Pence said the administration “will not tolerate” the continued detention of Marrero.
Hours after last week’s arrest, Maduro’s government showed several pictures of weapons it said special forces discovered in Marrero’s home, claiming that he was part of a “terrorist cell.”
Rodriguez played WhatsApp conversations between Marrero and Guaido in which they held various talks about funds blocked by US sanctions to finance mercenaries with the support of Colombian President Ivan Duque.
Maduro also repeated the accusations to a crowd of thousands in the capital on Saturday.
Rodriguez said funds to finance the terror plot were derived from Bank of America and Banesco Panama.
Guaido has asked the international community to continue sanctioning the Maduro regime.
The Trump administration is expected to increase sanctions on Venezuela this Thursday when sanctions in crude exports will increase.
Trump has warned Maduro not to arrest Guaido or his aids, or face the wrath of undefined consequences.
With Trump indicating “all options are on the table” — it seems that Washington is ready for a military intervention in the country, but for that to play out, terror cells allegedly funded by the US must first take out Maduro.