Wed 26 April, 2017
Tue 25 April, 2017
Our policy toward North Korea is not what most people think it is. We don't want the North Koreans to go away. In fact, we like them doing what they're doing; we just want less of it than they've been doing lately. If this sounds confusing, it's because this policy is unlike what the public has been led to assume. Thanks to something uncovered by WikiLeaks, the American public has a chance to be unconfused about what's really going on with respect to our policies in Korea.
This piece isn't intended to criticize that policy; it may be an excellent one. I just want to help us understand it better.
Our source for the U.S. government's actual Korean policy — going back decades really — is former Secretary of State Hillary Clinton. She resigned that position in February 2013, and on June 4, 2013 she gave a speech at Goldman Sachs with Lloyd Blankfein present (perhaps on stage with her) in which she discussed in what sounds like a very frank manner, among many other things, the U.S. policy toward the two Korea and the relationship of that policy to China.
That speech and two others were sent by Tony Carrk of the Clinton campaign to a number of others in the campaign, including John Podesta. WikiLeaks subsequently released that email as part of its release of other Podesta emails (source email with attachments here). In that speech, Clinton spoke confidentially and, I believe, honestly. What she said in that speech, I take her as meaning truthfully. There's certainly no reason for her to lie to her peers, and in some cases her betters, at Goldman Sachs. The entire speech reads like elites talking with elites in a space reserved just for them.
I'm not trying to impugn Clinton or WikiLeaks by writing this — that's not my intention at all. I just want to learn from what she has to say — from a position of knowledge — about the real U.S. policy toward North Korea. After all, if Goldman Sachs executives can be told this, it can't be that big a secret. We should be able to know it as well.
What Clinton's Speech Tells Us about U.S. Korea Policy
The WikiLeaks tweet is above. The entire speech, contained in the attachment to the email, is here. I've reprinted some of the relevant portions below, first quoting Ms. Clinton with some interspersed comments from me. Then, adding some thoughts about what this seems to imply about our approach to and relations with South Korea.
The Korea section of the Goldman Sachs speech starts with a discussion of China, and then Blankfein pivots to Korea. Blankfein's whole question that leads to the Clinton quote tweeted by WikiLeaks above (my emphasis throughout):
MR. BLANKFEIN: The Japanese -- I was more surprised that it wasn't like that when you think of -- all these different things. It's such a part of who they are, their response to Japan. If you bump into the Filipino fishing boats, then I think you really -- while we're in the neighborhood [i.e., discussing Asia], the Chinese is going to help us or help themselves -- what is helping themselves? North Korea? On the one hand they [the Chinese] wouldn't want -- they don't want to unify Korea, but they can't really like a nutty nuclear power on their border. What is their interests and what are they going to help us do?
Clinton's whole answer is reprinted in the WikiLeaks tweet attachment (click through to the tweet and expand the embedded image to read it all). The relevant portions, for my purposes, are printed below. From the rest of her remarks, the context of Blankfein's question and Clinton's answer is the threat posed by a North Korean ICBM, not unlike the situation our government faces today.
MS. CLINTON: Well, I think [Chinese] traditional policy has been close to what you've described. We don't want a unified Korean peninsula, because if there were one South Korea would be dominant for the obvious economic and political reasons.
We [also] don't want the North Koreans to cause more trouble than the system can absorb. So we've got a pretty good thing going with the previous North Korean leaders [Kim Il-sung and Kim Jung-il]. And then along comes the new young leader [Kim Jung-un], and he proceeds to insult the Chinese. He refuses to accept delegations coming from them. He engages in all kinds of both public and private rhetoric, which seems to suggest that he is preparing himself to stand against not only the South Koreans and the Japanese and the Americans, but also the Chinese.
Translation — three points:
- The U.S. prefers that Korea stay divided. If Korea were to unite, South Korea would be in charge, and we don't want South Korea to become any more powerful than it already is.
- We also don't want the trouble North Korea causes South Korea to extend beyond the region. We want it to stay within previously defined bounds.
- Our arrangement with the two previous North Korean leaders met both of those objectives. North Korea's new leader, Kim Jung-un, is threatening that arrangement.
It appears that China has the same interest in keeping this situation as-is that we do. That is, they want South Korea (and us) to have a Korean adversary, but they don't want the adversary acting out of acceptable bounds — coloring outside the lines laid down by the Chinese (and the U.S.), as it were. Clinton:
So the new [Chinese] leadership basically calls him [Kim Jung-un] on the carpet. And a high ranking North Korean military official has just finished a visit in Beijing and basically told [him, as a message from the Chinese]: Cut it out. Just stop it. Who do you think you are? And you are dependent on us [the Chinese], and you know it. And we expect you to demonstrate the respect that your father and your grandfather [Kim Jung-il, Kim Il-sung] showed toward us, and there will be a price to pay if you do not.
Now, that looks back to an important connection of what I said before. The biggest supporters of a provocative North Korea has been the PLA [the Chinese People's Liberation Army]. The deep connections between the military leadership in China and in North Korea has really been the mainstay of the relationship. So now all of a sudden new leadership with Xi and his team, and they're saying to the North Koreans -- and by extension to the PLA -- no. It is not acceptable. We don't need this [trouble] right now. We've got other things going on. So you're going to have to pull back from your provocative actions, start talking to South Koreans again about the free trade zones, the business zones on the border, and get back to regular order and do it quickly.
Now, we don't care if you occasionally shoot off a missile. That's good. That upsets the Americans and causes them heartburn, but you can't keep going down a path that is unpredictable. We don't like that. That is not acceptable to us.
So I think they're trying to reign Kim Jong in. I think they're trying to send a clear message to the North Korean military. They also have a very significant trade relationship with Seoul and they're trying to reassure Seoul that, you know, we're now on the case.
Clinton ends with a fourth point:
- From the U.S. standpoint, the current problem is now on the Chinese to fix.
So they want to keep North Korea within their orbit. They want to keep it predictable in their view. They have made some rather significant statements recently that they would very much like to see the North Koreans pull back from their nuclear program. Because I and everybody else -- and I know you had Leon Panetta here this morning. You know, we all have told the Chinese if they continue to develop this missile program and they get an ICBM that has the capacity to carry a small nuclear weapon on it, which is what they're aiming to do, we cannot abide that. Because they could not only do damage to our treaty allies, namely Japan and South Korea, but they could actually reach Hawaii and the west coast theoretically, and we're going to ring China with missile defense. We're going to put more of our fleet in the area.
So China, come on. You either control them or we're going to have to defend against them.
The four bullets above (three, and then one) give a very clear definition of longstanding U.S. policy toward the two Koreas. I think the only surprise in this, for us civilians, is that the U.S. doesn't want the Korean peninsula unified. So two questions: Why not? And, do the South Koreans know this? I'll offer brief answers below.
The "Great Game" In East Asia — Keeping the Korean "Tiger" in Check
South Korea is one of the great emerging nations in East Asia, one of the "Asian tigers," a manufacturing and economic powerhouse that's lately been turning into a technological and innovative powerhouse as well.
For example, one of just many, from Forbes:
Why South Korea Will Be The Next Global Hub For Tech Startups
American business has long led the way in high tech density or the proportion of businesses that engage in activities such as Internet software and services, hardware and semiconductors. The US is fertile ground for tech start-ups with access to capital and a culture that celebrates risk taking. Other countries have made their mark on the world stage, competing to be prominent tech and innovation hubs. Israel has been lauded as a start-up nation with several hundred companies getting funded by venture capital each year. A number of these companies are now being acquired by the likes of Apple, Facebook and Google. Finland and Sweden have attracted notice by bringing us Angry Birds and Spotify among others. But a new start-up powerhouse is on the horizon – South Korea. [...]
In other words, South Korea has leaped beyond being a country that keeps U.S. tech CEOs wealthy — it's now taking steps that threaten that wealth itself. And not just in electronics; the biological research field — think cloning — is an area the South Koreans are trying to take a lead in as well.
It's easy to understand Ms. Clinton's — and the business-captured American government's — interest in making sure that the U.S. CEO class isn't further threatened by a potential doubling of the capacity of the South Korean government and economy. Let them (the Koreans) manufacture to their heart's content, our policy seems to say; but to threaten our lead in billionaire-producing entrepreneurship ... that's a bridge too far.
Again, this is Clinton speaking, I'm absolutely certain, on behalf of U.S. government policy makers and the elites they serve: We don't want a unified Korean peninsula, because if there were one, an already-strong South Korea would be dominant for obvious economic reasons.
As to whether the South Koreans know that this is our policy, I'd have to say, very likely yes. After all, if Clinton is saying this to meetings of Goldman Sachs executives, it can't be that big a secret. It's just that the South Korea leadership knows better than the North Korean leader how to handle it.
[Update: It's been suggested in comments (initially here) that Clinton's "we" in her answer to Blankfein's question was a reference to China's policy, not our own. I'm doubtful that's true, but it's an interpretation worth considering. Even so, the U.S. and Chinese policies toward the two Koreas are certainly aligned, and, as Clinton says, "for the obvious economic and political reasons." (That argument was also expressed in comments here.) I therefore think the thrust of the piece below is valid under either interpretation of Clinton's use of "we." –GP]
Exactly one day ago, we reported that "China's first domestically built aircraft carrier will soon launch in Dalian, Liaoning Province for drills and trial voyages, putting to the test proprietary technology meant to further Beijing's expansion in the South and East China seas."
A dock at the Dalian shipyard was being filled with water Sunday the local press reported, in preparation for the launch. The Chinese-made vessel is expected to enter service around 2020, joining China's first and only aircraft carrier, a refurbished Ukrainian vessel known as the Liaoning.
Fast forward just 24 hours, when moments ago the People's Daily reported that China has officially launched its second aircraft carrier -- and its first domestically built, in Dalian on Wednesday morning
— People's Daily,China (@PDChina) April 26, 2017
The new carrier, the first domestically-built one, was transferred from dry dock into the water at a launch ceremony that started at about 9 a.m. in Dalian shipyard of the China Shipbuilding Industry, according to Xinhua.
It is China's second aircraft carrier, which comes after the Liaoning, a refitted former Soviet Union-made carrier that was put into commission in the Chinese People's Liberation Army Navy in 2012.
In a statement, China's Ministry of Defense's announced that China's second aircraft carrier launching ceremony was held at the China Shipbuilding Industry Corporation Dalian Shipyard this morning. Fan Changlong, member of the Political Bureau of the CPC Central Committee and vice chairman of the Central Military Commission, attended the ceremony and delivered a speech.
More, google translated:
The ceremony began at 9am with the majestic national anthem. In accordance with international practice, after cutting the ribbon, a "bottle throwing" ceremony took place. With a bottle of champagne broken ship bow, two sides of the jet ribbon, the surrounding ship with a whistle, the audience sounded warm applause. The aircraft carrier moved out of the dock and towed the dock under towing traction.
The second aircraft carrier by our own development, started in November 2013, in March 2015 to start the construction of the dock. At present, the aircraft carrier main hull to complete the construction, power, electricity and other major system equipment installed in place. Docking is one of the major nodes in the construction of aircraft carriers, marking China's independent design and construction of aircraft carriers to achieve significant results. The next step, the aircraft carrier will be planned for system equipment commissioning and outfitting construction, and a comprehensive mooring test.
Navy, China Shipbuilding Industry Group leadership Shen Jinlong, Miao Hua, Hu asked Ming, as well as military and other relevant departments of the leadership and scientific research personnel, cadres and workers, representatives of officers and soldiers to participate in the ceremony.
For those who may have missed our original post, here are the full details of China's first domestically-build aircraft carrier.
The new ship, like its predecessor, will be conventionally propelled, as opposed to nuclear-powered, and feature a sloped flight deck known as a ski jump for aircraft takeoff. It is somewhat smaller than the Liaoning, with a displacement of around 50,000 tons compared to around 67,000 tons. The SCMP notes that "from the successful refitting of the Liaoning in 2011 and its commission a year later, China spent just five years to produce the 001A."
China's first home-built aircraft carrier awaits launch at a Dalian shipyard
Around 200 visitors and reporters gathered in Dalian on Sunday, expecting a launch ceremony to coincide with the 68th anniversary of the Chinese navy's founding. The scaffolding around the ship, temporarily named the Type 001A, was removed and the deck was cleared, Shanghai-based news portal thepaper.cn reported, suggesting that the launch date was getting close. However, experts said tidal conditions yesterday were not conducive for a launch to mark the navy’s birthday, and expected a ceremony to take place in the next few days.
According to SCMP, the new vessel is designed to have more space for aircraft than the Liaoning, by some estimates letting the ship hold as many as 36 fighter jets, or 50% more than its predecessor. While the new carrier "differs little from the Liaoning as far as outward appearances go, its operational capabilities are vastly superior," Chinese military expert Liang Fang told state-run China Central Television.
Commentaries published by party mouthpiece People’s Daily on the PLA Navy anniversary yesterday said a strong maritime force was crucial.
“Facing the increasingly complicated maritime security and sovereignty struggle, a strong navy is necessary to protect national sovereignty and maritime rights, overseas interests and take part in international cooperation,” one of the opinion pieces said.
Another commentary said the nation’s aircraft carrier fleet had participated in training in the western Pacific last year, and that the launch of a new carrier was a sign that China was mastering naval technology.
Nonetheless, military observers said the launch of the new carrier represented only modest progress in China’s military modernisation, given the technological gap between the PLA Navy and its most powerful rival in the Asia-Pacific region, the US Navy, which currently has 10 operational, nuclear-powered Nimitz-class carriers, which carry around 90 aircraft and helicopters and have a crew of 5,000 each.
The new vessel is expected to operate mainly in the South China Sea alongside the Liaoning, which in December held its second set of exercises in the contested waters since entering service. Adding another ship would enable an aircraft carrier to remain present there while the other is in for maintenance. This arrangement, combined with ports and airstrips China has built on man-made islands in the sea, aims to give Beijing aerial supremacy over a region it considers central to its national interest and to curtail U.S. activity there.
According to Nikkei, future Chinese aircraft carriers are likely to be built faster now that the country has amassed the design experience and technology to bring the first vessel to launch.
Confirming this, work on a second Chinese-made carrier has already begun. The vessel probably will employ a steam catapult to launch aircraft, retired Maj. Gen. Xu Guangyu told Chinese media. A third vessel which has yet to begin production is expected to use nuclear propulsion, eliminating the need to resupply fuel. Work on escort vessels and submarines for a carrier strike group is also underway.
Quoted by SCMP, Hong Kong-based military analyst Liang Guoliang said that with the launch of the Type 001A, China would still only have two carriers, with the new ship requiring two or three years before it was put into full service. He noted that the US has 10 carrier strike groups, with at least four deployed in the Asia-Pacific region.
“The US navy has 9.5 million tonnes of shipping, while China has just 400,000 tonnes, or 4 per cent of the US capability. The US also has different kinds of carrier-based fighters, including its advanced carrier variants of the F-35 fighter ... while China just has the J-15,” Liang said. “Meanwhile, the US has more than 200,000 marines, while China is just trying to expand its force to 100,000.
“I think the Chinese military should realise that there are still huge gaps in both hardware and software between the two countries’ maritime capabilities.”
They probably do, which is why corporate espionage in the US is likely to intensify in the coming years as China rushes to cover the technological gap. And as China scrambles to catch up to the US fleet of aircraft carrier, it has also shown an eagerness to cover shortfalls in its submarine fleet: as reported on Friday, China is currently building the world's largest submarine facility, which when operational later this year, will be able to build as many as 4 subs at the same time.
The USS Mahan has to take evasive actions in the Straits of Hormuz today, in order to avoid an Iranian 'fast attack' vessel. The Mahan sounded the danger alarm, fired flares and manned their weapons, but the Iranian cowards tucked tail and scattered before reaching within 1,000 yards of the U.S. destroyer.
"Coming inbound at a high rate of speed like that and manning weapons, despite clear warnings from the ship, is obviously provocative behavior," said one American official in describing the Iranian actions.
This is the second time in recent months that the Mahan was put on high alert due to pesky Iranian vessels. Back in January, the Mahan fired three warning shots from a .50 caliber machine gun in order to stop small Iranian vessels from harassing them.
The U.S. military said Iranian vessels harassed US warships a total of 35 times in 2016 -- a 50% spike from the year prior.
During the Presidential campaign, Trump was livid over the treatment of US sailors, after a swarm of Iranian vessels seized an American riverine, blindfolded the crew, struck the US flag in exchange for an Iranian, and interrogated 10 crew members, while humiliating them on Iranian tv.
Trump said of the ordeal, “When I see pictures of them with arms up in the air and guns pointed at them, I wouldn’t exactly say that’s friendly.”
Trump added at a campaign rally, "And by the way, with Iran, when they circle our beautiful destroyers with their little boats and they make gestures that our people -- that they shouldn't be allowed to make, they will be shot out of the water."
Content originally published at iBankCoin.com
Governments generally increase military spending when they are involved in an armed conflict or when they perceive a security threat.
But interestingly, although perhaps not entirely surprisingly, military expenditure is also correlated with global oil prices.
Over the decade ending in 2016, patterns of increasing and decreasing military spending can generally be correlated with rising and falling oil prices, according the latest report from the Stockholm International Peace Research Institute.
This correlation likely exists partially because the annual budgets of petro-states largely depend on the price of oil. If an oil producer can make more dollars per barrel in a given year, then it can allocate more money to other projects, including military expenditures.
"Although the oil-price slump has had varying degrees of impact on the economies of oil-exporting countries, since 2015 military expenditure, in real US dollars, has decreased for the vast majority of oil exporting countries," the report's authors wrote. "This reflects the severity of the shock and highlights the need for sectoral reform to foster the diversification of oil exporters' economies."
"The decrease in oil revenues and associated economic problems attached to the oil-price shock have forced many oil-exporting countries to cut their total government budgets, which usually also includes cutting military spending," they added. "In some cases, the decreases have been so severe that it had affected regional and sub-regional trends (e.g. in Africa and South America)."
Oil prices started falling in 2014, and then collapsed further after OPEC's decision in November of that year to not cut production. Crude oil dropped from over $100 per barrel in June 2014 to about $30 per barrel in January 2016.
Fast forward to November 2016, when the cartel, along with other producers like Russia, agreed to curb production slightly for six months in an effort to boost prices. However, oil remains suspended around $50 per barrel — far below the $100 per barrel mark.
From 2015 to 2016, oil producers that have seen military spending drop include Venezuela, South Sudan, Angola, Azerbaijan, and Iraq, according to data from SIPRI. In fact, of the 15 countries with the largest decreases in military spending since 2015, only two were not oil exporters: Guinea and Zambia.
Another region worth looking at is the Middle East. Data is unavailable for several states, including Lebanon, Qatar, Syria, the UAE, and Yemen, but combined total military expenditure in 2016 decreased by 17% compared with the prior year among those countries in the region for which data is available. Interestingly, those countries' combined spending had dropped by only 19% when compared with 2007.
"The decrease in 2016 came despite the fact that all countries except Oman were militarily involved in at least one armed conflict in the region," the authors wrote. "This demonstrates the impact of the fall in oil prices on the economies of several of the region's major military spenders."
Of course, there are always counter-examples, given that a handful of producers can better handle an oil shock. In particular, Kuwait and Norway were able to keep up existing spending plans in 2016.
But, it's still worth noting the larger trend.
Iran news agency FARS reports that according to Syrian military sources, Moscow has informed Damascus of its preparedness to dispatch ground troops to Syria.
FARS - which like most US media should always be taken with a gran of salt - quotes the Al-Hadath news, according to whose sources Russia has announced that in case of the Syrian army's request it is ready to send ground forces to Syria. The sources said that special Russian forces are prepared to be deployed in regions which are experiencing the most pressures by the terrorist groups.
They added that the technical aspects of the plan have been studied and prepared by Russia, saying that the plan can be implemented upon Russian President Vladimir Putin's order after Damascus' official request.
A Russian daily reported earlier this month that the country's soldiers are about to shoulder the responsibility of restoring security to the Christian-populated regions during the Syrian Army's imminent anti-terrorism operations in Northern Hama.
FARS adds that according to Russian Izvestia, the Russian units will help popular forces in Hama province to restore security to the town of Mahradeh, whose population are mainly Christians. The daily added that terrorists are under the Syrian Army's siege from all directions.
There have been fierce clashes between the government forces and militants near Hahradeh since April 4th. "Informed sources" believe that the army intends to complete the siege of the terrorists in Northern Hama to clean the region up to the border with Idlib province.
A deployment of Russian troops in Syria may coincide with a deployment of US ground forces to Syria. Two weeks ago, Bloomberg reported that Trump's national security advisor, H.R. McMaster was planning on sending between 10,000 and 50,000 troops to Syria. Needless to say, a showdown between thousands of Russian and US troops in Syria is unlikely to have a happy ending.
After a disappointing March for the auto OEM's, a hopeful wall street has set it's sites on a rebound in April with consensus SAAR estimates currently set at 17.25 million, up from 16.53 million in March. Per the chart below, the March 2017 print for auto sales was the lowest in over two years, despite massive incentive spending by the OEMs.
Of course, OEMs didn't bother to adjust production levels to sinking sales which pushed inventory days to the highest March print since 2009.
But while wall street seems to be in a phase of perpetual optimism, JD Power and LMC Automotive have decided to lower their expectations for 2017 sales and warn that consumer discounts remain high enough to "threaten the industry's long-term health." Per Reuters:
U.S. auto sales in April likely fell almost 2 percent from a year earlier, with consumer discounts remaining at levels high enough to threaten the industry's long-term health, industry consultants J.D. Power and LMC Automotive said on Tuesday.
The consultancies also lowered their full-year 2017 forecast for new vehicle sales to 17.5 million units, from a previous forecast of 17.6 million.
April U.S. new vehicle sales will be about 1.48 million units, a drop of nearly 2 percent from 1.51 million units a year earlier, the consultancies said.
The forecast was based on the first 13 selling days of the month. Automakers are expected to report April U.S. sales results on May 2.
The seasonally adjusted annualized rate for the month will be 17.5 million vehicles, flat versus the same month in 2016.
Of course, as we've noted numerous times before (see "Morgan Stanley: Used Car Prices May Crash 50%"), the real story with the auto industry isn't the sinking SAAR levels but rather the growing level of incentive spending required to keep sales from crashing even further.
"While industry retail sales pace remains high, it is being powered by elevated levels of incentive spending which pose a serious threat to the long-term health of the industry," said Deirdre Borrego, senior vice president of automotive data and analytics at J.D. Power.
Excessive discounts can help sell new vehicles, but undermine resale prices.
The consultancies said consumer discounts averaged $3,499 per new vehicle sold, the highest ever for the month of April. The previous record was set in April 2009, during the height of the Great Recession.
But, auto investors don't seem to be all that worried so we're sure everything will work out just fine when OEM's release April sales on May 2nd.
Remember when the catalyst for the relentless, seemingly inexplicable broad market melt-up in mid-February was revealed to be an overeager short-biased hedge fund, which had been caught in a "short gamma" feedback loop, forced to buy more S&P futures the higher the market went? Well, as RBC's Charlie McElliggott writes, the "short gamma" feedback loop appears to have returned as yet another fund is now caught in the same trap, and the market will soon test just what the fund's point of margin call max pain is, potentially taking the S&P to 2,400 - if not far higher - on short notice.
As McElligott laments, "It’s awkward to write about this…AGAIN" which however won't stop him from doing just that, and explains as follows:
GUESS WHO'S BACK...MORE 'SHORT GAMMA' COCKROACHES, from RBC's Charlie McElliggott
The same dynamic at play during our last equities ‘melt-up’ is seemingly back ‘in-play.’ Remember the hypothetical story on the multi-billion dollar open-ended futures fund which found itself ‘synthetically short’ size SPX due to its strategy where it sells multiple upside calls for every in-the-money long call? Well the macro ‘relief rally’ yesterday reintroduced that very same ‘gap risk’ which this type of strategy hates.
Well, we are now getting closer to ‘launch’ as the same situation is speculated to be ‘out there’ again. There was some covering in 2330s and 2370s yesterday, while most of the size seemingly sits at the 2400 level. As the market is sniffing out the upper strikes that such a strategy might be short, there is a self-fulfilling ‘short gamma’ as we push ever-closer to the pain-points. Of course, today’s +++ earnings run is only further feeding into the anxiety, with strong #’s from CAT, DD, BIIB, MCD etc squeezing futures higher. The fact of the matter is, the closer to actualizing these (short) upper strikes, the more likely we are to see that ‘itchy trigger finger’ on their delta-hedging. I would keep an eye out on 2380 / 85 levels for possible next ‘breakpoints’ which could induce further forced covering.
If we were to then push onward to / through the 2400 level, then it almost seems the whole market will ‘act short’ simply based on stops, as SPX / ES would be making new all-time highs, which could set-off ‘buy stops’ from shorts, or potentially drag new longs into the market on the momentum break. This is OUTSIDE of the potential ‘short gamma’ from the above trade(s). That said, the real chunky OI in both SPX and SPY options sits at 2425 / 2450 levels. A break to those levels would see serious ‘short gamma’ pain.
Mind you, this is all very relevant in relation to my current view that we are realistically still in the midst of a macro ‘range trade,’ especially in regards to rates / ‘reflation,’ as the commodities complexcontinues to really struggle as Crude falters and the Chinese liquidity driver fades. My message has been to watch said “reflation trap” then, as there is still significant basis to short “reflation” at the 2.35/40 level—especially with this US data dynamic of ‘soft’ data rolling and ‘hard’ data now biased towards ‘missing.’
It’s difficult to quantify how much of an effect ISIS has had our collective psyches. Since this organization started making the news several years ago, we’ve been inundated with utterly horrifying stories about ISIS on a nearly daily basis. These people do things that are so wicked, it’s hard to believe that they were committed by human beings. Because of that, I suspect that long after ISIS is gone, their organization will be a talking point for decades in much the same way that Hitler and the Nazis are still brought up on a regular basis today.
Fortunately, it appears that ISIS is becoming history as we speak. All evidence suggests that the moment of collapse for the ISIS caliphate is rapidly approaching. In fact, the RAND Corporation recently published a report that spells out just how much ISIS has declined over the past few years.
The report found that ISIS, also known as the Islamic State, “has lost substantial control of territory and people since 2014 in Iraq, Syria, Afghanistan, Libya and Nigeria,” putting it in danger of losing its state, which it calls a “caliphate,” altogether.
But control over territory and people isn’t the only thing that makes ISIS a formidable terrorist organization. The group has recently been focusing heavily on external attacks, some of which are mounted without any direct orders from ISIS leaders.
RAND reported that ISIS has lost 57% of its territory and 73% of its population. And much more importantly, polls suggest that their support in the Muslim world is rapidly dwindling. ISIS isn’t just a terrorist group. It’s an insurgency that tried to carve out a state from Iraq and Syria, and no insurgency could have made it this far unless they had at least some support among the population. Now ISIS is losing that as well.
However, this encouraging news comes with a catch.
It’s important to keep in mind that the RAND Corporation is a major facet of the military-industrial complex. So what they think will happen after the caliphate collapses is very telling.
The group still has enough supporters, though, to be considered a serious threat to countries in the Middle East and around the world. Rand also found that ISIS attacks have shot up in recent months. The data suggests that ISIS “has begun to move from an insurgent group that controls territory to a clandestine terrorist group that conducts attacks against government officials and noncombatants,” the report said. This is the model of ISIS’ predecessor organization, Al Qaeda.
Though it seems that the US-led campaign against ISIS has been successful so far, ISIS remains a long way from extinction.
“Fully eliminating the threat the Islamic State poses will require continued American leadership for years to come,” the report said. “… In the short and perhaps medium terms, this contraction in territorial control may actually lead to more terrorist attacks across the globe. But over time, the group’s capacity to recruit, fund, organize, and inspire such attacks will likely diminish, and its brand may lose its allure if the Islamic State no longer controls territory in Iraq and Syria.”
In other words, the military-industrial complex is licking its chops. That’s because ISIS, which is largely a creation of the West, is about to replace Al-Qaeda as America’s elusive bogeyman. Long after their hellish caliphate is dead, they’ll be launching attacks on the United States from far-flung lands, which will surely be used as an excuse to decimate our freedoms, and drag us into many more wars in the future. A lot can happen between now, and when ISIS “loses its allure.”
To our complete 'shock,' a federal judge in San Francisco has just blocked Trump's Executive Order intended to withhold funding from communities that limit cooperation with U.S. immigration authorities. The basis of the finding is that only Congress, not the president, has authority to attach new conditions to federal spending.
"The Constitution vests the spending powers in Congress, not the President, so the Order cannot constitutionally place new conditions on federal funds. Further, the Tenth Amendment requires that conditions on federal funds be unambiguous and timely made; that they bear some relation to the funds at issue; and that the total financial incentive not be coercive. Federal funding that bears no meaningful relationship to immigration enforcement cannot be threatened merely because a jurisdiction chooses an immigration enforcement strategy of which the President disapproves."
U.S. District Judge William Orrick, an Obama appointee, issued the temporary ruling moments ago after San Francisco and Santa Clara County argued that it threatened billions of dollars in federal funding. The decision will stay in place while the lawsuit moves through court.
Ironically, an attorney for the Justice Department, Chad Readler, downplayed the usefulness of the Executive Order admitting at a recent court hearing that it only applied to three Justice Department and Homeland Security Department grants that amounted to less than $1 million nationally and possibly no San Francisco funding at all.
Meanwhile, for the first time we learn that the DOJ, at oral argument, also contended the sanctuary cities EO was toothless--merely an exercise of Trump's "bully pulpit" to "encourage communities and states to comply with the law."
— southpaw (@nycsouthpaw) April 25, 2017
But, Judge Orrick disagreed with the scope of the Executive Order saying that it attempts to "to reach all federal grants, not merely the three mentioned at the hearing."
It is heartening that the Government’s lawyers recognize that the Order cannot do more constitutionally than enforce existing law. But Section 9(a), by its plain language, attempts to reach all federal grants, not merely the three mentioned at the hearing. The rest of the Order is broader still, addressing all federal funding. And if there was doubt about the scope of the Order, the President and Attorney General have erased it with their public comments. The President has called it “a weapon” to use against jurisdictions that disagree with his preferred policies of immigration enforcement, and his press secretary has reiterated that the President intends to ensure that “counties and other institutions that remain sanctuary cites don’t get federal government funding in compliance with the executive order.” The Attorney General has warned that jurisdictions that do not comply with Section 1373 would suffer “withholding grants, termination of grants, and disbarment or ineligibility for future grants,” and the “claw back” of any funds previously awarded. Section 9(a) is not reasonably susceptible to the new, narrow interpretation offered at the hearing.
...and apparently Judge Orrick didn't think the DOJ's arguments were even "legally plausible."
— southpaw (@nycsouthpaw) April 25, 2017
So, if the DOJ believes that the scope of the Executive Order would only impact $1mm in federal funding and was "merely an exercise of Trump's 'bully pulpit', then we have to wonder whether the whole thing was just a charade to avoid more "flip-flopping" accusations? What say you?
Here is the full order:
So what do you do when a massive student loan bubble results in crippling leverage for an entire generation of your population rendering them financially unqualified to obtain mortgage financing and their 'God-given right' to a slice of the 'American Dream'? Well, you simply change the rules to allow mortgage lenders to ignore all that pesky student debt...anything less would simply be evil and potentially racist, sexist and all sorts of other -ist words.
Luckily, Fannie Mae is right on top of the issue and has just released new rules allowing millennial borrowers to, among other things, simply exclude student loans, credit cards and auto loans that are "paid by someone else"...wink wink...when applying for a new mortgage. As an added benefit, taxpayer subsidized mortgage loans can also now be used to repay student debt...Hooray for taxpayers!
Fannie Mae announced new policies that will help more borrowers with student debt qualify for a home loan. These innovations address challenges and obstacles to homeownership due to a significant increase in student loan debt over the past decade and provide access to credit for qualified borrowers. The new solutions give homeowners the opportunity to pay down student debt with a mortgage refinance, allow borrowers to exclude non-mortgage debt paid by others as part of the loan application process, and make it more likely for borrowers with student debt to qualify for a mortgage loan by allowing lenders to accept student debt payments included on credit reports.
Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
Debt Paid by Others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
Student Debt Payment Calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.
“We understand the significant role that a monthly student loan
payment plays in a potential home buyer’s consideration to take on a
mortgage, and we want to be a part of the solution,” said Jonathan
Lawless, Vice President of Customer Solutions, Fannie Mae. “These new
policies provide three flexible payment solutions to future and current
homeowners and, in turn, allow lenders to serve more borrowers.”
You know, because more debt is exactly the cure for millennials suffering the financial consequences of too much debt.
But, at least this should help with inflating Housing Bubble 2.0.
After last night's announcement of ~20% tariffs on softwood lumber imported from Canada, Prime Minister Justin Trudeau lashed out at the Trump administration saying the U.S. could suffer from a "thickening" border as trade tensions between the two countries escalated, sending the Canadian currency to a 14 month low.
As a reminder, the United States announced it would impose preliminary anti-subsidy duties averaging 20 percent on imports of Canadian softwood lumber, Commerce Secretary Wilbur Ross said on Monday, escalating a long-running trade dispute between the two neighbors. The move, which affects some $5.66 billion worth of imports of the construction material, sets a tense tone as the two countries and Mexico prepare to renegotiate the 23-year-old North American Free Trade Agreement.
Speaking to a technology company in Ontario, Trudeau said he would defend the national interest: "standing up for Canada's interests is what my job is, whether it's softwood or software," Trudeau said, prompting applause and cheers.
"You cannot thicken this border without hurting people on both sides of it. Any two countries are going to have issues that will be irritants to the relationship and, quite frankly, having a good constructive working relationship allows us to work through those irritants."
Elsewhere, Canada's Natural Resources Minister Jim Carr said the U.S. move to set tariffs on softwood lumber shipments are an “unfair and unwarranted trade action.” Speaking to reproters in Ottawa, Carr said that Canada is looking at an aid package for lumber industry and workers which could up to $300 million, and added that a court challenge of duties is possible, and that Canada has won all of those cases in the past.
Carr also said free trade is in the best interest of both nations: "There are irritants in the trading relationship, they aren’t new."
Canada's Liberal Party leader says the two countries are economically interconnected, but it's not a one-way relationship. He said that millions of U.S. jobs depend on smooth flow of goods, services and people back and forth across the border. The Prime Minister also vowed to stand up for Canadian interests after Trump's decision sent the Canadian dollar to a 14-month low.
Yet while the currency fell, shares in Canadian lumber companies rose as the level of the new tariffs came in at the low end of what investors were expecting. Shares in West Fraser Timber, which would pay the highest duty rate of the affected companies, rose 5.6 percent to C$59.50 and the Canfor stock gained 3.5 percent to C$18.82. The average 20 percent anti-subsidy duties announced late on Monday compared to a 20-30 percent range expected by RBC equity analysts.
As Reuters adds, softwood lumber joins dairy as a key target for U.S. President Donald Trump, who tweeted a new attack on Canada's supply management system for dairy on Tuesday. Last week the president called Canada's dairy protections "unfair." "Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!" Trump tweeted Tuesday morning.
* * *
So what does Trump's announcement mean for the Canadian economy? Here is a summary of the key takeaways from a BofA note on the escalating trade war between the US and Canada.
- Trade uncertainty back to the forefront after US announced preliminary duties on Canadian softwood lumber exports.
- The announcement on tariffs was accompanied by negative comments regarding NAFTA, which may herald NAFTA renegotiation.
- Downside risks to growth intensify as higher tariffs lower exports and higher uncertainty delays investment.
And the details:
Trade uncertainty back to the forefront
US wants to renegotiate NAFTA
The US is likely to open the North America Free Trade Agreement (NAFTA) for renegotiation and is willing to use tariffs to contest what it considers unfair trade. This has been our long standing view, but we got clear evidence that the US will be very active on the trade front after Wilbur Ross, US commerce secretary, announced on April 24th the imposition of preliminary duties of almost 20% against Canadian softwood lumber exports. Ross said that the US is using countervailing duties after it was “not able to achieve a fair result” through negotiation with Canada. He said that Canada benefits from a provision in NAFTA that allows Canada to supersede US sovereignty.
Downside risks to Canadian growth
The imposition of countervailing tariffs along with the comments on NAFTA increases uncertainty regarding trade policies for the North America region, which will likely delay investment. Although we believe that Canada is not the main target of US anti-trade policies, it is certainly very exposed to US trade. Higher tariffs will have a negative impact on production in the Canadian lumber industry (Lumber exports are almost 1% of Canadian GDP). Growth in Canada has been surprising to the upside, in line with our more constructive view of the economy. But the likely renegotiation of NAFTA and an active US trade policy put downside risks on our 2.3% GDP growth expectation for 2017.
Renegotiation of NAFTA is positive, but…
We expect the US to send a notification to open NAFTA for renegotiation soon. That will open a 90 day window for countries to prepare. Any renegotiation is likely to be lengthy, going well into 2018. And an institutional renegotiation of NAFTA has a good chance of ending with an updated agreement that benefits the region by incorporating new sectors into the treaty (e.g., energy, ecommerce). Consider the TPP blueprint that the staffs of the three countries involved had already agreed on as a starting point. But in the meantime uncertainty will likely be high as countries take different postures or even actions such as the impositions of tariffs to improve their leverage. The risk is that it all ends in a trade war, although the strength of the value chains in North America makes the latter an unlikely scenario, in our view.
Back to dovish BoC
The increase on trade uncertainty will be highlighted by the BoC, which will support our strategists’ view of a weaker CAD, in our view.