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3 Things Intrepid Potash Management Wants You to Know
https://finance.yahoo.com/news/3-things-intrepid-potash-management-153300424.html
There's a long way to go yet, but 2017 marked a major turning point for fertilizer producer Intrepid Potash (NYSE: IPI). It's been mostly helpless against the prolonged market downturn that has embroiled the global potash industry in recent years. That was brought on by poor supply discipline from the world's leading producers and made worse by the extreme concentration of power in the industry. Nearly all of the planet's potash comes from just 19 deposits, with just three companies supplying 60% of production.
Management did its best to control the factors it could. It nearly doubled the number of shares outstanding in an offering that raised funds used to greatly reduce debt on the balance sheet. Despite the dilution, it could be considered a successful move. The company also transitioned to a new low-cost production method for all of its potash output and increased its focus on langbeinite, a niche fertilizer that Intrepid Potash sells under its Trio brand.
While the business still lost money in 2017, there were signs in the recent fourth-quarter and full-year 2017 earnings report that the company is on the right path. It even recently earned a small analyst upgrade. What should investors think about the stock given all of the recent moving parts? Here are three things Intrepid Potash management wants you to know.
1. Solar evaporation ponds are a success
Intrepid Potash is nearly out of the red thanks to steadily improving operating and net margins. For example, a fourth-quarter 2016 operating loss of $16 million shrank to less than $3 million in the final quarter of 2017. While expenses increased in the fourth quarter of last year compared to the prior period, the increase was temporary.
Most of the improvement was derived from the potash segment, which is now fully utilizing solar evaporation ponds. They are exactly what they sound like: Mineral-containing brine is pumped into large, above-ground ponds, energy from the sun slowly evaporates the water (for free), and the resulting slurry is concentrated and purified into several product streams, namely potash and a handful of byproducts.
The results have been amazing. The potash segment's gross profit improved from a loss of $28.6 million in 2016 to income of $15.6 million in 2017. Things should continue to improve, especially with a significant inventory build in the final quarter of last year, partly due to the seasonality of production (higher in the first and last quarterly periods of each year), and partly due to market fundamentals.
President and CEO Robert Jornayvaz commented on the fourth-quarter 2017 earnings conference call:
Our potash segment realized another quarter of strong margins due to a lower-cost production profile, an increased focus on the byproducts and more selective selling in the markets with higher net realized sales prices. We have solid volumes committed for the first quarter. Our decision to build inventory during the fourth quarter is clearly paying off, as we see good market fundamentals entering the spring season with solid demand and higher price levels as the $20 price increase is now in effect.
That $20 increase may not seem like much, but it's about an 8% increase from 2017 prices. Good news: Potash isn't the only business eyeing improvements this year.
2. Exports providing upside for Trio in 2018
In 2017, Intrepid Potash generated 65% of its revenue from potash and the balance from Trio, which was down from 76% of sales derived from potash in 2016. Unfortunately, the increased focus on Trio last year didn't work out quite like the company had hoped, as selling prices declined 32% year over year for the product. Meanwhile, potash prices rose 22% in that span.
Management is hardly deterred, though. It sees significant upside for selling prices -- especially considering selling prices for the individual components of Trio add up to vastly more than the product itself -- and it has realized an 8% increase in early 2018. That's occurring just as the company's production capability has been optimized.
But there's another major opportunity for the Trio brand: exports. Intrepid Potash ramped up activity in international markets throughout 2017, and it expects to reap the benefits this year. In response to a question about production and inventory management in 2018, Jornayvaz responded:
We've just done a great job of growing our volumes. And when we have certain international customers that are placing their third and fourth orders and those orders are going up significantly -- we have one customer in the South American region that has literally gone from zero to tens of thousands of tons. And so we are now beginning to focus on what are the proper run rates for the plant, because as you know, as we run that plant, it has significant excess capacity. So 2018 is an exciting year for us as we look at our ability to manage our transportation costs on a much higher volume basis and having customers that are now providing warehouse space and placing larger orders that allow us to negotiate freight contracts at larger levels, larger volumes and with more advanced notice.
Management added that larger order volumes lower the per-unit transportation costs of international shipments. Meanwhile, for smaller orders, Intrepid Potash has partnered with other fertilizer companies shipping product abroad to lower freight costs. If selling prices lift off their 2017 bottom, then the company could see positive gross margin for the segment once again.
3. Diversification efforts are ramping up
While Intrepid Potash will continue to generate the bulk of its business from fertilizer production and sales, management has been actively developing alternative business opportunities. The biggest comes from the company's significant water assets strategically located within shouting distance of the Permian Basin, the most important oil and gas-producing region on the planet at the moment. Producers in the shale formation utilize fracking, which requires copious amounts of water, which creates an unusual opportunity to sell water to energy producers.
Water sales may not sound very important, but the fertilizer producer recorded $7 million in water transaction revenue in 2017. Intrepid Potash expects to increase that significantly in 2018 thanks to a combination of long-term contracts and spot market selling. Considering water sales are accompanied by up to 90% gross margin, they represent an important source of income and cash flow for shareholders. Jornayvaz expects water to be an important part of the business in 2018 and beyond:
Water sales of $3.5 million in the fourth quarter were in line with our expectations of $3 million to $4 million and increased our full year sales to $7 million. Fourth quarter sales were a significant increase over the $2.1 million sales during the third quarter of 2017. Increasing demand, combined with several commitments in place for 2018, give us great confidence in our expectation of $20 million to $30 million in sales during 2018. We continue to work on, negotiate, and execute on opportunities that should increase this run rate in future years.
Water sales may be the most significant source of diversification, and could represent over 10% of total sales in 2018, but they aren't the sole source. Intrepid Potash is also expecting between $0.5 million and $1 million in brine sales (for use as a fracking fluid additive) this year, in addition to expanding new business in oilfield services.
It sure hasn't been a fun few years for Intrepid Potash, but the company's management has done a great job executing a strategy designed to return the business to profitable operations. Those efforts have delivered a healthier fertilizer business through more efficient potash production and a diversified customer base for Trio sales. If those core segments can thrive in the current down cycle for fertilizers, and revenue diversification efforts take off, then the company could be able to excel in almost any market environment. I would feel more comfortable with a few more quarters of progress and sustainable profits, but I have to admit that the company is oh-so-close to putting its struggles behind it.
Here’s One Industry Where the U.S. Is Already Catching China—Fertilizers
Low gas prices are the key factor in a surge in U.S. fertilizer output
By LUCY CRAYMER in Hong Kong and RHIANNON HOYLE in Sydney
Updated Feb. 12, 2017 8:53 p.m. ET
While President Donald Trump vows to reinvigorate struggling American industries and regain ground lost to rivals like China, the process is already under way in the U.S.’s booming fertilizer industry.
U.S. output of urea, a key nitrogen-based fertilizer, surged by around 10% last year, boosted by a number of new and expanded plants in states from Iowa to Louisiana that helped increase total capacity by 24%. Meanwhile, output in China, the world’s No. 1 fertilizer producer, slumped by 7% in 2016, and its exports dropped by more than a third.
These shifting fortunes aren’t due to government intervention such as higher import tariffs or entreaties to “buy American.” Instead, they are largely due to trends in global energy markets.
U.S. fertilizer producers are benefiting from the long-brewing shale revolution. The combination of hydraulic fracturing and horizontal drilling has significantly boosted production, bringing down the cost of gas.
And in the U.S., gas is the key ingredient of nitrogen-based fertilizers like urea—which is mainly applied directly to soils—and ammonia, which is typically mixed with other products, or further refined to make urea.
Meanwhile, their rivals in China have suffered from a sharp rise in the price of coal following Beijing’s decision to limit production last year, restricting normally ample supplies of the fuel. Roughly three-quarters of China’s urea is produced by first turning coal into gas.
U.S. Fertilizer Industry SproutingProduction is growing in the U.S. while China's exports are declining.
Estimates of top global urea capacity additions in 2017
“Low-cost shale gas in the U.S. has transformed the competitiveness of a number of industries for which energy accounts for a high share of input costs,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight. “One of the biggest winners has been the U.S. chemicals industry.”
The surge in U.S. fertilizer production will likely continue this year, as a number of long-planned new plants—which typically take around four years to build—come online. U.S. ammonia production capacity could jump by 2 million metric tons this year to around 11.4 million metric tons, Rajesh Singla, head of agriculture research at Société Générale, estimates.
Urea production capacity could also rise by 4.1 million metric tons this year, with at least five massive new plants or expansions due to start operating, according to ICIS, a market-information provider, put-ting the U.S. on track to have 50% more capacity by 2020 from 2015.
Illinois-based fertilizer manufacturer CF Industries has just finished one of these projects, an expansion of its Port Neal nitrogen plant in Sioux City, Iowa, the heart of the U.S. cornbelt.
“Given where we viewed the long-term cost of gas in the U.S., we thought this is the right place to invest,” said Chief Executive Tony Will. The plant is expected to produce 816,466 metric tons of ammonia and 1.27 million metric tons of urea annually, employing around 100 people.
As more fertilizer output moved to the U.S., urea imports in 2016 slumped, dropping by 34% last year. Although China remains the largest exporter, its share of global urea production fell to 39% in 2016 from 43% a year earlier, according to CRU Group, a commodities consultancy.
The U.S.’s cost advantage is crucial. Producing a metric ton of urea using gas in the U.S. costs $130 on average, CRU estimates. That same trailer load costs between $180 and $210 a metric ton using anthracite coal in China. Gas makes up about 60% to 80% of production costs, depending on the efficiency of a plant and the price of gas, according to producer OCI Americas Inc.
“Many inefficient [Chinese] plants have quit from the industry…12.6 million [metric] tons of urea capacity have been closed from the industry from 2013 through to 2016,” said Gavin Ju, a senior consultant for CRU in Beijing.
Cheap energy costs have enticed foreign companies like Australia’s Incitec Pivot Ltd., which decided in 2013 to set up an $850 million ammonia plant in Waggaman, La. The plant, which has a capacity of 800,000 metric tons, started operating in October and will ramp up this year.
“Because of the energy advantage through the shale gas revolution, U.S. fertilizer producers are globally among the most competitive,” said Incitec Pivot Chief Executive James Fazzino, who said the Waggaman investment now stacks up even better than when it was approved.
“If the current [Trump] administration delivers on the commitments around energy advantage, cutting unnecessary red tape and developing an attractive taxation environment, that advantage will become even more pronounced,” he said.
Dutch-owned OCI Americas is meantime near completion on a 1.5-million-to-2-million-metric-ton nitrogen fertilizer plant in Wever, Iowa, that alone will increase U.S. urea capacity by more than 10%. Proximity to U.S. customers, primarily the country’s 2.1 million farmers, is another important factor.
“Foreign producers have significant logistical costs to deliver product to the U.S., including ocean and land freight, storage and throughput fees, which can amount to over $100 a [metric] ton depending on the product,” said Ahmed El-Hoshy, chief executive of OCI Americas.
Rising urea prices as Chinese exports decline are another positive for the fertilizer industry.
For sure, higher selling prices, coupled with lower coal prices and a weaker yuan, could reinvigorate Chinese shipments of nitrogen-rich fertilizer into the global market.
Still, U.S. producers should continue enjoying margins better than most rivals elsewhere, keeping the industry boom intact and leading the U.S. to significantly cut its import balance in the years ahead, analysts at Citigroup Inc. said.
https://www.wsj.com/articles/heres-one-industry-where-the-u-s-is-already-catching-chinafertilizers-1486938901
A timeline of the Keystone XL oil pipeline
Notable events in the dispute over the Keystone XL oil pipeline, which is slated to run from Canada to U.S. refineries in the Gulf Coast.
___
March 2008 " The U.S. State Department issues a presidential permit for a $5.2 billion Keystone pipeline to transport crude oil.
September 2008 " TransCanada files paperwork to expand the existing Keystone pipeline with a new Keystone XL route. The pipeline would extend from Canada's tar sands through Montana, South Dakota and Nebraska, where it would connect with the existing Keystone pipeline route to carry more than 800,000 barrels of crude oil a day to specialized refineries along the Texas Gulf Coast.
The original Keystone pipeline route runs through North Dakota, South Dakota, Nebraska, Kansas, Oklahoma and Texas. Because the Keystone XL would cross the U.S. border, the State Department must determine whether the project is in the national interest.
June 2010 " First Keystone pipeline goes into operation.
August 2011 " Then-Nebraska Gov. Dave Heineman sends a letter to President Barack Obama asking that the proposed Keystone XL pipeline avoid the Sandhills, an area consisting of fragile, grass-covered sand dunes in western Nebraska.
Aug. 26, 2011 " The U.S. State Department issues its final environmental impact statement determining "there would be no significant impacts to most resources along the proposed project corridor."
Oct. 15, 2010 " As the permit is reviewed, then-Secretary of State Hillary Rodham Clinton says the department is "inclined" to approve project. The project begins to galvanize the environmental movement to pressure the Obama administration to act on climate change. Republicans and other project supporters argue the project will create jobs and help the economy.
November 2011 " Amid growing public resistance to the Keystone XL, Heineman calls lawmakers into a special session to address environmental concerns in Nebraska. Lawmakers approve a pipeline siting law that requires companies to apply through an independent state commission. Obama announces a delay, pushing off the decision until after his re-election campaign. His administration says other potential routes through Nebraska need to be studied.
Dec. 23, 2011 " Congress tries to force Obama's hand by passing legislation requiring approval of the Keystone XL pipeline within 60 days unless the president determines the project does not serve the national interest. Weeks later, Obama rejected the application but allowed TransCanada to re-apply.
April 2012 " Nebraska lawmakers rewrite the pipeline law to give the governor the power to approve the Keystone XL route through the state.
May 4, 2012 " TransCanada reapplies and restarts the federal review process.
March 1, 2013 " The State Department issues an environmental review that raises no major objections to the Keystone XL oil pipeline and says other options to get oil from Canada to Gulf Coast refineries are worse for climate change.
June 25, 2013 " Obama declares he will only approve the project if it doesn't worsen carbon pollution. "Our national interest would be served only if this project does not significantly exacerbate the problem of carbon pollution," Obama says in a speech declaring that fighting climate change will be a major priority his second term.
Jan. 31, 2014 " The State Department releases another final environmental impact statement, again voicing no major environmental objections to the project.
Feb. 19, 2014 " A Nebraska judge overturns the state law that allowed the pipeline, throwing the project into legal limbo.
April 18, 2014 " The State Department announces it is again delaying its review, citing the legal dispute over the Nebraska route.
January 2015 " TransCanada files legal papers in nine Nebraska counties to invoke eminent domain for the land that's needed to construct, operate and maintain the pipeline.
Feb. 11, 2015 " Congress again tries to push the Obama administration to decide on the permit by passing legislation forcing the decision and sending it to the White House. Obama vetoes the bill days later.
Sept. 22, 2015 " Clinton, now seeking the Democratic nomination for president, says she opposes construction of the Keystone pipeline.
Nov. 2, 2015 " As it appears increasingly likely that Obama will reject the pipeline, TransCanada asks the administration to suspend the company's application. The State Department reviews the request for a day, and then rejects it.
Nov. 6, 2015 " Obama announces he is rejecting the permit to build the Keystone pipeline. The project is not in the national interest, he says. "America is now a global leader when it comes to taking serious action to fight climate change. And frankly, approving this project would have undercut that global leadership," he says.
June 2016 " TransCanada seeks $15 billion in damages from the federal government in response to the Obama administration rejecting the Keystone XL pipeline.
Jan. 24, 2017 " President Donald Trump signs executive actions to advance the construction of the Keystone XL pipeline, along with the four-state Dakota Access oil pipeline.
Trump takes steps to advance Keystone and Dakota pipelines
http://www.worldoil.com/news/2017/1/24/trump-takes-steps-to-advance-keystone-and-dakota-pipelines
WASHINGTON (Bloomberg) -- President Donald Trump took steps to advance construction of the Keystone XL and Dakota Access pipelines, marking the start of an era with fewer constraints on the oil industry to the chagrin of environmentalists who have bitterly fought the projects.
The moves, among Trump’s first actions since taking office, are a major departure from the Obama administration, which rejected TransCanada Corp.’s Keystone proposal in 2015 and has kept Dakota Access blocked since September. Environmentalists, concerned about climate change and damage to waters, land and Native-American cultural sites, now face an executive branch that’s less sympathetic to their efforts. For the oil industry, it heralds more freedom to expand infrastructure and ease transportation bottlenecks.
"We are going to renegotiate some of the terms," Trump told reporters today in the Oval Office as he signed the two measures. "We will build our own pipelines we will build our own pipes."
Foreshadowing Trump’s plans, the president told U.S. auto executives at a White House meeting Tuesday morning: "We’re going to make the process much more simple for the oil companies and everybody else that wants to do business in the United States."
TransCanada climbed as much as 2.9% to C$64.36 at 11:24 a.m. in New York. Energy Transfer Equity LP and Energy Transfer Partners LP, the developers of the Dakota project, climbed as much as 4% and 2.4%, respectively.
TransCanada had no immediate comment on the president’s actions before they were announced, and Energy Transfer didn’t immediately respond to requests for comment. A spokeswoman for the Standing Rock tribe that opposes the Dakota project says she would comment "if it happens."
White House press secretary Sean Spicer on Monday said both Dakota Access and Keystone are examples of projects that would "increase jobs, increase economic growth, and tap into America’s energy supply more." He said Trump wanted to balance environmental protection with activity that can grow jobs and the economy.
It wasn’t immediately clear what mechanism the documents Trump signed today would take. But his advisers have urged the new president to direct the U.S. Army Corps of Engineers to grant an easement that would allow construction of the final portion of Dakota Access, reversing the Obama administration’s conclusion that more environmental scrutiny was needed.
The advisers had also urged the president to pave the way for Keystone XL by rescinding a 49-year-old directive from former President Lyndon B. Johnson that assigned the State Department responsibility for determining whether proposed cross-border energy projects serve the "national interest."
TransCanada may need to submit another formal application to build the pipeline. The company’s plans for Keystone XL already have been vetted, with years of environmental scrutiny culminating in Obama’s 2015 decision that the pipeline was not in the U.S. interest.
TransCanada has not said it would reapply for permission to build the pipeline, but the day after Trump’s election, the Calgary-based company said it was looking for ways to convince the new administration of the project’s benefits to the U.S. economy. The company has previously said it remains "committed to Keystone XL."
Environmentalists fiercely battled the project, making it a flashpoint in broader debates about U.S. energy policy and climate change. Landowners in the pipeline’s path warned that a spill of dense crude could contaminate the Ogallala aquifer, a source of drinking water that stretches from Texas to South Dakota. And activists said it would promote further development of oil sands in Alberta, Canada that generally require more energy to extract.
Dakota Access opponents say the pipeline would damage sites culturally significant to Native Americans and pose an environmental hazard where it crosses the Missouri River. Earlier this month, the Department of the Army withheld the final easement necessary for construction beneath the lake.
Energy Transfer has argued it went through the full permitting process and has the necessary approvals. The company has said the line will be in service in the first quarter of this year, a delay from its original expectations that Dakota Access would be operational by the end of 2016.
Swift approval of Dakota Access could reinvigorate the sometimes violent protests at the site of the proposed construction. Environmental activists vowed to continue battling both projects.
“A powerful alliance of indigenous communities, ranchers, farmers, and climate activists stopped the Keystone pipeline the first time, and the same alliance will come together to stop Keystone again if Trump tries to raise it from the dead," said Travis Nichols, a spokesman with Greenpeace.
Josh Nelson, the deputy political director of the CREDO activist group said the action would show Trump is "in the pocket of big corporations and foreign oil interests."
"Fierce grassroots activism has stopped these pipelines over and over again,” he said. "CREDO will do everything in its power to stop the Dakota Access and Keystone XL pipelines, and keep dirty fossil fuels in the ground where they belong.”
Pipeline supporters said a final easement for the project would illustrate Trump’s commitment to building out energy infrastructure needed to ferry oil and gas around the U.S. Although Keystone XL would transport oil sands crude from Canada, some space on the line is slated to be filled by supplies from North Dakota’s Bakken shale play.
Dakota Access, likewise, is aimed at giving Bakken producers a new route to energy markets, allowing them to forgo more costly rail shipments that have been a backstop when existing pipes fill up. With a capacity of about 470,000 bpd, Dakota Access would ship about half of current Bakken crude production and enable producers to access Midwest and Gulf Coast markets.
Craig Stevens, spokesman for the Midwest Alliance for Infrastructure Now said moves to advance Keystone XL and Dakota Access would be a "positive development" for "our nation’s resource development energy infrastructure as a whole.
Energy Transfer owns the Dakota Access project with Phillips 66 and Sunoco Logistics Partners LP. Marathon Petroleum Corp. and Enbridge Energy Partners LP announced a venture in August that would also take a minority stake in the pipeline
Interesting Development
http://www.nbcnews.com/politics/white-house/trump-sign-orders-advancing-keystone-dakota-access-pipelines-n711321
Trump To Sign Executive Orders Advancing Keystone
President Donald Trump will sign executive actions Tuesday to advance the Keystone XL and Dakota Pipelines, NBC News confirms.
He is expected to sign executive orders regarding both projects in the Oval Office this morning.
The decision is sure to anger environmental advocates who say that the projects would have severe negative impacts on the areas where they are built and would encourage more reliance on fossil fuels. The Standing Rock Sioux tribe and its allies have vigorously protested the Dakota Access project, saying it would damage cultural sites.
Backers of the pipelines say they will create jobs and cut energy costs.
The Obama administration rejected the Keystone XL pipeline in November 2015, and it denied a permit for the Dakota Access project late last year.
DONALD J. TRUMP CONTRACT WITH THE AMERICAN VOTER
“Therefore, on the first day of my term of office, my administration will immediately pursue the following six measures to clean up the corruption and special interest collusion in Washington, DC:
FIRST, propose a Constitutional Amendment to impose term limits on all members of Congress;
SECOND, a hiring freeze on all federal employees to reduce federal workforce through attrition (exempting military, public safety, and public health);
THIRD, a requirement that for every new federal regulation, two existing regulations must be eliminated;
FOURTH, a 5 year-ban on White House and Congressional officials becoming lobbyists after they leave government service;
FIFTH, a lifetime ban on White House officials lobbying on behalf of a foreign government;
SIXTH, a complete ban on foreign lobbyists raising money for American elections.
On the same day, I will begin taking the following seven actions to protect American workers:
FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205
SECOND, I will announce our withdrawal from the Trans-Pacific Partnership
THIRD, I will direct my Secretary of the Treasury to label China a currency manipulator
FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately
FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.
SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward
SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure
Additionally, on the first day, I will take the following five actions to restore security and the constitutional rule of law:
FIRST, cancel every unconstitutional executive action, memorandum and order issued by President Obama
SECOND, begin the process of selecting a replacement for Justice Scalia from one of the 20 judges on my list, who will uphold and defend the Constitution of the United States
THIRD, cancel all federal funding to Sanctuary Cities
FOURTH, begin removing the more than 2 million criminal illegal immigrants from the country and cancel visas to foreign countries that won’t take them back
FIFTH, suspend immigration from terror-prone regions where vetting cannot safely occur. All vetting of people coming into our country will be considered extreme vetting.
Next, I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration:
1. Middle Class Tax Relief And Simplification Act. An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with 2 children will get a 35% tax cut. The current number of brackets will be reduced from 7 to 3, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35 to 15 percent, and the trillions of dollars of American corporate money overseas can now be brought back at a 10 percent rate.
2. End The Offshoring Act Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.
3. American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.
4. School Choice And Education Opportunity Act. Redirects education dollars to gives parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year college more affordable.
5. Repeal and Replace Obamacare Act. Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds. Reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.
6. Affordable Childcare and Eldercare Act. Allows Americans to deduct childcare and elder care from their taxes, incentivizes employers to provide on-site childcare services, and creates tax-free Dependent Care Savings Accounts for both young and elderly dependents, with matching contributions for low-income families.
7. End Illegal Immigration Act Fully-funds the construction of a wall on our southern border with the full understanding that the country Mexico will be reimbursing the United States for the full cost of such wall; establishes a 2-year mandatory minimum federal prison sentence for illegally re-entering the U.S. after a previous deportation, and a 5-year mandatory minimum for illegally re-entering for those with felony convictions, multiple misdemeanor convictions or two or more prior deportations; also reforms visa rules to enhance penalties for overstaying and to ensure open jobs are offered to American workers first.
8. Restoring Community Safety Act. Reduces surging crime, drugs and violence by creating a Task Force On Violent Crime and increasing funding for programs that train and assist local police; increases resources for federal law enforcement agencies and federal prosecutors to dismantle criminal gangs and put violent offenders behind bars.
9. Restoring National Security Act. Rebuilds our military by eliminating the defense sequester and expanding military investment; provides Veterans with the ability to receive public VA treatment or attend the private doctor of their choice; protects our vital infrastructure from cyber-attack; establishes new screening procedures for immigration to ensure those who are admitted to our country support our people and our values
10. Clean up Corruption in Washington Act. Enacts new ethics reforms to Drain the Swamp and reduce the corrupting influence of special interests on our politics.
On November 8th, Americans will be voting for this 100-day plan to restore prosperity to our economy, security to our communities, and honesty to our government.
This is my pledge to you.
And if we follow these steps, we will once more have a government of, by and for the people.”
When it comes to ‘saving globalization’ world leaders are still missing the point
“Philosophers have only interpreted the world, in various ways. The point, however, is to change it,” or so Karl Marx once wrote. As trade liberalization and globalization more broadly are called into question, G20 leaders could do with both interpreting the situation and changing it.
It is not an easy task for the G20, which is a diverse group of developed and emerging economies, accounting for around 80% of GDP. In spite of their great success in launching a trade and investment working group and agreeing on guiding principles of investment policy-making, G20 leaders failed to address the emergence of anti-globalization voices. Here are four things they got wrong – and three ways they can turn the situation around in 2017.
When protectionism makes sense
Here’s the first thing they got wrong when they met in China: their statement reaffirming their “opposition to protectionism on trade and investment in all its forms”. In fact, this is not only legally inaccurate, but it’s beyond their political mandate.
In the World Trade Organization’s current rule book, certain defensive trade measures are totally legitimate. That includes anti-dumping and countervailing duties, safeguard measures, and other restrictive policy instruments to protect public interest. The only caveat is these measures must be applied in a way that is consistent with the conditions and methodologies agreed by all members.
Opposing all forms of protection unnecessarily raises public fears and is politically hazardous. Some protectionist measures are designed to function as indispensable safety valves, to ensure that nations have the right to restrict trade and investment in certain, clearly defined conditions, while still benefiting from progressively liberalized trade and investment. Far from being condemned, this type of protective trade measure should be guaranteed.
In 2017, G20 leaders may wish to take a more legally sensible and politically nuanced approach. They could instead, for example, call on all members to refrain from using any illegal measures that seek to restrict trade and investment. They could also reiterate that any legal protective measures that are put in place should be strictly applied according to international economic laws and regulations.
Stop harping on about the benefits of globalization
The second thing G20 leaders spoken about in their China meeting was the importance of communicating “the benefits of trade and open markets to the wider public more effectively”.
Is this what the situation calls for right now: more preaching from trade evangelists? On the contrary, I would argue that so far, the benefits of trade have been oversold. People aren’t idiots: they’re well aware of the benefits of globalization, trade and open markets. They see the evidence in their latest smartphone, their kitchen appliances and the clothes in their wardrobe.
What leaders and policy-makers haven’t done is communicate the inevitable side-effects. As a result, those who lose out are taken by surprise when these negative consequences start to affect them. When they complain, they’re dismissed rather than shown the understanding and empathy they deserve.
In 2017, I hope G20 leaders will speak out about these negative consequences and make it clear that those people left behind by globalization have not been abandoned by their leaders.
Sharing the costs and benefits
The final thing G20 leaders spoke about in China was the need for “appropriate domestic policies to ensure that benefits are widely distributed.” In fact, it’s not just that the benefits are unevenly distributed – it’s that the negative consequences are as well. Any policies we put in place will fail unless they recognize this subtle but important distinction.
At the domestic level, that calls for policies of vertical redistribution. Public authorities should use tax revenues from globalization’s winners to empower the less competitive portion of the population who fail or gain much less in more open markets, with targeted skills training and social safety nets. A similar approach could be used for creating new job opportunities: for example, authorities could use tax revenue to increase public investment in infrastructure, improving the quality of affordable education, and lowering administrative and logistic costs for micro and small businesses.
Change is also needed at an international level. This has been very difficult to achieve so far, largely because there is an enormous amount of polarization between rich and poor countries. When workers in developed countries hear trade liberalization, they think offshoring and job losses to places like China, Mexico or Vietnam. When those in developing countries hear the term, they think of the multinationals that seem to benefit more from their cheap labour than they themselves do. Both complaints need to be addressed.
2017: a time for change?
In 2017, Germany will take over the G20 presidency. In her video outlining her vision, Chancellor Angela Merkel spoke of the need to “shape an interconnected world”, make globalization work for all, intensify international cooperation, and oppose isolationism and any return to nationalism. Interestingly, she stayed away from the ambiguous term “protectionism”.
In attempting to do so, G20 leaders should consider three important points.
Make trade, not war
First, while leaders must stop focusing so much on the benefits of globalization – which, as we’ve discussed, the public already know – they should still remember the strategic value of open trade regimes for international peace and prosperity.
“If we could increase commercial exchanges among nations through lowered trade and tariff barriers and remove international obstacles to trade, we would go a long way towards eliminating war itself”, former US Secretary of State Cordell Hull wrote in his memoirs following two devastating world wars.
The GATT, the predecessor of the World Trade Organization, was a brain child of many of those war-time statesmen. Their goal was to ensure an open, non-discriminatory and predictable trading environment. They knew all too well that when goods don’t cross borders, soldiers will.
The power of listening
Secondly, trade liberalization alone is not sufficient for guaranteeing international peace and economic wellbeing. Other international and domestic policies should be put in place if we are to reap all the benefits of trade and tackle some of its disrupting side effects.
Before developing hard policies, political leaders and opinion leaders should take a softer approach. They could start by attempting to gain a better understanding of one another’s domestic difficulties and supporting policies that could alleviate these problems and therefore help safeguard open trade.
Us against the robots
Finally, G20 leaders need to prepare for a new world where jobs are replaced by computers and automation.
This has already altered the trade landscape. According to a new study, about 88% of job losses in the US manufacturing sectors were because of automation and other domestic factors, rather than international trade.
If academics at the Oxford Martin School are to be believed, this trend will continue over the next two decades, with 47% of all jobs falling victim to automation.
No nation will escape this future, so it is up to us all to work together. We can do that by sharing best practices on how to ensure our citizens are equipped with skills that even robots can’t do, or how to strengthen laws and legislations to protect worker bargaining power. We should also look to increase level of policy harmonization between nations on taxation and employment policies.
The time for action
The economic case for trade leaves no room for uncertainty, and yet trade and globalization are coming under increasing attack. Whether the sum total of benefits and downsides of trade is positive depends not just on trade. Sustainable development also requires upgrading education, infrastructure and in-country innovation, as well as mutual understandings and policy harmonization on employment, taxation and other factors unrelated to trade.
To trade or not to trade, that is not a question. But if we want to make sure we reap the benefits it has to offer, in 2017 G20 leaders must not just talk a good talk; they must start acting to protect an open trading system in which nobody is left behind.
https://www.weforum.org/agenda/2017/01/when-it-comes-to-saving-globalization-world-leaders-are-still-missing-the-point/
Thank you for the welcome. Happy New Year and may Trump not destroy this beautiful country in next 4 years.
That is exactly why Trump gets away with a lot of his antics that would have destroyed careers of many other politicians. Here is hoping that while this strategy worked thus far, things will fall apart when people hold him accountable for the things he promised...His primary objective was to repeat his key fear points: 1) Americans have lost thousands of jobs to cheaper, emerging markets, 2)Immigrants on American soil are taking jobs from Americans, 3)The tax system is destroying jobs, 4) America’s allies are not doing and paying enough to fight terrorism, 5) Hillary Clinton is a corrupt politician who helped to create and support the growth of terrorism. We shall see how next 4 years go.
http://time.com/4388379/donald-trump-winning-arguments/
Trump Just Showed Us We Should Always Assume He Is Lying... Again
And the corporate media just failed yet another test on calling him out on his lies.
http://www.alternet.org/media/trump-just-showed-us-we-should-always-assume-he-lying-again
Donald Trump is a prolific liar. That’s neither an opinion nor a criticism, but a statement of scientific fact. In the midst of the presidential campaign, Politico analyzed a few hours of Trump’s speeches and found he lied once every five minutes on average. PolitiFact gave Trump its Lie of the Year Award for 2015, and has since determined that only 15 percent of Trump’s words are true or even mostly true. Toronto Star journalist Daniel Dale, who fact-checked Trump for 33 days and found he told as many as 25 lies in a 24-hour period (excluding debates, when he crammed up to 34 lies into 90 minutes), wrote that Trump “lies strategically. He lies pointlessly. He lies about important things and meaningless things. Above all, he lies frequently.” Trump lies so effortlessly and consistently that the Washington Post created a plug-in that, lacking the human tendency to grow fatigued, fact-checks Trump’s lie-filled tweets in real time.
With that track record, every single statement released by Trump or one of his many spokespeople, all paid liars, should be presumed a lie in need of fact-checking. The media’s default position should be that everything expelled by the Trump machine, via the mouth of Trump, his Twitter feed or his flacks' talking heads, is an untruth that should be accompanied by a disclaimer.
But the press, which gave Trump’s campaign $3 billion in free ad space, is still taking the president-elect at his word. Trump, who hasn’t given a real press conference since July, took credit for saving thousands of jobs at Sprint when he spoke briefly to the press outside his Mar-a-Lago resort on Wednesday.
“Because of what’s happening and the spirit and the hope, I was just called by the head people at Sprint and they’re going to be bringing 5,000 jobs back to the United States,” Trump stated, according to Bloomberg. “I just spoke with the head person. He said because of me they’re doing 5,000 jobs in this country.”
Engadget reporter Timothy J. Seppala notes that Sprint followed up Trump’s statement with a press release claiming the company is “excited to work with President-Elect Trump and his administration to do our part to drive economic growth and create jobs in the U.S.”
As you should absolutely expect, Trump was lying. Seppala found that way back in October, Sprint’s parent company, SoftBank, announced that “the company was sinking $100 billion into a tech-investment fund.” Reports of the new hires were being touted as long ago as April 2015. In other words, Trump had no hand in generating the jobs at Sprint that he took credit for on Wednesday. The company had already publicly boasted about its creation months ago.
Seppala pressed onward until he was able to confirm the truth from an involved party.
When I reached out to a Sprint spokeswoman asking if the announcement was a direct result of working with Trump or part of a pre-existing deal, she copy and pasted the press release I'd sent along with my first email. I responded saying I already had the press release and asked again if this was a direct result of working with Trump or part of a pre-existing deal in place. I tagged Sprint in a tweet about the situation, and it wasn't until after that started getting retweeted that the spokesperson responded.
"This is part of the 50,000 jobs that [SoftBank CEO] Masa previously announced," she said. "This total will be a combination of newly created jobs and bringing some existing jobs back to the U.S."
There’s more, per Politico:
Trump also announced that OneWeb would be hiring 3,000 people in the United States. But SoftBank earlier this month reached a deal with OneWeb to provide the upstart company $1.2 billion in funding, and OneWeb's widely publicized Dec. 19 announcement had included a commitment to “create nearly 3,000 new engineering, manufacturing and supporting jobs in the U.S. over the next four years,” according to a news release at the time.
All this is troubling for a number of reasons. Even for a politician, Trump’s tendency toward easily refutable lies seems nearly unprecedented. This is the third time in recent memory that he has lied to make it seem like he’s delivering on campaign promises about jobs. Earlier this month, Trump attacked a union leader who called out his lies about saving jobs at air-conditioner manufacturer Carrier, and weeks before that Trump was caught lying about his role in keeping Ford jobs stateside. We should see those lies coming by now, or at least recognize them as lies, because lying is all Trump is capable of doing.
That’s why it’s so troubling that the media reported Trump’s lie as truth. BoingBoing points to Oliver Willis’ blog, where he chronicled the major news agencies that “repeated [Trump’s] absolute lie in their headlines.” The list includes CNN, New York Times, USA Today, Washington Post and Reuters, among others.
As journalist Dan Gillmor noted on Twitter, in a year in which fake news was treated as the cause of everything from Trump’s sure-to-be-horrific presidency to the end of Western civilization as we know it, it’s a particularly disturbing media moment. After equating the unquestioned press reiteration of Trump lies with “propaganda,” Gillmor accused the press of engaging in the very thing it has accused various bad actors of since the election.
“When journalists knowingly publish lies they're publishing fake news,” Gillmor wrote. “When they can't be bothered to check, it's false news.” In the case of Trump, if the media ever expects to avoid either, it’s critical that the starting point for every PEOTUS quote begin with a reality check.
We’re in for a lot more of this, though we’ve already endured plenty, and certainly enough to know better. People who valued white supremacy over truth put a man in the Oval Office who has shown us countless times who he is: someone willing to lie and obfuscate at every opportunity as long as he looks good in the end. (Sprint’s complicity in spreading Trump’s lie means we should be skeptical even when he seems to have an alibi.)
The people who voted for Trump don’t care if he’s telling the truth, but the rest of us should. Authoritarians are bad at the truth, and capitalize on complacency and confusion. The demagogue in our midst is counting on us growing so accustomed to the atmosphere of lies that we breathe them in like air without noting its choking toxicity. The best strategy for the media, and for all of us, is to regard every Trump statement as a lie waiting to be disproved.
Truthfully, I don't know how it will all unfold next year and beyond. Hoping for the best but will not know until I see "actions" from Trump on what he is saying publicly. Can't seem to know how much of what he is saying is rhetoric to satisfy disenfranchised America or something that is feasible. I am leaning toward that things are changing not only in America but rest of world in this fourth industrial revolution where many people are being left behind.
Something needs to be done for this at the same time not do anything dumb policy wise to go backwards while rest of world is progressing. I am not smart enough to forecast future but below article was interesting on 2017 forecast by Statfor.
https://www.stratfor.com/forecast/2017-annual-forecast
The convulsions to come in 2017 are the political manifestations of much deeper forces in play. In much of the developed world, the trend of aging demographics and declining productivity is layered with technological innovation and the labor displacement that comes with it. China's economic slowdown and its ongoing evolution compound this dynamic. At the same time the world is trying to cope with reduced Chinese demand after decades of record growth, China is also slowly but surely moving its own economy up the value chain to produce and assemble many of the inputs it once imported, with the intent of increasingly selling to itself. All these forces combined will have a dramatic and enduring impact on the global economy and ultimately on the shape of the international system for decades to come.
These long-arching trends tend to quietly build over decades and then noisily surface as the politics catch up. The longer economic pain persists, the stronger the political response. That loud banging at the door is the force of nationalism greeting the world's powers, particularly Europe and the United States, still the only superpower.
Only, the global superpower is not feeling all that super. In fact, it's tired. It was roused in 2001 by a devastating attack on its soil, it overextended itself in wars in the Islamic world, and it now wants to get back to repairing things at home. Indeed, the main theme of U.S. President-elect Donald Trump's campaign was retrenchment, the idea that the United States will pull back from overseas obligations, get others to carry more of the weight of their own defense, and let the United States focus on boosting economic competitiveness.
Barack Obama already set this trend in motion, of course. Under his presidency, the United States exercised extreme restraint in the Middle East while trying to focus on longer-term challenges — a strategy that, at times, worked to Obama's detriment, as evidenced by the rise of the Islamic State. The main difference between the Obama doctrine and the beginnings of the Trump doctrine is that Obama still believed in collective security and trade as mechanisms to maintain global order; Trump believes the institutions that govern international relations are at best flawed and at worst constrictive of U.S. interests.
No matter the approach, retrenchment is easier said than done for a global superpower. As Woodrow Wilson said, "Americans are participants, like it or not, in the life of the world." The words of America's icon of idealism ring true even as realism is tightening its embrace on the world.
Revising trade relationships the way Washington intends to, for example, may have been feasible a couple decades ago. But that is no longer tenable in the current and evolving global order where technological advancements in manufacturing are proceeding apace and where economies, large and small, have been tightly interlocked in global supply chains. This means that the United States is not going to be able to make sweeping and sudden changes to the North American Free Trade Agreement. In fact, even if the trade deal is renegotiated, North America will still have tighter trade relations in the long term.
The United States will, however, have more space to selectively impose trade barriers with China, particularly in the metals sector. And the risk of a rising trade spat with Beijing will reverberate far and wide. Washington's willingness to question the "One China" policy – something it did to extract trade concessions from China – will come at a cost: Beijing will pull its own trade and security levers that will inevitably draw the United States into the Pacific theater.
But the timing isn't right for a trade dispute. Trump would rather focus on matters at home, and Chinese President Xi Jinping would rather focus on consolidating political power ahead of the 19th Party Congress. And so economic stability will take priority over reform and restructuring. This means Beijing will expand credit and state-led investment, even if those tools are growing duller and raising China's corporate debt levels to dangerous heights.
This will be a critical year for Europe. Elections in the pillars of the European Union — France and Germany — as well as potential elections in the third largest eurozone economy — Italy — will affect one another and threaten the very existence of the eurozone. As we have been writing for years, the European Union will eventually dissolve. The question for 2017 is to what degree these elections expedite its dissolution. Whether moderates or extremists claim victory in 2017, Europe will still be hurtling toward a breakup into regional blocs.
European divisions will present a golden opportunity for the Russians. Russia will be able to crack European unity on sanctions in 2017 and will have more room to consolidate influence in its borderlands. The Trump administration may also be more amenable to easing sanctions and to some cooperation in Syria as it tries to de-escalate the conflict with Moscow. But there will be limits to the reconciliation. Russia will continue to bolster its defenses and create leverage in multiple theaters, from cyberspace to the Middle East. The United States, for its part, will continue to try to contain Russian expansion.
As part of that strategy, Russia will continue to play spoiler and peacemaker in the Middle East to bargain with the West. While a Syrian peace settlement will remain elusive, Russia will keep close to Tehran as U.S.-Iran relations deteriorate. The Iran nuclear deal will be challenged on a number of fronts as Iran enters an election year and as the incoming U.S. government takes a much more hard-line approach on Iran. Still, mutual interests will keep the framework of the deal in place and will discourage either side from clashing in places such as the Strait of Hormuz.
The competition between Iran and Turkey will meanwhile escalate in northern Syria and in northern Iraq. Turkey will focus on establishing its sphere of influence and containing Kurdish separatism while Iran tries to defend its own sphere of influence. As military operations degrade the Islamic State in 2017, the ensuing scramble for territory, resources and influence will intensify among the local and regional stakeholders. But as the Islamic State weakens militarily, it will employ insurgent and terrorist tactics and encourage resourceful grassroots attacks abroad.
The Islamic State is not the only jihadist group to be concerned about. With the spotlight on Islamic State, al Qaeda has also been quietly rebuilding itself in places such as North Africa and the Arabian Peninsula, and the group is likely to be more active in 2017.
Crude oil prices will recover modestly in 2017, thanks in part to the deal struck by most of the world's oil producers. (Notably, no country will fully abide by the reduction requirements.) The pace of recovery for North American shale production will be the primary factor influencing Saudi Arabia's policy on extending and increasing production cuts next year. And though it will take time for North American producers to respond to the price recovery and to raise production, Saudi Arabia knows that a substantial rise in oil prices is unlikely. This means Saudi Arabia will actively intervene in the markets in 2017 to keep the economy on course for a rebalance in supply, especially in light of its plan to sell 5 percent of Saudi Aramco shares in 2018.
Higher oil prices will be a welcome relief to the world's producers, but it may be too little, too late for a country as troubled as Venezuela. The threat of default looms, and severe cuts to imports of basic goods to make debt payments will drive social unrest and expose already deep fault lines among the ruling party and armed forces.
Developed markets will also see a marked shift in 2017, a year in which inflation returns. This will cause central banks to abandon unconventional policies and employ measures of monetary tightening. The days of central banks flooding the markets with cash are coming to an end. The burden will now fall to officials who craft fiscal policy, and government spending will replace printing money as the primary engine of economic growth.
Tightening monetary policy in the United States and a strong U.S. dollar will shake the global economy in the early part of 2017. The countries most affected will be those in the emerging markets with high dollar-denominated debt exposure. That list includes Venezuela, Turkey, South Africa, Nigeria, Egypt, Chile, Brazil, Colombia and Indonesia. Downward pressure on the yuan and steadily declining foreign exchange reserves will meanwhile compel China to increase controls over capital outflows.
Calm as markets have been recently, steadied as they were by ample liquidity and by muted responses to political upheaval, they will be much more volatile in 2017. With all the tumult in 2017, from the threats to the eurozone to escalating trade disputes, investors could react dramatically. Asset prices swung noticeably, albeit quickly, in the first two months of 2016. 2017 could easily see multiple such episodes.
The United States is pulling away from its global trade initiatives while the United Kingdom, a major free trade advocate, is losing influence in an increasingly protectionist Europe. Global trade growth will likely remain strained overall, but export-dependent countries such as China and Mexico will also be more motivated to protect their relationships with suppliers and seek out additional markets. Larger trade deals will continue to be replaced by smaller, less ambitious deals negotiated between countries and blocs. After all, the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership were themselves fragments spun from the breakdown of the Doha Round of the World Trade Organization.
Economic frustration can manifest in many ways, not all of which are foreboding. In Japan, the government will be in a strong position in 2017 to try to implement critical reforms and adapt its aging population to shifting global conditions. In Brazil and India, efforts to expose and combat corruption will maintain their momentum. India has even taken the ambitious step of setting its economy down a path of demonetization. The path will be bumpy in 2017, but India will be a critical case study for other countries, developed and developing alike, enticed by the efficiencies and decriminalized benefits of a cashless economy and who increasingly have the technology at their disposal to entertain the possibility.
NOBEL ECONOMIST: 'I don’t think globalisation is anywhere near the threat that robots are'
http://www.businessinsider.com/nobel-economist-angus-deaton-on-how-robotics-threatens-jobs-2016-12
A Nobel Prize-winning economist has warned that the rise in robotics and automation could destroy millions of jobs across the world.
Angus Deaton, who won the Nobel Prize last year for his work on health, wealth, and inequality, told the Financial Times he believes robots are a much greater threat to employment in the US than globalisation.
Addressing the theory that Donald Trump's victory in the US presidential elections was fueled by a backlash against globalisation, Deaton told the FT: "Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result. I don’t think that globalisation is anywhere near the threat that robots are."
He added: "It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook. But driverless cars are another matter entirely."
Obama's White House warned on Thursday that advances in artificial intelligence and robotics have the potential to wipe out millions of jobs in factories and industries like trucking, potentially increasing inequality.
The World Economic Forum (WEF) predicted a "Fourth Industrial Revolution" at the start of this year, as automation and robotics transform the global economy and the way we work. WEF expects 5 million jobs to be destroyed by 2020 by the trends. An in-depth study by Citi and Oxford University also found that 77% of all jobs in China are at risk of automation and 57% of all jobs across the OECD.
Changes are already starting to be seen. Foxconn, a key manufacturing partner for Apple, Google, Amazon, and the world's 10th largest employer, has already replaced 60,000 workers with robots. And two of the world's ten largest employers globally — Walmart and the US Department of Defence — are using drones, for warehouse delivery and surveillance respectively.
Nobel economist Angus Deaton on a year of political earthquakes
Over trout in Princeton, the laureate says he’s glad the Clinton era is over and it isn’t only Trump voters who feel ‘excluded’
Having never lunched with a Nobel laureate before, I land early and prepared in the parking lot outside Mistral. The sleek Princeton eatery, whose chefs playfully blend local produce and global inspiration and describe themselves as “food activists”, is Angus Deaton’s favourite place to eat in town. Yet things quickly start to go awry when I find myself standing in the cold rain trying to wrestle my credit card out of a parking meter that is not just refusing to recognise it but seems to want to confiscate it. Getting increasingly wet, I am also caught in a logistical bind. The clock is ticking. Do I keep the laureate waiting or risk having to explain a parking ticket to the editor? I finally extract the card and decide to risk the fine. My boss will understand. My guest might not.
By the time I make it inside, I am a few minutes late and Deaton, winner of the Nobel Prize for economics in 2015 and optimistic defender of globalisation, is installed already at a small table on the far side of the room. I shake his hand and offer my apologies.
Deaton is gracious about my bind and offers some advice. It helps that he looks like he has been plucked from central casting for emeritus professors: requisite tweed jacket, jumper and wire-rimmed glasses; white hair just unkempt enough to give a flicker of Ivy League eccentricity. He is also wearing a blue bow tie with vivid red stars that once belonged to one of his mentors, the late Richard Stone, fellow Nobel Prizewinner and the godfather of British national accounts.
Mistral is bright and airy despite the rain outside, and filled with music, cheer and the clanging of cutlery and plates. The noise forces us — two slightly rumpled large men — to lean across the small table to hear each other. I can’t help thinking that we are also, in the parlance of 2016, two “metropolitan elites”, sipping a smooth Oregon pinot noir and pondering death, pain and Donald Trump.
The president-elect is one reason I am here, of course. At the close of a year that has upended western politics, Deaton is among those best placed to explain the populist earthquakes.
Just weeks after he won the Nobel Prize, Deaton and his wife, fellow Princeton economist Anne Case, published a paper revealing an alarming trend in US society: a surge in suicides and other “deaths of despair” among high school-educated white men had reached such an alarming level that middle-aged whites collectively had become the only demographic group in America in decades to see rising mortality. By their calculations, between 1999 and 2013 as many as 490,000 extra lives were lost as a result of the shift.
The Case/Deaton study was seized on as causal evidence for the rise of Trump and his appeal to disgruntled white voters in the American heartland. When President Obama welcomed Deaton and his fellow 2015 laureates to the White House, he spent most of a 45-minute meeting with the group interrogating the two economists about their findings. “He opened the door himself and shook my hand and I said, ‘I’d like to introduce you to my wife’. And he said ‘Professor Case needs no introduction. I’m a huge admirer of her work’,” Deaton recounts. “She just melted because we’d published the paper like the week before on the dying white people and he said, ‘We’re going to talk about your paper.’ And he’d read it down to the footnotes!”
Our waitress is full of American efficiency and the first of our food arrives quickly, a trout rillette served with pickled fennel and potato chips that Deaton has nominated as a favourite. An avid fly fisherman, he spends his summers stalking trout in Montana. “After a day’s fishing I’ll know the solution to something or have good ideas that were not accessible before,” he tells me later.
Back to Obama. “The man has a lot of class,” says Deaton. “He may not have been a very effective president. But that’s beside the point now I guess.”
In the wake of November’s US presidential election result, the quip is telling. Deaton is among those who sees Trump’s election — and the Brexit vote that shocked the UK earlier in the year — as a consequence of the arrogance of political elites.
He is scathing about the Clintons, and Hillary Clinton in particular, for their links to a broken establishment. “One of the great benefits of the election to me is that I don’t have to pretend that I like her,” he tells me at one point, even as he confesses he reluctantly voted for her.
But his bigger frustration is with what he sees as the detached and technocratic backgrounds of so many people in centrist politics nowadays.
“If you think about the first leaders of the UK’s Labour party, they were singing hymns on the train platform as they went off to work. And they were of ‘those people’,” he says. “If you think of someone like Gordon Brown, who I have immense admiration for, and Obama — and the high point of my year this year was my meeting with Obama — he’s not one of ‘those people’ any more. He’s an intellectual with progressive views who is making policy in a way that he judges is good for those people.”
***
Deaton’s view is derived from his own background. Born in Edinburgh in 1945, he is the grandson of a Yorkshire coal miner, and the son of a civil engineer whose own battles to get an education drove him to push young Angus into a rigorous study routine that eventually led to a scholarship to Fettes, Scotland’s Eton, then Cambridge.
“I’ve always — and not always happily — considered myself an outsider,” Deaton tells me. “Certainly at Fettes. And then the Scots are always outsiders in England. They are always putting you in your place in one way or another and there is this pretty rigid class hierarchy.
This, he considers, “is a true sympathy that I think I have with these people who support Trump.”
Fishing in Montana has also contributed to his understanding. “You meet these people who are quite impoverished and they have a different set of values?.?.?.?Fishing guides with health problems, who are veterans and refuse to go to the [Veterans Administration hospital for free care] because they see it as a handout.”
Deaton is conscious that there is an irony to his feeling of alienation from the elite. A few days after we meet he is to be knighted by the Queen “for his services to research in economics and international affairs”, capping a remarkable year. While we lunch, Case is in New York picking up a hat to wear to Buckingham Palace.
“I’ve always shared the idea of being excluded,” he says. “Maybe I should stop feeling that. I think there’s this sense of not being recognised, which in my case is absurd and it’s just not true.”
Brexit has only amplified his feelings of detachment, however. He is against both a UK exit from the EU and Scottish independence. Yet 2016 has left him, like many Scots, reconsidering the latter. “I think the dilemma [Brexit] poses for Scotland is pretty intolerable,” he says. “If Scotland has to clean out all its universities of European citizens there are really horrible things that are going to happen.”
He has ordered a roasted pepper and broccoli rabe flatbread pizza with pine nuts, feta cheese, pickled raisins and a fried egg on top. I dig into a plate of creamy burrata served with beets, pear and hazelnuts. We toast. “So are you happy with this the way it is?” Deaton asks. I nod enthusiastically, confessing that if he has an obsession with data then I have one with burrata.
Deaton retired from his position at Princeton in the spring but he and Case are continuing to dig into the data. Since the election others have seized on the correlation between places with high white mortality rates and votes for Trump. But the link to those who report suffering from physical pain is even greater, Deaton says. He sees an epidemic of pain and a related flood of opioids into communities over the past decade as being, more than globalisation or economic dislocation, the real cause of rising mortality among middle-aged white Americans.
With Gallup’s help he has been collecting data on how many people report having felt physical pain in the past 24 hours and says the numbers are staggering in the US. What is causing that epidemic — and its links to Trump’s rise — remains unclear, he says. He seems more willing to blame pharmaceutical companies and doctors for overprescribing opioids. A surge in addiction (drug overdoses caused more deaths in the US last year than auto accidents) has, he argues, proved far more fatal than globalisation.
***
Deaton’s 2013 book The Great Escape argued that the world we live in today is healthier and wealthier than it would otherwise have been, thanks to centuries of economic integration. He sees efforts to blame globalisation for woes in the US Rust Belt or Britain’s beleaguered industrial areas as a mistake.
“Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result,” he says. “I don’t think that globalisation is anywhere near the threat that robots are.”
Our next course has landed. Deaton has a grilled shrimp Caesar salad placed before him while I have Weisswurst served in a hotdog bun with apple kraut.
In his book, Deaton argues there is an inextricable link between progress and inequality and his views on wealth and innovation are complicated by that. “It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook,” he tells me. “But driverless cars are another matter entirely,” with millions of truck and other drivers likely to lose jobs.
It’s hard to think Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook. But driverless cars are another matter entirely
Asking whether inequality is bad for economic growth is, Deaton says, a “simple-minded question”. Yet inequality manifested in wealthy people or corporations buying control of government is a different matter. “That surely is a catastrophe. So I have come to think that it’s the inequality that comes through rent-seeking [the use of wealth to influence politics for selfish gain] that is the crux of the matter.”
I ask him what we should make of president-elect Trump’s installation of fellow billionaires in his first cabinet?
He shrugs. “I know. But then the Obama administration was elected on that platform [of change] and tried and didn’t succeed very well. And the Clintons just seem like the opposite of the way you want to do this stuff.”
Deaton’s work on wellbeing is among his best-known and he once argued that happiness effectively peaked once a person was earning the equivalent of $75,000 a year. Would Trump be happy on $75,000 a year? Would Deaton?
Deaton points out the paper’s conclusion was actually that gains in happiness flattened out once you rose out of poverty. “And I’ve been there where your life is really, really shadowed by not knowing where the money is going to come from?.?.?.?It’s a misery.”
“I doubt that Donald Trump would be happier?.?.?.?if he was a different person. But Trump is always telling people how great his life is and about all the great things that he’s done and that’s also all about his income. And that’s also what we found. If you ask people how their lives are going, as a whole, it seems they tend to point to income,” regardless of the diminishing gains in happiness.
He pauses. “I certainly have had more income in the last year.”
What have you done with the [Nobel] prize money? I ask.
“Well, I retired from Princeton,” he says, smiling.
Our dessert arrives. Deaton has recommended what turns out to be a delicious brown butter cake with crispy slices of fried fig and lemon poppy seed ice cream.
It feels like time to ask about the future. What of all those who see — in Brexit, Trump and the rise of populism in Europe — a looming end to the postwar liberal economic order?
“Let’s hope not,” he answers. “You can certainly draw a picture of 2016 which makes it look like the 1930s, which of course is what everyone is doing.” Deaton takes the long view and is convinced of the durability of progress, partly because he is also a product of globalisation and views things more broadly.
Although he holds both US and British citizenship, he identifies most strongly as an expatriate Scot and part of a tradition of ambitious young Scots who have ventured out into the world since 1707, when the union with England opened the British colonies to them.
“It was that opening which created those opportunities, which those people seized, and prospered. That’s why it’s hard for me to think differently,” he says. In places such as India, where he has worked extensively, the gains from globalisation have also contributed to “a huge decline in social oppression and it has happened worldwide,” he says, pointing to the gains made in women’s rights and gay rights in recent decades.
In Trump — and those he has appointed to cabinet posts — Deaton actually sees a reversion to the Republican mean, rather than a revolution. A Republican’s win was something that, according to US history, was always a more likely scenario than the election of another Democratic president.
He also welcomes the shaking up of liberal institutions and expects an adjustment. “The good story is these will all be warnings to the elites that you can’t go on like this.”
As the waitress refills our sparkling water, Deaton returns one last time to “dead white people”. “Despite what I said before, economics is a big part of the story that we haven’t put our fingers on,” he offers. “My guess is that economics and the decline of unions and the sense of not being represented any more prepared the soil for this horrible upheaval. They certainly lost these jobs in manufacturing and those jobs came with unions which provided them with representation. So they are deprived of that and that makes them more susceptible to suicide and depression.”
Would The Great Escape be less optimistic if he wrote it today? “No. I don’t think so. Because I’m talking about the last 250 years.”
A few minutes later we say goodbye and I wander back to my rental car. There is a limp, wet parking ticket stuck to my windscreen, a $40 fine. I smile. I’m also drawn back to the advice Deaton offered when I first sat down and mentioned my fear of a looming ticket.
“I’m sure you can get out of it,” the Nobel laureate told me. “Just tell them the system was broken.”
NOBEL ECONOMIST: 'I don’t think globalisation is anywhere near the threat that robots are'
http://www.businessinsider.com/nobel-economist-angus-deaton-on-how-robotics-threatens-jobs-2016-12
A Nobel Prize-winning economist has warned that the rise in robotics and automation could destroy millions of jobs across the world.
Angus Deaton, who won the Nobel Prize last year for his work on health, wealth, and inequality, told the Financial Times he believes robots are a much greater threat to employment in the US than globalisation.
Addressing the theory that Donald Trump's victory in the US presidential elections was fueled by a backlash against globalisation, Deaton told the FT: "Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result. I don’t think that globalisation is anywhere near the threat that robots are."
He added: "It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook. But driverless cars are another matter entirely."
Obama's White House warned on Thursday that advances in artificial intelligence and robotics have the potential to wipe out millions of jobs in factories and industries like trucking, potentially increasing inequality.
The World Economic Forum (WEF) predicted a "Fourth Industrial Revolution" at the start of this year, as automation and robotics transform the global economy and the way we work. WEF expects 5 million jobs to be destroyed by 2020 by the trends. An in-depth study by Citi and Oxford University also found that 77% of all jobs in China are at risk of automation and 57% of all jobs across the OECD.
Changes are already starting to be seen. Foxconn, a key manufacturing partner for Apple, Google, Amazon, and the world's 10th largest employer, has already replaced 60,000 workers with robots. And two of the world's ten largest employers globally — Walmart and the US Department of Defence — are using drones, for warehouse delivery and surveillance respectively.
The Fourth Industrial Revolution
https://forecastingeconomy.wordpress.com/2016/12/25/the-fourth-industrial-revolution/
How should we compensate the losers from globalisation?
http://blogs.ft.com/gavyndavies/2016/12/11/how-should-we-compensate-the-losers-from-globalisation/
The rise in political “populism” in 2016 has forced macro-economists profoundly to re-assess their attitude towards the basic causes of the new politics, which are usually identified to be globalisation and technology. The consensus on the appropriate policy response to these major issues – particularly the former – seems to be changing dramatically and, as Gavin Kelly persuasively argues, probably not before time.
Unless economists can develop a rational response to these revolutionary changes, political impatience will take matters completely out of their hands, and the outcome could be catastrophic. Unfortunately, while the nature of the problem is coming into sharper focus, the nature of a solution that makes economic sense while also being politically feasible remains embryonic at best (see Danny Leipziger).
Until very recently, the mainstream attitude of economists towards globalisation was straightforward. Free trade was overwhelmingly believed to increase productivity and overall economic welfare, both in developed economies and emerging economies.
Therefore, it was argued that barriers to trade and international capital movements should be reduced as rapidly as possible, wherever they existed. While it was recognised that there could be losers from free trade in the developed economies, these losers were thought to be few and temporary, compared to the gainers, who were many and permanent.
The political upheavals of 2016 have forced economists to reconsider. The final shape of what is now called “populism” is not yet entirely clear. It does not seem to fit easily on the traditional right/left, or liberal/conservative, spectrum. This is why two of the most obvious benefits of the political revolution, Theresa May and Donald Trump, are hard to categorize in this regard [1].
There does, however, seem to be one unifying theme and that is a resurgence in economic nationalism, with a collapse in support for internationalism or globalisation. Since the “elites” are seen as the main beneficiaries of globalisation in the developed economies, this has gone hand in hand with anti-elitism and a rejection of advice from “experts”. The latter could easily develop into anti-rationalism, which would surely prove disastrous in the long term.
Economists have now recognised these dangers, and a new consensus has started to emerge. There has been (almost) no change in the overwhelming belief that free trade and globalisation are good things for society as a whole. But it is now much more widely accepted that the losers from these changes can be more numerous, more long lasting and more politically assertive than previously thought.
The new consensus holds that the gains from globalisation can only be defended and extended if the losers are compensated by the winners. Otherwise, pockets of political resistance to the process of globalisation will begin to overwhelm the gainers, even though the latter remain in the majority [2].
While the compensation principle seems clear enough, the complexity of actually getting it done is much greater. As Jared Bernstein says, the rust belt needs help, but it is not clear how to help the rust belt. Nor is it at all obvious that there would be a political or economic consensus supporting some of the most obvious measures that could be adopted, at least on the scale that would be needed to make a noticeable difference.
The main gainers from globalisation have been twofold: unskilled labour in the emerging world, and those at the upper end of the income scale in the developed economies. The main losers have been industrial workers in the developed world. (See Mark Carney for some compelling evidence on this topic.) The most direct “solutions” to the problem would presumably be to take measures that would reverse these changes in income distribution, either globally or within the boundaries of the developed world.
This is why President-elect Trump has focused protectionist proposals on imports from Mexico and China, which are clearly the most important threats to the manufacturing sector in the United States. Unfortunately, tariffs on manufactured imports from these two countries are likely to displace production to other emerging economies, not to the industrialized regions of America.
Furthermore, a more general restriction on all manufactured imports into the US would raise prices to American consumers, cause disruptions to domestic output as key imported components became scarce, and worsen the productivity crisis that is already serious enough anyway. This would also redistribute income away from workers in the emerging world, who are still low paid by global standards. That would not deserve to command general consent in the political process, but there is a rising danger that it could happen anyway.
What about compensating the losers by redistributing income away from those who have gained inside the developed economies, mainly at the upper end of the income scale? That approach might be seen to respect the principles of natural justice, since it would reverse the “windfall” redistribution in income and wealth caused by free trade.
It does, however, run into very familiar difficulties with a generalized redistribution of this type. It would be difficult to distinguish between those who have lost from globalization, and those who have hit upon hard times for other reasons, including the results of their own choices. And it would undermine economic incentives to take risk and promote expansion.
The principle of compensation for loss already operates through the tax and benefits system, and it could be argued that this already provides the safety net that society has seen as optimal in the past. Why does this new source of loss merit a new and larger form of compensation than previously provided against other economic shocks, like recessions and shifts in the composition of demand away from certain types of production?
One answer to this question is that the losers from globalization tend to be concentrated in particular regions, like the American rust belt and Northern England. It is particularly hard for people in these regions to recover. This would argue for regional transfers, away from more successful regions like the coastal states in America, and London in the UK. These ideas have been tried in the past, without any great success, even when implemented in large scale, such as the transfers made to East Germany after the Berlin Wall came down (see Paul Krugman).
Is this a counsel of despair? No, but it does warn of great difficulties ahead, and of the dangers (entirely ignored by candidate Trump) of raising false hopes in the afflicted regions.
Some progress is certainly being made. Lawrence Summers calls for “responsible nationalism”. Maurice Obstfeld, the outstanding Chief Economist at the IMF, has outlined a long list of appropriate policy measures, including programmes of retraining for the unemployment, regional infrastructure spending, etc. [3]
But while he calls for “trampoline” policies that offer a springboard to new jobs, rather than “safety net” policies, these interventions are rather familiar to Obama-style liberals. Meanwhile the Republicans in the US and the Conservatives in Britain seem to have decided to go down a very different path. Liberal economic solutions, while attractive to the IMF, have the wrong set of politicians in power.
If we cast our minds back 12 months, no one predicted Brexit or Donald Trump’s victory. Politics is moving fast, and economics needs to catch up. How to compensate the losers from globalisation will be the big story in macro in 2017.
——————————————————————————————————–
Footnotes
[1] A “populist” uprising would not normally be expected to lead to a large and immediate reduction in corporate tax rates, which is the most obvious consequence of Brexit and Trumpism in their early days. This surprising development shows how difficult it will be for investors to predict the policy changes that “populism” will bring.
[2] The victory of Donald Trump over Hillary Clinton was an obvious case in point. Trump won because he attracted disproportionate support in the rust belt states, while Clinton attained an overall majority of the popular vote. This was a good example of the age-old electoral principle that a few large losses can have a greater effect on electoral outcomes than a huge number of small gains.
[3] The policy menu suggested by Maurice Obstfeld includes: retraining, education, infrastructure, health investment, better housing, lower barriers to entry for new businesses, partial wage insurance for displaced workers, the earned income tax credit, and international co-ordination against tax avoidance.
The CEO of United Technologies just let slip an unintended consequence of the Trump-Carrier jobs deal
Greg Hayes, the CEO of United Technologies, the parent company of the heating and air-conditioner manufacturer Carrier, just let slip a consequence of a deal struck to keep jobs in Indiana.
And American workers won't like it.
Carrier said last month that it would keep more than 1,000 jobs across two locations in Indiana, following pressure from President-elect Donald Trump. The decision was touted as a win for the incoming president, who had pledged keep the jobs from moving to Mexico.
In a wide-ranging interview with CNBC's "Mad Money with Jim Cramer" that aired Monday, Hayes set out the comparative advantages of moving to jobs to Mexico, the motivation behind his decision to keep those jobs in Indiana, and the ultimate outcome of the deal: There will be fewer manufacturing jobs in Indiana.
Before we get to that
First, Hayes was asked what's so good about Mexico. Quite a lot, it turns out. From the transcript (emphasis added):
JIM CRAMER: What's good about Mexico? What's good about going there? And obviously what's good about staying here?
GREG HAYES: So what's good about Mexico? We have a very talented workforce in Mexico. Wages are obviously significantly lower. About 80% lower on average. But absenteeism runs about 1%. Turnover runs about 2%. Very, very dedicated workforce.
JIM CRAMER: Versus America?
GREG HAYES: Much higher.
JIM CRAMER: Much higher.
GREG HAYES: Much higher. And I think that's just part of these — the jobs, again, are not jobs on assembly line that people really find all that attractive over the long term. Now I've got some very long service employees who do a wonderful job for us. And we like the fact that they're dedicated to UTC, but I would tell you the key here, Jim, is not to be trained for the job today. Our focus is how do you train people for the jobs of tomorrow?
So Mexico has cheaper labor with a much more dedicated workforce, and these are the kinds of low-skilled jobs most people don't find that attractive. Elsewhere in the interview, he made clear that United Technologies intended to keep engineering jobs in the US and that these higher-skilled jobs were not at risk of being moved overseas.
"The assembly lines in Indiana — I mean, great people," Hayes said. "Great, great people. But the skill set to do those jobs is very different than what it takes to assemble a jet engine."
Hayes was then asked why he decided to cancel the move to Mexico. From the transcript (emphasis added):
GREG HAYES: So, there was a cost as we thought about keeping the Indiana plant open. At the same time, and I'll tell you this because you and I, we know each other, but I was born at night but not last night. I also know that about 10% of our revenue comes from the US government. And I know that a better regulatory environment, a lower tax rate can eventually help UTC of the long run.
But here's the kicker
The result of keeping the plant in Indiana open is a $16 million investment to drive down the cost of production, so as to reduce the cost gap with operating in Mexico.
What does that mean? Automation. What does that mean? Fewer jobs, Hayes acknowledged.
From the transcript (emphasis added):
GREG HAYES: Right. Well, and again, if you think about what we talked about last week, we're going to make a $16 million investment in that factory in Indianapolis to automate to drive the cost down so that we can continue to be competitive. Now is it as cheap as moving to Mexico with lower cost of labor? No. But we will make that plant competitive just because we'll make the capital investments there.
JIM CRAMER: Right.
GREG HAYES: But what that ultimately means is there will be fewer jobs.
The general theme here is something we've been writing about a lot at Business Insider. Yes, low-skilled jobs are being lost to other countries, but they're also being lost to technology.
Everyone from liberal, Nobel-winning economist Paul Krugman to Republican Sen. Ben Sasse has noted that technological developments are a bigger threat to American workers than trade. Viktor Shvets, a strategist at Macquarie, has called it the "third industrial revolution."
Hayes said in the same interview that United Technologies was focused on how to "train people for the jobs of tomorrow."
In the same breath, he seems to be suggesting the jobs it is keeping in Indiana are the jobs of yesterday.
The Next Industrial Revolution
http://www.theatlantic.com/business/archive/2016/09/the-next-industrial-revolution/498779/
A “crisis of abundance” initially seems like a paradox. After all, abundance is the ultimate goal of technology and economics. But consider the early history of the electric washing machine. In the 1920s, factories churned them out in droves. (With the average output of manufacturing workers rising by a third between 1923 and 1929, making more washing machines was relatively cheap.) But as the decade ended, factories saw they were making many more than American households demanded. Companies cut back their output and laid off workers even before the stock market crashed in 1929. Indeed, some economists have said that the oversupply of consumer goods like washing machines may have been one of the causes of the Great Depression.
What initially looked like abundance was really something more harmful: overproduction. In economics, as in anything, too much of a good thing can be problematic.
That sentiment is one of the central theses of The Wealth of Humans, a new book by the Economist columnist Ryan Avent about how technology is changing the nature of work. In the next few years, self-driving cars, health-care robots, machine learning, and other technology will complement many workers in the office. Counting both humans and machines, the world’s labor force will be able to do more work than ever before. But this abundance of workers—both those made of cells and those made of bits—could create a glut of labor. The machines may render many humans as redundant as so many vintage washing machines.
Once again, what once seems like abundance will instead be over-supply: The machines may invent their makers out of work.
Last week, I spoke with Avent about his book, how his theories might help to explain the 2016 election, and the future of working. The following conversation has been edited for clarity and concision.
Derek Thompson: In classic Economist style, your title, The Wealth of Humans, is doing double or triple duty. First, it’s a play on Adam Smith’s The Wealth of Nations, and indeed there’s a lot of Smith in here. Second, it’s a book about the most common definition of wealth, money, and how it might be earned and distributed in the future. Third, it’s about Merriam-Webster’s second definition of wealth, which is a surfeit, a surplus, and your argument is that we may be entering a world with too many workers. Anything I’m missing?
Ryan Avent: Those were the ones I had in mind. There may be others lurking.
Thompson: There is an ongoing debate about whether technological growth is accelerating, as economists like Erik Brynjolfsson and Andrew McAfee (the authors of The Second Machine Age) insist, or slowing down, as the national productivity numbers indicate. Where do you come down?
Avent: I come down squarely in the Brynjolfsson and McAfee camp and strongly disagree with economists like Robert Gordon, who have said that growth is basically over. I think the digital revolution is probably going to be as important and transformative as the industrial revolution. The main reason is machine intelligence, a general-purpose technology that can be used anywhere, from driving cars to customer service, and it’s getting better very, very quickly. There’s no reason to think that improvement will slow down, whether or not Moore’s Law continues.
I think this transformative revolution will create an abundance of labor. It will create enormous growth in [the supply of workers and machines], automating a lot of industries and boosting productivity. When you have this glut of workers, it plays havoc with existing institutions.
I think we are headed for a really important era in economic history. The Industrial Revolution is a pretty good guide of what that will look like. There will have to be a societal negotiation for how to share the gains from growth. That process will be long and drawn out. It will involve intense ideological conflict, and history suggests that a lot will go wrong.
Thompson: Even I would admit that is a weird time to predict the end of work, considering that the unemployment rate has been at or under 5 percent all year, the private sector in the U.S. has created jobs for record-high 77 consecutive months, and wages are actually rising at their fastest rate since the Great Recession.
So what is the best evidence that your prediction is plausible?
Avent: I would say the best evidence comes from the wage growth numbers. I know we’ve experienced an uptick in recent months, but we’re seven years into the recovery and still well short of the level of nominal wage growth we would expect, even compared to recent disappointing recoveries. In the bigger picture, for a lot of middle-skilled workers, especially men, you have stagnating wages for several decades. Apart from the top 1 percent, a lot of people are having a lousy time.
If you look at the experience of rich countries across the world, you see there is a tradeoff between wage growth, productivity, and employment growth. Employment in Britain is at an all-time high, and wage growth there has underperformed America and most of Europe. This suggests that the main way that employers are using people in countries like the U.K. is to use them to do low-productivity work.
Thompson: There is a familiar story of technology and the labor force that one might call the “we used to” story. We used to work on farms, we used to work in textiles, we used to work in factories … What’s the next chapter of the “we used to” story? What sector currently employing a lot of Americans is the lowest-hanging fruit for disruption?
Avent: Driving is certainly an area where we’ve seen more rapid progress than I would have guessed. Truck drivers, bus drivers, and train drivers have pretty good pay and those account for millions of jobs. Most importantly, there seems to be an interest among companies employing those workers to bring [the tech that would replace humans] forward. In the long run, I’m optimistic for technology to transform health care, but that’s a harder sector to disrupt.
Machine intelligence will be applied in ways we cannot imagine yet. One example is talking. Today, if you have a problem with a car company, you might end up conversing with a bot over the phone. Those are conversations that we thought weren’t automatable that are now. We used to employ a lot of people to talk to people and people have those conversations with bots.
Thompson: At the moment, there is some evidence that wages are rising fastest at the bottom, which is an interesting challenge to these theories. You’ve predicted that wages won’t rise for a substantial share of middle and low-skill workers, because there is an abundance of labor. But you also predict that high wages for easily automated jobs will be a big fat target for automation, because employers will want labor-saving technology wherever they can save the most money.
So, I wonder, do you regard rising wages for fast-food workers today as a challenge to your theory, or a development that will hasten the automation of fast-food joints, because when McDonald’s workers are earning high wages, it’s more tantalizing for management to replace them with machines?
Avent: It will be interesting to see how increases in the minimum wage affect this. You see stories of robotic burger-flippers and people ordering food through iPads. It’s possible you see more of that as minimum wages rise. It seems like there is technology waiting on the shelf to displace that work.
I think I would say: If in 10 years time, workers in those jobs have received a substantial raise relative to current levels, and employment has not fallen, and productivity has not gone up, that would be evidence that I’m wrong. But my expectation is that as these workers become more expensive, you’ll see more interest in the technology that could displace them.
I should add that that would be a very good thing! We want businesses to invest in tech that makes the economy more productive.
Thompson: Your book is very good on the intersection of two ideas that don’t often interact in economic analysis, which is the future of work and housing policy. It is ironic that liberals, who in the abstract support more inclusive immigration and shared wealth, often live in coastal metros areas that are exclusive by design—they are built around water, limit housing height, and declare certain zones out-of-bounds for further construction. As you point out in the book, one of the tallest buildings in New York City is a residential tower on Park Avenue that is home to a stack of billionaires who, although they could live in any ZIP code on the planet, have chosen to live on top of each other, like candies in a Pez dispenser.
I can imagine a future where these rich liberal cities might also be on the frontline of the coming automation wave. It seems to me that technology adoption for services like Uber spreads fastest among densely populated areas with young, educated workers who are early adopters. That’s cities. Plus, labor-saving technology is most tantalizing where wages for low-skill work is highest. That’s cities, too. Might these rich cities be canaries in the coal mine for technology displacing human workers?
Avent: That’s an interesting question: I think I would say yes. Big cities like London, New York, and San Francisco play out in miniature the debates we’ll see at a national level. They’re generating phenomenal wealth, and people who don’t have access to it can be left behind.
These cities tend to be early adopters of Uber and other sharing economy apps, which are systematizing jobs in ways that make them more automatable. For example, once you take the brain out of the driving, it’s just a person following a map, and it’s easy to imagine a machine just following a map. I could also imagine that in these cities, in-person contact becomes something like a luxury good.
Thompson: Like the phenomenon of $120,000 nannies and Latin tutors on the Upper West Side.
Avent: Yes. The very rich will still want people, their own personal shoppers and assistants. Being able to retain human labor would be a sign that you’re wealthy. So even in a future city that had a lot of laborers replaced with technology, you might still have artisanal service sector workers.
Thompson: One of the popular solutions to this problem is the idea of a universal basic income, or UBI—a bare minimum that every adult would be owed that is paid out of this new wealth. What do you think of UBI?
Avent: Right now, our safety net is mostly insurance for the young and the old and people with bad luck. The expectation is that most people pay into it and therefore they expect insurance when they get old or sick. A universal basic income is a totally different social contract. It says that, on a permanent basis, a large class of people will probably be subsidized by a different class. That’s a much trickier thing politically, and it raises questions about the value that they are contributing to society.
Thompson: This question of who gets what in America and who is worthy of a piece of our national wealth seems in many ways to be at the heart of Bernie Sanders and Donald Trump phenomena, don’t you think?
Avent: Bernie Sanders and Donald Trump are two sides of the beginning of this social evolution. Bernie is pushing along the direction of, "let’s distribute more." Trump is pushing along a related direction which is, "let’s exclude others who are not like us." The book talks at the end about how redistribution creates political pressure to exclude those who don’t belong, who aren’t like the majority. The rise of nationalistic political figures in America and in Europe is related to the idea that the majority wants to draw the circle of society closer.
Thompson: I think that too often work is defined in these conversations as a narrow exchange: employee labor for employer money. But as you write—not only in this book, but also in your essay on hard work—a job is so much more than that. It’s a social network, it’s a distraction, it’s a way to fill the day, it’s a source of status and pride and ownership. Even if the number of salaried jobs as a share of the labor force declines, this is something we really don’t want to lose.
Avent: People enjoy work. Even those who don’t enjoy what they do enjoy the feeling of agency and being able to provide for others. For a world to work where a universal basic income accounts for the bulk of the consumer spending for many people, something else needs to account for the social side of work. It is disappointing to think that we’d have to create make-work for people, but it may be the hard truth.
We’re a long way away from that world. What comes next would be higher wage subsidies and in-kind benefits, like tuition-free college or subsidized health care. But it’s coming, and the debate will be: If we’re going to pay people to do work that isn’t necessary, who do we let into the system? Who is allowed to benefit?
Interesting argument....
thefederalist.com/2015/10/20/america-please-stop-glorifying-manufacturing-jobs/
When will people see the scam in Trump?
www.chicagotribune.com/news/opinion/commentary/ct-trump-white-working-class-scam-20161125-story.html
Trump’s first 100 days: Immigration, trade and more policy plans outlined
http://www.amny.com/news/politics/trump-s-first-100-days-immigration-trade-and-more-policy-plans-outlined-1.12651197
Five ingredients for a populist backlash - Niall Ferguson
The Stock Market Could be Underestimating This Company’s Value
http://centsandsense.com/investment/intrepid-potash-1/
By Jason In INVESTMENT, MAKING CENTS 25 Sep 2016
Before going into today’s post, I want to remind you not only about the disclosures of this site, but also that you should always do your own due diligence when making your own investment decisions.
One of the main holdings in my personal portfolio is a small company called Intrepid Potash (IPI). IPI produces potash and langbeinite — both primarily used in the agricultural industry as a fertilizer but which also has other uses in the animal feed and oil and gas drilling markets.
I heard about this company from a close college friend, Tarik, who conducted his own original research on the company and I subsequently ran through my own diligence process.
At a very high level, the company’s financial statements indicate an accounting value to shareholders of $396 million, and yet the current market capitalization is only $81 million. In theory, if you were to buy the stock at the current market price of $1.06 per share, you would be receiving 4.89x that in shareholder value (one heck of a safety or profit margin).
However, potash prices are at multi-year lows and the company has been losing money as it seeks to reduce its costs. The question is — will the company lose $300 million or more for shareholders to lose equity in the company from today’s market prices?
There are a couple interesting points about the company.
1. The shareholder accounting value (aka “book value”) of $5.22/share was written down from $12.47/share in December 31, 2014. As potash prices have fallen, the company wrote down or wrote off over $6.83/share in net property, plant, equipment and mineral properties, and non-current deferred tax assets alone.
This write down potentially indicates that the company’s assets are valued conservatively — and that there is potential to add back lost value if potash prices improve and/or the company becomes profitable and realizes lost value in its $150 million in lost deferred tax assets or $450 million in reduced value of its net property, plant, equipment and mineral properties.
2. With such a huge discount to book value, the market is implying that 1) the company’s assets are still overblown despite a huge write down in 2015, 2) the company may never achieve profitability, and/or 3) that the company should be priced for bankruptcy.
I find it hard to believe that the company could rationally have zero other options except losing over $300 million before returning capital to shareholders. Even if the company sold its current properties for half its accounting value, at these levels shareholders could make a 100% or more return after all liabilities are paid off.
Interestingly, on the liabilities front, major debt payments aren’t due until 2020, giving the company more than 3.25 years to find a path to profitability, monetize its inventory or other assets, or for potash prices to recover, although the company does need to renegotiate some debt covenants (more on this later).
And on the point about potash prices, there are indications that potash prices could have hit a bottom — having increased in price these past couple weeks, as producers shutter or idle production facilities, and as players in the industry consolidate or take steps to rationalize supply and demand.
3. Interestingly, the CEO, President and Executive Chair of the company has been a huge buyer of IPI shares since September 2015 when the stock was trading at $7.29 per share. If this insider has been purchasing shares at multiples of the current stock price, and continues to purchase shares (most recently in May 2016), then perhaps he is signaling that he believes the stock is worth more than what the market price is at and he is willing to back it up with personal capital. In my mind, actions speak louder than words.
On a side note, there is a potential catalyst this week that could alleviate the market’s concerns over any bankruptcy possibility. The company has announced that it anticipates revising the terms of its senior notes by September 30, 2016.
Other positive catalysts include: continued increase in potash prices, further cost cutting initiatives from the company, improvement in the agricultural or oil and gas drilling industries, or a potential acquisition or merger offer.
That said, smaller companies have a greater likelihood for fraud compared to larger corporations who are more prominently followed by analysts and major news outlets, potash prices can continue to decrease, the company could be mismanaged, or the company can issue a capital raise and severely dilute existing shareholders.
However, not to downplay the potential downside, but a capital raise would strengthen the company financially and reduce bankruptcy concerns and the fact that the CEO has been acquiring shares gives him less incentive to lie or mismanage the company.
In future posts I will continue to monitor the performance of IPI and may include more components of my investment research process.
Ocean Rig Is A Great Buy For Patient Investors
http://seekingalpha.com/article/3999702-ocean-rig-great-buy-patient-investors
Summary
Ocean Rig (Orig) has been able to use depressed debt and asset values to increase shareholder value in a big way and has shown outstanding earnings so far.
The shares' huge valuation discount compared to competitors should result in significantly better performance in coming years.
Based on cash and current contracts, the company will not have financial problems in the next years and will be able to maintain a healthy cash balance.
Management displays a much more bearish medium term view on the market than competitors and says that it's evaluating long term restructuring options.
The main intention of that talk seems to be to frighten debt-note holders to sell the notes back to the company at significant discounts.
Model assumptions and Results
Below, I present an updated financial table for 2016 and 2017 for Ocean Rig (NASDAQ:ORIG), based on the current situation, updated cost and contract data and the announced ship delivery delays including payment rescheduling.
Among the assumptions:
- No further contracts in 2016 and 2017 (which is obviously the worst case)
- No more cold stacking
- Only cash revenues and costs are recorded - no deferred items
- An arbitration settlement of $75 M in 2017 (50% of the claims) regarding Eric Raude and Olympia
- Further buybacks of 2017 debt, leading to a repurchase gain of $100 M
- Ship opex costs (operating ships): 135k/d in Q1 of 2016, 115k/d thereafter (excluding maintenance)
- Investments in upgrades and spares of $ 105 M in 2016 and $ 50 M in 2017
Ship opex costs (for operating ships) came down again in Q2 to $113/d. Management thinks that's sustainable.
Under that scenario, cash flow from operations in 2017 will remain healthy with $ 365 M;
The EPS numbers exclude gains from debt repurchases. EPS from operations will be around break even to slightly positive in 2017. Ebitda is around $ 950M in 2016 and close to $640 M in 2017.
Under the simplified assumption that all revenues and expenses are translated into cash in the same quarter, cash is estimated at $470 M at the end of 2017. With no new contracts in 2018, which is highly unlikely, the company would start to burn cash in that year, but still have near $250 M cash at the beginning of 2019 (no payments for new ships assumed).
ORIG is currently trading around 3% of book, consisting of high end assets, as if it was facing immediate insolvency, having uncompetitive assets and a disappearing market. All that is absurd.
Management's market view
The stock is currently penalized by the display of management's extremely bearish market expectations for coming years, while the company's competitors see the bottom of the cycle near the beginning of 2017. I am not speculating here if there is an agenda behind management's very negative view and I am not bashing the CEO. But it has to be said that the arguments (Q2 presentation page 12) represent one sided selection of negatives. That includes the mentions of GS's (dated) prediction of $20 oil and of massive oil oversupply, while the consensus view is that supply and demand is moving into balance and several serious sources project a coming and lasting undersupply situation in the oil market.
From the presented floater data, you have to deduct that offshore drilling spending will fall to 15% of the 2014 level by the end of next year, which is far below consensus and would result in a decline of deepwater production by 1Mb/d per year from reduced infill drilling (such a reduced supply would provoke a surge in oil prices). Petrobras' planned budged cuts for the next 5 years are mentioned. Besides that PB makes new 5 year plans every year, depending on the current oil price, is has to be mentioned that the Brazilian government is relieving PB from its obligation to own 30% in any national offshore project. Without that PB roadblock, offshore investments there could surge when the oil price recovers.
Does ORIG's management really not have more updated information?
The market seems to reward companies that perceive the sunrise and penalize those that see only a black hole. But all are sitting in the same boat. That said, so far, ORIG's management has done a good job in a difficult environment.
Comments on management's restructuring ideas
Management mentioned that they are evaluating restructuring options in case of a multi-year market slump, including a Chapter 11 reorganization as one of many options. That has frightened investors. It's difficult to imagine how the company could justify such an extreme option now with the shown levels of cash flows and cash until 2019 in a worst case scenario.
For 2018, debt covenants may need to be adjusted. Such adjustments have become routine among competitors. Banks understand the market situation and have no appetite in taking over drillers or auctioning off their assets, certainly not if the companies continue to make their debt payments.
That the company is in talk with debt holders is currently common in the drilling industry, but the first meaningful refinancing of debt is not required before 2020. ORIG is relatively well placed in that regard. Painting a long term Armageddon scenario for the industry and then asking banks to provide continuing financing for a period starting four years from now seems to be a strange negotiating strategy.
GE and president Kandylidis own a meaningful amount of equity in the company. While they may try to get the shares from other shareholders cheaply, as some people pretend, it's certainly not their intention to diminish the underlying value of those shares unnecessarily. Handing over control to creditors is the last thing they would consider. So, what's the intention behind mentioning that option?
The company's mention that, in a possible restructuring, some debt holders would be significant losers, indicates that the main objective is to frighten note holders, although the 2017 notes are secured by the company's assets and only the 2019 notes are unsecured. ORIG stopped buying back the notes in March after their price had significantly recovered. With prices down again, a new round of notes buying would be a very logical and rewarding activity. If 50% of the remaining notes outstanding can be bought back at an average 50% discount, the net cash benefit, including interest savings, could amount to $170 M by the end of 2017, significantly improving the cash situation and the covenant compliance by then. In my projection, I assume a $100 M gain from further 2017 notes buybacks ($210 M nominal for $125 M) after 2016-Q2. But a repurchase of 2019 notes could also be targeted. The best and easiest "restructuring" option is simply to use some of the cash for the buyback of early maturing low priced debt, as that results in more cash after maturation.
Investors should remember last October: Negative talk, which later turned out to be without substance, preceding massive debt buy backs.
Debt-equity swaps? SDRL earlier this year exchanged some bonds for shares. Debt at nominal value was swapped for shares valued at 30% of their book value. Analysts project more of such deals for SDRL - up to 30% of bonds outstanding. But at ORIG, first talking the share price down and then persuading note holders to switch? That doesn't make sense.
BTW, ORIG hasn't cancelled the repurchased debt. That's not uncommon. SDRL still has debt in inventory repurchased years ago. The reason might be taxes. The interest paid on the still nominally outstanding notes at ORIG's Drill Rig holdings is reducing the corresponding income taxes while the interests received on the notes repurchased and hold by another entity in another jurisdiction seem to be tax free.
Ship delivery postponements
Prepayments for new ships are reaching $600 M in 2016 - in sum worth 85% of one new ship,
The delivery of the first two ships has been delayed by only one year. That is surprising in light of management's negative market view. Construction of the third ship, Amorgos, originally scheduled for 2019 delivery, is "on hold". ORIG can reactivate that at its discretion or walk away from the deal with no further obligations. I think that the project could get reactivated when the floater market tightens, based on the signing of a long term employment contract first. Shareholders would have preferred a two year delay for the first two ships, but the agreement has released ORIG from its corporate guarantee. The ship delivery in 2018 requires financing on the basis of a healthy contract. The chances two years from now for a high end ship to get such a contract are not that bad. Otherwise ORIG is in an excellent position to further delay delivery and final payments.
Besides the prepayment in 2016, the arrangements regarding the new ships are OK. In practice, they will not have a negative impact on cash and cash flows in coming years, but will be a meaningful plus in the next up phase of the market. What is puzzling to me is the statement in the SEC filing that the final payments for the ships have to be made "upon the fifth anniversary of the delivery date".
Arbitration claims
ORIG wants $90 M from Total for the cancellation of the Olympia contract. I think that's better than cash-flow neutral. Not surprising that Total is objecting. The other claim for $62 M concerns the Eirik Raude, apparently for a contract extension that ORIG somehow had forgotten to mention to shareholders. I assume conservatively a total settlement around $75 M, recorded in 2017.
The ENI agreements
The company got a very generous compensation for the Olympia contract cancellation which I think is better than cash-flow neutral. By contrast, the mentioned day rate for the extension of the Poseidon contract is at cost. I think that both deals are linked and that at least $10M of the compensation is in fact attributable to the Poseidon contract extension.
Cold stacking
The company is cold stacking 5 of its 11 floaters. That contrasts with the behavior of other drillers who say that cold stacking is not worthwhile and who keep their modern floaters ready stacked. Indeed, it's probably a zero sum decision. The company may save $40 to $50 M per year compared to ready stacking, but it could also miss possible employment opportunities in the next two years, more likely in 2018. At the end, the costs of returning the ships to the market will eat up the savings.
My view of the offshore market
The recovery of the offshore market is tied to the recovery of the oil price. Depending on the sources, global crude supply is now coming in line with or has fallen below demand. Global commercially available oil inventories are probably less than commonly published. Probably up to 300 Mb of the oversupply in the years 2014 to 2016 have disappeared in Chinese and Indian strategic reserves. Up to 200 Mb will remain in the supply system because of a 4 Mb/d growth in global consumption in that period. Crude prices below $60/b lead to ongoing supply destruction outside OPEC. Prices in the $60 range should show some recovery there, especially in North America, but not enough to match the global demand growth of at least 1Mb/d each year. The negative effects of the postponement of long term upstream supply projects will start to show up in 2018 and are difficult to reverse because of capacity constraints and time lags.
A return to some form of managed supply by oil exporters, notably OPEC, with a reduction of crude price volatility, would be extremely helpful for all sides. With Iran having moved up production to pre- sanction levels and other exporters having shown an increasing willingness to participate in managed supply earlier in the year, its chances are slowly increasing. The Saudi boy prince, who had sabotaged a return to managed supply at the last minute in April, seems to leave oil policy now to the new oil minister, who appears to be a common sense person.
My view of the offshore market is closer to consensus than the view displayed by ORIG's management.
Class 6 ships will be the first beneficiaries when the recovery starts. I've laid out the base case for an offshore floater recovery here. That assumes that offshore spending in 2018 will be 20% higher than in 2016, but still 30% below 2014 levels. The number of older class 4 semis and class 5 ships getting scrapped will exceed the number of new arrivals by a factor 1.5 to 2 between 2015 and 2020. Many old cold stacked floaters will never work again. All that will lead to reduced supply in the years ahead, compared to 2014. Since I wrote that scenario, around 10 more old floaters have been scrapped or are held "for sale". The extreme pain now will lead to a faster market rebalancing later.
Day rate increases will lag utilization rate increases. Offshore Driller's earnings in the years 2017 and 2018 will be abysmal but the leading indicators - oil price and utilization rates of modern floaters - will most likely drive share prices and improve the mood among debt issuers and holders.
Valuations - a few competitors
Atwood (NYSE:ATW): With no new orders in 2017, as assumed in the model for ORIG, ATW would be cash flow negative and show a loss around $4/share in 2017. Including ATW's 2 new ships basically finished and parked in the yard and considering the related outstanding payments as debt, ATW's debt/class 6 ship equivalent is around 25% lower than ORIG's (2016 year end comparison).
Seadrill (NYSE:SDRL): SDRL carries 20% more debt per class 6 ship equivalent (EBITDA capacity adjusted rig volume) than ORIG. The company needs to refinance $3.7 B between now and 2018. It's obviously the worst time in the cycle to do that, but nobody expects seriously Chapter 11. SDRL faces significantly higher interest rates on the refinanced debt and probably some dilution through bond-equity swaps. SDRL and ORIG have the same asset quality. In that case, book value/share is a reasonable comparison metric. As ORIG is somewhat less leveraged, it should get an additional valuation premium, meaning that its share price should at least be double that of SDRL's.
Diamond Offshore (NYSE:DO). DO owns only 7 modern floaters (including only 4 ships and including the coming Great White semi). The rest, currently 17 units, is mostly more than 40 year old stuff. Eight of these old floaters have been refurbished and got new birth dates, but with the exception of two or 3 units with mooring capabilities, their economic value is low and fading fast. Life expectancy of all the old floaters is limited. In fact, based on current contracts, the modern floaters will generate more than 90% of Ebitda in coming years. Only the modern floaters have significant Ebitda capabilities in the future. The total realistic Ebitda capacity of the other floaters is probably just one third of the total modern floaters. After the final payment for the Great White, DO's net debt will be between 2.5 and 2.6 B by the end of 2016. Adjusted for Ebitda capacity, DO's debt/floater is at the same level as ORIG's (not counting ORIG's prepayments). DO's advantage is a better contract coverage of its modern floaters in 2018, but in 2019, the cards are likely to get redistributed. In a recovering market - 2019 and beyond - ORIG, with then 13 modern or specialized floaters, is likely to outperform DO with only 7 modern floaters by a significant margin. In that context, it's surprising that the market currently values a $ of free cash flow that DO generates more than 30 times higher than a comparable $ generated by ORIG.
Charts
http://stockcharts.com/freecharts/candleglance.html?$SPX,$VIX,$USD,$UST3M,$UST10Y,VWEHX,$WTIC,$GOLD,$COPPER,$DJUSST,DBA,!PRII|B|A12,26,9|0
http://stockcharts.com/freecharts/candleglance.html?XLB,XLV,XLP,XLY,XLE,XLF,XLI,XLK,XLU|B|A12,26,9
http://stockcharts.com/freecharts/candleglance.html?EWZ,EWW,ewc,eza,ewa,ewg,ewu,ewi,ewh,ewj,ewy,fxi|B|A12,26,9|0
The US Federal Reserve has finally raised interest rates and ended its long-standing Zero Interest Rate Policy (ZIRP); this in itself should leave the US Dollar well-positioned versus major counterparts through the start of 2016. And indeed the Fed’s hike stands in sharp contrast to the European Central Bank, which moved to cut interest rates just a week before the FOMC decision. Market reactions to both the ECB and the Fed are nonetheless telling—the Euro rallied sharply as the ECB’s rate cut was less aggressive than feared, while the US Dollar was mostly unchanged following a lackluster Fed announcement.
Another viewpoint.
http://news.goldseek.com/GoldSeek/1416256154.php
Interesting viewpoint. We will see what happens..
http://blog.smartmoneytrackerpremium.com/
History Channel-Gold
http://www.zerohedge.com/news/2014-06-05/gold-conspiracy
Fair enough... you got rights to your opinion.
Does it ever make you wonder if there is absolutely no use for gold, why every government in the world still keep it as reserve in vaults? Do a google search on history of "currency" and read up on its history and see how past empires and their currency rose and collapsed repeatly throughout history... US Dollar system is still fairly young and an experiment, unless managed carefully will face similar fate as past empires did.
The way I see it in simplest terms on why oil and gold went up hundreds percent over decades in relation to Fiat "dollar" being devalued in same time period makes perfect sense. In real terms (inflation adjusted) oil did not go up unreasonably. Normal supply/demand caused the volatility.. Take a look at inflation adjusted charts in google search.
I suppose it all boils down to belief in US Dollar since oil, gold and most everything else is valued in dollar terms. So for me... what does not make sense is how a so called "currency" that is just piece of paper printed from FED backed by nothing but taxpayers, for which supply of it has been printed over the years/decades is astronomical and yet still somewhat strong. I take it back... there is perfect reason for this strength in Dollar... PetroDollar scheme, currency war that is going on between nations to get competitive edge, etc.
Currency War ON, but Techniques Vary
http://www.forexnews.com/blog/2013/05/08/currency-war-on-but-techniques-vary/
The Fed, BoJ and BoE are buying bonds, the ECB and RBA cut interest rates and the RBNZ intervened in its currency directly. The decision by the RBNZ to intervene over cutting interest rates was particularly interesting since New Zealand has plenty of room to lower rates. This was clearly a conscious decision on their part to focus on capping the currency’s rise. Taking a look at the charts, the “intervention” appears to have occurred on April 15th, which suggests that 86 cents is their pain threshold for the currency. The RBA also said a strong currency was the motivation for this week’s rate cut.
I don't think this is coincidence that GOLD also took a massive dive around middle of April... I guess until the dust settles on this currency devaluation war, there appears to be extreme volatility on GOLD.
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=0&mn=3&dy=0&id=p58343891086
Any thought?
Talk of an end to QE is gibberish...
http://goldnews.bullionvault.com/currency-war-qe-051020135
JEEZ THIS is getting boring. Stocks go up on QE/stimulus hopes. Then, when stocks have the rare down day, it's on concerns QE/stimulus will end, writes Greg Canavan for the Daily Reckoning Australia.
What a farce this all is. QE will never end. It can't. Only the pace of its twisted and corrupt purchases will vary.
But a market hooked on the cracky odors of QE is no longer a rational beast...not that it has been in any way rational for many, many years now. So when the Federal Reserve's Charles Plosser says he favors scaling back the pace of stimulus, the market sells off in a panic.
It's pathetic really. An equity market is meant to be a predictor of the economy and business conditions six months hence. Now it's a daily punt on the utterings of fools masquerading as wise men.
No wonder capital is edgy. No wonder it's shifting to the core...the safety of global blue chips. If the Fed's starting to push everyone around, why not move where it's a bit safer...if only in a relative sense?
The other point to note about the edgy nature of global capital is that when it shifts to the core, it has an effect on currency markets too. If global blue chips are the core of the equity market...then the US Dollar is the core of the financial system.
The Aussie Dollar cracked overnight, falling nearly 2 cents against the greenback. It's nearing parity once again. We think, in time, it will go right back through that level to where it belongs...somewhere around the 80 US cent level.
Many people can't understand why or how the US Dollar could possibly be strong with the 'Bernank' monetizing US$85 billion per month. The simple fact is that the US is at the core of the US financial system. When the system is healthy, money flows from the core to the periphery.
So a weak or weakening US Dollar is bullish for the global economy...in that it's a sign of robust conditions elsewhere in the world. For example, when the US runs large trade deficits, it sucks in goods and services from around the world and pays in IOU's...usually in the form of US government bonds.
The Dollar denominated bonds then become the 'reserves' of the country that sent the goods and services to the US. That country can then expand its domestic credit on top of these increased reserves...which then increases economic activity. So the US gets a free lunch and exporters get seemingly unlimited demand for their products. It's a sweet system.
But when it's not working too well, the US Dollar strengthens. Capital changes direction and goes from the periphery to the core. This happened in a heartbeat in the 2008 crisis...now, the process appears to be deceptively slow.
After all, global markets keep going up, masking the underlying fragilities of the financial system.
But the recent move back into the Dollar suggests an underlying caution taking place. Capital seeks a refuge in the 'city-state' stocks...companies with revenues larger than many nations' GDP. To buy many of those stocks you must buy the US Dollar first.
So as the US Dollar-centric system totters, paradoxically you'll see the US Dollar strengthen. All other currencies will fall by the wayside. We'll look back in a few years' time and laugh at the 2012 meme of the Aussie being a 'reserve currency'.
The final bout will take place between the Dollar and gold. Gold will win of course, but the Dollar will put up a fight. It will go the 12 rounds.
One of the chief reasons for this continued flight into the US Dollar is, we think, directly related to Japan. As you know, the Bank of Japan recently made an all-out assault against the Yen. The Japanese currency is now considerably weaker against its major trading partners.
There is no doubt yen weakness was behind the Bank of Korea's decision to cut interest rates yesterday by 25 basis points to 2.5%. Korea is a major competitor to Japan and is feeling the pinch of its currency moves. Data released in April shows Korean export growth at just 0.4% year-on-year. Not good for a nation highly dependent on export growth.
The main front in the currency war has moved to Asia. Perhaps that's why the Australian Dollar fell so hard overnight. Currency and trade wars between our major commodity consumers do not bode well for the future.
And China is a major victim of the currency wars too. Owing to its loose peg to the US Dollar, China to some extent imports US monetary policy. So the Fed's $85 billion per month monetization program causes inflationary problems there.
Yesterday, China reported slightly higher than expected inflation figures for April, with annual prices rises of 2.4%. This puts policymakers in a bit of a bind. As Reuters reports:
'China's annual consumer inflation accelerated more than expected in April while factory prices fell for a 14th consecutive month, highlighting the dilemma facing the central bank as it balances support for the economy against the threat of rising prices.'
The link to the Dollar benefitted China for many years. It underwrote their industrialization and urbanization. But now it's becoming a problem, which is why China is looking increasingly to liberalize its financial markets and allow capital to flow more freely.
But that won't be an easy task. Freeing up the capital market too soon could cause the banking system to crash (captive savings of the Chinese household sector have underpinned the country's historic credit boom). China will need to move very carefully.
And it will have to do this while dealing with a belligerent neighbor in Japan, who by devaluing the Yen is trying to steal from anyone whatever dwindling demand is out there.
So as the US Dollar moves above 100 Yen for the first time in four years, any talk about the end of QE, or even scaling it back in anything beyond words, is just more Fed gibberish. Get ready for an escalation in the currency wars.
JPMorgan Accounts For 99.3% Of The COMEX Gold Sales In The Last Three Months
TIME CYCLES
This week the DOW broke out to all time new highs in a perfect wave location: Int. iii of Major 3 of Primary III, or 3 of 3 of 3. For comparison purposes we took a look at the last ‘breakout to all time highs’ in 2006. We then adjusted the wave count of that bull market as if it too were a Cycle wave. Under that wave count the previous ‘breakout’ was also at Int. iii of Major 3 of Primary III. A perfect fit, but there is more.
During the 2002-2007 bull market it took exactly 48 months of bull market activity before the breakout occurred. Then the market topped exactly 12 months later. That bull market began in Oct02, broke out in Oct06, and topped in Oct07. This 2009-2013 bull market has also taken exactly 48 months before the ‘breakout’. The bull began in Mar09, broke out Mar13, which now suggests a bull market top in Mar14.
Following this theme: breakout to new highs – then top within twelve months. We checked further back into market history and noticed the following. After the 1998 crisis the DOW made new all time highs in Jan99, then topped in Jan00. After the 1987 crash the DOW made new all time highs in Aug89, then topped in July90. There is definitely a time/price pattern at work here.
Adding to this probability is the potential for an upcoming recession, using the irregular presidental recession cycle. Since 1949 there have been eleven recessions. Three occurred in an election year, at the end of a president’s term. But eight occurred within 18 months after a new/second term president was sworn in. President Obama was sworn in January 2013.
If we now make the assumption that the bull market high will occur in Feb/Mar14 to complete Cycle [1]. This five year bull market will have matched, in time, the five year bull of the previous Cycle wave [1]: 1932-1937. It will have also matched, in time, the previous bull market: 2002-2007. Then, however, the market enters a new treacherous bear market period: Cycle wave [2].
After the last Cycle [1] 1932-1937, Cycle [2] dropped 49% in 12 months into 1938. Cycle [2] should have ended there with that percentage of decline. Cycle waves generate about a 50% market correction. After a big bullish looking rally into 1939, Germany invaded Poland and the market eventually went back to the 1938 lows by 1942. Cycle [2] should have lasted 1 year (12 months). This would have been similar to Cycle [4] which also lasted 1 year, 1973-1974 (21 months). The percentage of decline is important, not the time, as we recently observed in the 2 year, Oct07-Mar09, (17 month), 54% decline.
The next thing of interest is the presidential 4 year cycle, which typically bottoms in the months Mar/Jly/Oct. It has a pretty good record: 1982, 86, 90, 94, 98 and 2002. But occassionally it gets out of sync. In example: 2006, 2010, and soon 2014. When this occurs it eventually realigns, sometimes rather quickly. For example: 1946 made a high then a mini crash followed into the 4-year low, 1962 made a high and a mini crash followed, and 1990 made a high then a mini crash followed.
Finally, with about a 50% market loss expected for Cycle [2], the 4 year low potentially bottoming in 2014, and possibly a Secular cycle low as well. We looked back in market history for huge declines during a short period of time. We found two historical periods of huge declines, bonafide crashes, in just two months: 1929 -48%, and 1987 -35%. The 1929 crash, was a straight down one downtrend event. The 1987 crash was an unusual five wave/trend elongated flat event. Primary wave II, during this bull market, duplicated that pattern during its 19% decline. An omen of things to come?
With high frequency trading, long term rates heading higher, and the USD in a bull market. There is now the potential for a bull market high in Feb/Mar14, then a bonafide market crash during 2014. This is just another example of investor mass psychology patterns in action: past, present and future.
Harry Dent: Stock Market Roller Coasters and Bear Megaphones
http://www.marketoracle.co.uk/Article38805.html
Booms and busts in the economy are based on predictable demographic cycles such as those studied by Harry Dent, founder of HS Dent, chairman of SaveDaily.com and author of "The Great Crash Ahead: Strategies for a World Turned Upside Down." In this Gold Report interview, Dent predicts a global crash between mid-2013 and early 2015, in an ongoing decade of economic coma. For now, gold and gold equities are great investments, but when the crash comes, read on to find out what he suggests will be a good sector until the echo generation enters the workforce and starts buying potato chips and houses.
The Gold Report: Harry, you base your economic predictions largely on demographics and demographic cycles. As the baby boomers enter old age and spend less, will that quash any hope of an upward trend in the overall economy?
Harry Dent: Ultimately, yes. Spending by baby boomers hit its peak in countries like the U.S. in 2007. On average, baby boomers will spend less and less in the years ahead as they move toward retirement. Governments and central banks around the world keep stimulating to keep their economies up and to keep their banks from failing, but they are fighting against the largest generation in history. Stimulus works less well with an older population that does not have kids to raise and put through college. Demographics will make stimulus plans more and more difficult, and at some point they will fail.
TGR: A lot of your thinking is rooted in history. One of your recent articles mapped the trajectory of the 1929, 1968 and 2007 booms and busts, noting that politicians and investors blew those opportunities by focusing on the symptoms rather than the causes. Is there any tactic that can overcome the demographics?
HD: We have two major trends. The first is the baby boom peaking in most wealthy countries. The second is the greatest debt bubble in history, especially in real estate.
Private sector debt has grown 2.7 times the economy since 1983; government debt has grown almost as fast. In a debt bubble, assets rise, people overspend, businesses overexpand and it takes a period—usually a decade or so—to work off those excesses. Today, governments around the world are refusing to countenance a downturn. They are trying to replace every dollar of economic downturn or of bank losses with stimulus money created out of nowhere. Similar to an addict taking more and more of a drug to not come down off of a high, the governments are keeping the bubble going.
Stimulus can avert a crisis in the short term, but not long term. You have to deal with your debt or you will not emerge from the crisis, as Japan has shown clearly after 23 years of a coma economy.
TGR: One of the trends you wrote about recently was what you called the "currency war" among Japan, the U.S. and the Eurozone, in which all are printing money. What does that mean for investors and how should investors react?
HD: After the last great debt bubble, in the 1930s, governments did not step in to prevent the collapse of banks. Governments did increase trade tariffs, which led to trade wars.
Recently, Japan's strategy has been to print enough yen to push down its currency to increase exports, even though its domestic economy is dying due to an aging population, bad demographic trends and super-high debt ratios. By doing this, Japan is starting the next trade war. Other countries will respond by lowering their currencies and doing more stimulus. If you keep doing this, the whole thing will break down at some point.
The question is when. We think the next breakdown will start in late 2013 or early 2014.
Europe tried a $1.3 trillion quantitative easing (QE) stimulus program in late 2011/early 2012, but fell into a recession anyway. The U.S. has had QE3 and now, QE3 Plus. Japan, too. These are signs of desperation, not progress. Countries cannot reinvigorate economies that are comatose, they can only keep them barely alive on life support.
These latest stimulus plans will create very little incremental growth and even decline. Stimulus only works so long because it is artificial. It is not real.
TGR: Do you expect the result to be inflation or deflation?
HD: We had deflation for several months in late 2008 and early 2009, when the financial system actually melted down from the debt bubble bursting. Then the government stepped in and started stimulating like crazy to create inflation. If we had seen this level of money printing and stimulus anytime in the past, inflation would have gone through the roof. But it has not; inflation is at a modest level.
With governments fighting deflation with inflation, we will get more inflation in the near term from all the stimulus. But if the system melts down again, which we expect between late 2013 to early 2015, deflation will set back in. There is also likely to be another crisis and deflationary period between 2018 and 2019. These are the two danger periods we see ahead for investors.
The pattern is inflation, deflation, then another government stimulus plan, followed by minor inflation and then deflation again. Until governments eliminate their restructured debt, they cannot come out of their debt crises. No government is doing this, which is not a good sign for the future.
TGR: How can investors protect themselves in such an unsettled economy?
HD: Investors must realize that there is a new normal. Stocks will not be growing at 12%/year. Bonds will not yield 5–6%. The new normal is not even the expectation of 4% on stocks and 2% on bonds that people like Bill Gross from PIMCO suggest. The new normal is a roller coaster of one bubble bursting after another.
Investors have to get away from the traditional concepts of diversification and asset allocation for the next decade or so. When bubbles burst, everything goes down. In 2008, real estate, oil, commodities, gold and silver crashed. The U.S., European and emerging markets crashed.
With each bubble, the market has gone to a slightly new high and to a slightly new low when the bubble bursts. We call it a megaphone pattern.
Megaphone
We are likely to see new highs in a lot of stock indexes in the first half of 2013. Our target for the Dow is 6,000 in the next two or three years, when we see the next burst coming.
You need to think like a long-term trader. Get more defensive. When stocks crash, get back into them. This will not be a decade where investments will only go down. It will be a roller coaster of boom, bust, boom, bust.
TGR: Roller coasters can be scary things. Unless you are looking in the rearview mirror, how do you know when is the high and when is the low?
HD: It is not easy. We predict that the Dow could go as high as 15,000 this year before dropping to 6,000 in early 2015. Nobody can predict the exact top or the exact date.
You can only guess by seeing when investors are overly bullish or bearish and when patterns are stretching on. And if governments are able to contain the next crash and crisis to, say, 1,100 on the S&P 500, then we will see a bigger crisis between 2018 and 2019.
The megaphone pattern is the best single pattern we have right now. The next top in this megaphone pattern in the S&P 500 is around 1,600; only 6% from now. Stocks do not have a lot of upside despite all the good news about fiscal cliffs being averted, QE3 Plus and stimulus from Japan and China.
I do not see a lot of good news coming. Baby boomers will keep aging and spending less. Stock earnings are decelerating, although still growing for now.
Gold is the one thing we see going up more than anything else in the near term. The more money governments print, the better it is for gold. But when that government strategy fails and economies melt down, gold will go down.
Gold and silver may be the best investments in the next several months. The gold and bond bubbles will be the last to peak as even the bond bubble seems to be starting to unravel. Everybody has been rushing into gold, silver and bonds as safe havens, but the truth is investors keep rushing into every bubble until it bursts and, at some point, all the bubbles burst.
TGR: How high do you think gold could go before it bursts?
HD: For two years, gold has been trading between $1,520/ounce (oz) and $1,800/oz. If gold breaks above $1,800/oz, the next target is $1,934/oz (the past high), and then a new all-time high is likely between $2,030–2,080/oz. If it gets that high, we would advise people to take their gains in gold.
However, I think gold is likely to fall to $750/oz in the next two to three years, maybe even lower.
TGR: What about gold equities, particularly the juniors, are they on a downtrend or have they hit bottom and are ready to come back up?
HD: I think gold stocks are near a bottom and, like gold, are likely to rally in the first half of 2013. The equities are much oversold. Traders are very bearish on them, which is a good sign.
In general, we see stocks in the U.S. and Europe as having 4–6% on the upside. However, silver and gold stocks could go up anywhere from 10–25%. Gold and silver equities are very good plays right now.
TGR: You have called this an opportunity for once-in-a-lifetime investment success and have suggested investing in Asian, multinational, technology and healthcare stocks. What are some specific names that could succeed in this roller-coaster environment?
HD: I focus more on sectors than stock analysis. In general, whenever there is a crash, you want to buy because another bubble or expansion will follow, even in a long-term bear market. You want to buy the sectors most favored by technology and demographic trends.
If I am right, and stocks crash again in late 2014 or early 2015, I want to buy in the healthcare sector in the U.S. and Europe, especially the most leveraged areas: biotech, medical devices and pharmaceuticals. The baby boomers will continue spending on healthcare and healthcare products, even as budgets get crimped by entitlement reductions. [Editor's Note: For more ideas on investing in the life sciences, visit The Life Sciences Report].
Next, I want to invest in areas of the world with strong demographics and emerging countries that are not as dependent on commodity cycles. We think commodity cycles, which have peaked every 30 years, most recently between 2008 and 2011, will go down into the early 2020s before turning up again. Instead of emerging areas like Brazil, the Middle East or Africa, which are large commodity exporters, I want to invest in countries like Vietnam, Cambodia, Thailand, Indonesia and especially India. India is not a major commodity exporter and it has the best demographics.
But whatever you buy, you have to wait for the crash, maybe two to three years from now. You have to wait for the crash because all stocks go down to some degree in a crash, so you do not want to buy now.
TGR: Do you also trade based on the daily headlines? For example, I have read about Apple Inc. (AAPL:NASDAQ) taking a short-term dip that is part of a larger wave. Do you take advantage of daily dips?
HD: We are more expert in the long-term trends, demographics and cycles, but, yes, we do look at the short-term technical indicators. Stock being oversold or overbought or people being overly bullish or bearish are the most important factors.
Apple is a classic example. It was around $700/share and in a matter of months went down to $440/share. Wall Street loved Apple and now is shedding the stock. That is classic short-term thinking.
Apple will probably go a little lower, but it is undervalued now. I would rather buy Apple than Google Inc. (GOOG:NASDAQ). In fact, I would rather buy gold, which is undervalued and overly bearish.
Long-term trends are highly predictable. Short-term trends depend on political decisions like the fiscal cliff and on traders over- or undervaluing stocks.
TGR: We have talked about the baby boomers. Let's turn to the other end of the age spectrum. According to your research, when will enough young people be in the workforce earning money, buying potato chips and houses to pump up the economy again?
HD: We are looking for that to happen in the early 2020s. That is when the echo boom, the next generation, will enter the workforce in large enough numbers and start to raise their families and buy housing. The next boom will not be as strong, but it will turn the trends back up.
The echo boom generation in almost every wealthy country—whether it is in Japan, which peaked earlier than us, or Korea, which will peak later—is not as large as the baby boom generation. The baby boomers built all this housing and infrastructure, and it bubbled and now it is bursting.
Look at Japan. Real estate there has been down for two decades. The next generation should be buying houses by now, except the young generation has much more part-time work and lower wages than its parents' generation. The older generation has been protecting all of its benefits and entitlements and retiring at their expense. A recent survey showed that 40% of young Japanese males have no interest in sex, dating or marriage. Why? Because they cannot afford it. They just want to be carefree and survive on a small budget.
Nikkei
Everything that has happened in Japan will happen in Europe and the U.S. The U.S. and Northern Europe, where the echo generation will move forward in the early 2020s, have better demographic trends than Southern Europe, Germany and Switzerland. The trends in East Asia, Japan, Singapore and Korea and eventually China, are horrible.
TGR: What should we be doing while the market is in a coma to be ready to prosper when the country comes back in 10 years?
HD: Fortunes were made in the early 1930s, from Joseph Kennedy to major companies, like General Motors and General Electric. In a downturn, you take advantage of the fact that everything falls. Buy when things are down.
Everyone likes a sale. Who would not want to buy a $500 Brioni shirt for $150 or pay $30,000 for a Mercedes that normally goes for $60,000? That is what will happen in financial securities over the next decade.
We will continue to see crashes, and after a crash you can buy businesses, commodities, real estate, stocks, even gold, at unbelievably lower costs. You create wealth by buying things at the bottom.
Gold
The smart people in the new normal environment of ongoing crashes think like long-term traders. They sell stocks, commodities, real estate and gold when they are high and re-buy them at unbelievable discounts when they crash. The world is your oyster if you are patient.
Your key goal should be to protect the gains you made in the greatest global bubble boom in history. Get out, keep cash and wait for the next big crash. Then buy at $0.20 or $0.40 on the dollar. What could be better than that?
TGR: Sounds like an opportunity to me. Thanks, Harry, for your time and your insights.
Harry S. Dent Jr. is founder of HS Dent, an economic research firm; editor of Survive and Prosper newsletter; and chairman of SaveDaily.com, a low cost investment platform for financial institutions. His mission is "Helping People Understand Change." Using years of hands-on business experience, in the late 1980s Dent developed a new way of understanding the economy and forecasting what lies ahead based on consumer demographics, which he outlined, in late 1992, in his book, "The Great Boom Ahead." In that book he stood virtually alone in accurately forecasting the unanticipated boom of the 1990s and even called for the next great depression to start in 2008. Dent has authored several bestsellers including "The Great Depression Ahead in 2008," and his latest, 2011 book "The Great Crash Ahead: Strategies for a World Turned Upside Down," he outlines why government stimulus is doomed to failure and the economic havoc that lies ahead. Dent regularly lends his economic expertise to the media on television, in print, and on the radio, and is sought after as a panelist and speaker for international forums around the world. He graduated from the University of South Carolina and earned his Master of Business Administration from Harvard Business School where he was a Baker Scholar. Subscribe to the free daily Survive & Prosper newsletter at www.harrydent.com.
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Stock Market Pullback Imminent, Cyclical Bull to Continue
http://www.marketoracle.co.uk/Article26347.html
Crisis High 2011
http://www.safehaven.com/article/19990/crisis-high-2011
After two years of issuing "sell" ratings on equities and making bearish pronouncements on the year-ahead economic outlook, Wall Street has finally turned bullish again. Recent analyst polls reveal the consensus outlook for 2011 is for another year of double-digit stock market gains. Even stalwart bears are starting to sound a more optimistic note on the prospects for continued economic recovery in 2011 and beyond.
One analyst who doesn't share this newfound optimism is far from the conventional Wall Street type. He correctly predicted the 2008 credit crash and also turned bullish in March 2009 following the crisis low. He has made a career of going against the consensus and he's once again staking his reputation against the Wall Street establishment. He believes that far from being the dawn of a bullish economy, 2011 will witness the end of the post-credit crisis economic recovery. He also believes 2011 will witness a "crisis high" in the stock market and most likely a turning point within the context of the long-term cycles. That analyst is none other than Samuel "Bud" Kress of the SineScope advisory (SJK Capital, 15 Phoenix Ave., Morristown, NJ 07960). His tenth and latest Special Edition is aptly titled, "Crisis High 2011-2014."
In the more than 10 years that Kress has been writing his Special Editions we've seen the long-term sequence of yearly cycles which bear his name unfold according to schedule. We saw the Kress 12-year cycle bottom hard in 2002, producing a major bear market low. We saw the 10-year cycle bottom in 2004, producing a mini-cyclical bear market and another leg of the bull market following its bottom. We saw the 6-year cycle descend into 2008, adding downside impetus to the credit crisis and producing another cyclical bull market in 2009. This year's notable cycle event is the peaking of the 6-year cycle, which takes on special significance since the 6-year cycle is the last of the major yearly cycles to be in the ascending phase. Once the 6-year peaks later this year, each one of the Kress yearly cycles (with the exception of the 4-year) will be in the final "hard down" phase until late 2014.
Until the 6-year cycle peaks, the next few months are likely to witness the transfer of wealth from the insiders to the outsiders. Private equity groups, for instance, will be looking to offload debt via the IPO market. Institutional traders who bought stocks around the lows of the last bear market in late 2008/early 2009 will be looking to sell to the public, which is only just beginning to return to the equities market after spending the last two years in low-yielding bond funds. Such tactics are always employed in critical years when the major yearly cycles are peaking and 2011 should prove to be no exception.
Kress sees 2011 as being the last year of the financial recovery that began in March 2009. He uses the metaphor of a storm to describe the 2008 credit crash and believes the financial storm of that year arrived beginning with the "leading edge," which gave way in 2009 to the benign "eye of the storm." As with a hurricane, the storm's "eye" isn't the end of the storm; rather it's merely a temporary respite as the storm's "trailing edge" follows at some point. Kress believes the "trailing edge" of the financial storm will begin by next year and he says it could be a tsunami.
In section two of the latest Special Edition, Kress provides an in-depth look at the major yearly cycles which comprise the 120-year Grand Super Cycle scheduled to bottom in 2014. When analyzing the impact of the yearly cycles it's important to keep in mind that the final 12% of the duration of any cycle is the "hard down" phase. The 120-year cycle's hard down phase began 14 years prior from 2014, which was 2000. This says Kress, "was the peak of the nation's economic expansion, the beginning of economic winter, and the terminal high."
The 120-year cycle includes two 60-year cycles, which also answers to the economic long wave (also known as the Kondratieff Wave, or K Wave). The K Wave tracks the four economic phases of the credit cycle from boom to bust. Applying the 12% "hard down" rule of thumb, 7 ¼ years retroactive from the scheduled 2014 Grand Super Cycle bottom is mid-2007. "This period began the 'hard down' phase of economic winter prior to the 'credit crash' and the beginning of deflation," writes Kress. "Of greater significance," he adds, "the current 60-year [cycle] is the fourth which completes the series which began with the first 120-year which transformed America into an independent country as we know it today." The inference here is that when the current 120-year/60-year cycles bottom in 2014, the United States will experience a revolutionary transformation, of which Kress has more to say elsewhere in the report.
60-Year Super Cycle
The 120-year cycle has also aptly been termed the "revolutionary cycle" since its bottom is always accompanied by a revolution of socio-political and economic import. Concerning the upcoming 2014 revolutionary cycle low, of which the recent Middle East uprisings are merely a portent, Kress asks: "Could wealth creation become a rarity; could the American Dream become a fantasy; could we become a socialistic economy; could a WWII equivalent develop; could our political structure be reformed; could it be the end of the Federal Reserve; could the U.S.A.'s premier world power become subordinated to second rate???"
In regard to the 6-year cycle, Kress points out that the present 6-year cycle began in later 2008 and is scheduled to peak in late September/early October this year. He says the peaking of the 6-year cycle should begin the second half of the credit cycle, and that "depression could accelerate the decline of the final three years of all the higher cycles comprising the 120-year Grand Super Cycle in later 2014."
Kress observes, "With all of SineScope's cycles being in the down phase for the first time since 1890, the potential for the worst of anything to occur exists. This elicits some very disarming implications for the U.S.A. and our lifestyles for the next three years."
The latest Special Edition by Kress also discusses the outlook for consumer spending in light of the long-term cycles. "With the consumer representing approximately 70% of our economy," he writes, "growth is dependent on consumer spending, which is a function of credit expansion and increased employment." The credit crisis, however, elicited a sea change of consumer attitude toward debt. As Kress observed, "Consumers not only ceased incurring additional debt, they also began reducing it, which is referred to as 'deleveraging' but in reality is liquidation of capital resulting in reduction of consumer spending."
Kress says that recent earnings gains have been mainly from cost savings realized from deleveraging and employee downsizing, with revenue gains being only a token rate reflection of low consumer spending. He believes that corporate cost savings have nearly run their course. "If [consumer] spending continues to decline," he writes, "corporations might have to close plants which would complete liquidation of the three assets comprising our economy -- human, capital, physical -- and the U.S.A. [will] effectively be in liquidation." He adds that if oil and food prices continue to rise it will further curtail consumer spending, and that an additional "red flag" would be an increase in the unemployment rate.
The most provocative aspect of Kress's latest Special Edition is the discussion of how low the S&P 500 could decline by the time the "revolutionary low" is reached in 2014. Prior to addressing this Kress writes, "Hundreds of equity mutual funds manage trillions of dollars of equities with positions in increments of 100,000 shares. What happens if and when these managers decide to sell -- and to whom?" Accordingly, Kress believes that capital preservation is the watchword for the years 2012-2014 as opposed to capital gains.
Concerning the outlook for gold, Kress points out that two opportunities exist during the 60-year Super Cycle to buy gold. The first is during the hyper-inflationary period of the cycle, in which gold is the ultimate hedge against the ravages of inflation. This period occurred during the inflationary period of 1966-1981 when the gold price increased approximately 23 times measured in price per ounce. Gold then entered a bear market until 2000. "If gold increases the same amount during the same 15 year period of economic contraction from 2000-2014," writes Kress, "gold would achieve over $5,000 per ounce."