Sunday, December 18, 2016

Trump’s Tech Summit Was Just The Start Of Re-Centering The Economy

By James Poulos
The New York Post
December 19, 2016

One of Donald Trump’s biggest and most urgent challenges is to usher Americans out of the post-2008 slow-growth world — without ushering the economy off a cliff. His meeting last week with top Silicon Valley executives was one key part of a larger strategy, one that will also impact Wall Street.

To face perhaps the biggest domestic test of his presidency, Trump needs to rebalance our economic leadership away from the intangible, bubble-prone worlds of speculative finance and “apps for everything,” toward concrete investment, production and innovation that can make the future great again.

Trump needs a full-court economic press, unleashing fracking as well as a revolution in viable alternative energy; supplementing broad tax and regulatory reform with increased infrastructure spending and job creation.

To get the economy out of its current unbalanced state, Trump should mobilize the productive power of technology in the real world — rather than favoring the speculative business models with narrowly distributed results that have held sway over much of Wall Street, and some of Silicon Valley itself, since 2008.

Fortunately, Silicon Valley’s top moguls seem open to helping Trump pull off this pivot. Jeff Bezos, Tim Cook, Larry Page, Eric Schmidt and Sheryl Sandberg all accepted Peter Thiel’s invitation to Wednesday’s gathering at Trump Tower. “Anything we can do to help this go along,” Trump told them.

But he wisely singled out Elon Musk for both an exclusive post-meeting session and membership on Trump’s Business Advisory Council.

By integrating Tesla and SolarCity into a single energy-infrastructure firm, Musk is getting technology out of cyberspace and back into the brick-and-mortar, flesh-and-blood world where we need productive change the most.

Musk, like Thiel, knows how to fix the post-2008 economy: by breaking our economic dependence on speculative valuation. Driven by big bets in tech and finance markets, where few goods or services are actually produced, today’s economy is too unstable, inaccessible and frantic.

As Thiel warned in “Zero to One,” trying to grow the pie by making a lot of money through betting and hedging takes the focus off innovations that stay valuable into the future.

Fighting for moment-to-moment advantages makes it too hard to focus on setting and achieving the long-term goals that investors, producers and consumers all need to maintain a dynamic yet stable economy.

Thiel connects this problem to our neglectful energy policy. Instead of pushing ahead with a new generation of nuclear-power facilities (a big Thiel priority), for instance, we haggle fruitlessly over guilt-ridden, economy-killing plans to regulate carbon emissions, rather than driving for the kind of real-world innovation that can truly replace these energy sources.

In such a stifling environment, frustrated competition has turned to the virtual economy skewered on TV by “Silicon Valley” and in print by Michael Lewis’ “Flash Boys.” Wall Street’s embrace of technology, for instance, unleashed an algorithm arms race, plowing financial energy and prestige into unproductive markets.

From the mortgage-backed-securities market to the illegally manipulated derivatives market, too many Wall Streeters strove to cash in without creating or financing any tangible new goods.

No wonder populist frustration has bubbled over. As much as Silicon Valley has boosted the economy since 2008, Americans know that, alone, it can’t rescue capitalism from Wall Street’s mistakes and Washington’s meddling.

For that, presidential leadership is needed. And if Trump adopts the right priorities, he can deliver.

Given his early push on infrastructure, he ought to supplement his jobs agenda by supporting construction of next-generation nuclear power plants, and speed regulatory approval for more automated transportation.

These advancements will help ensure Americans become both energy-independent and energy-rich — crucial to more efficiency, more productivity and more jobs.

Meanwhile, given his unique credibility with Wall Street and its populist critics, he should stop banks from returning to the bad old days of gambling on subprime debt with taxpayer dollars by privatizing Fannie Mae and Freddie Mac.

And he should join billionaire investor Carl Icahn, himself a Trump supporter, in encouraging Americans to invest wisely, avoiding a new stock-market bubble.

Trump’s critics complain that he’s pretending we can restore the economy of the 1950s. In fact, he’s merely refusing to buy into an “economy of the future” that leaves most Americans behind.

And if he can push the nation’s economic center of gravity back into the real world, the United States will again have a future we can all believe in.

Article Link To The New York Post:

Apple To Appeal EU Tax Ruling This Week, Says It Was A 'Convenient Target'

By Foo Yun Chee 
December 19, 2016

Apple (AAPL.O) will launch a legal challenge this week to a record $14 billion EU tax demand, arguing that EU regulators ignored tax experts and corporate law and deliberately picked a method to maximize the penalty, senior executives said.

Apple's combative stand underlines its anger with the European Commission, which said on Aug. 30 the company's Irish tax deal was illegal state aid and ordered it to repay up to 13 billion euros ($13.8 billion) to Ireland, where Apple has its European headquarters.

European Competition Commissioner Margrethe Vestager, a former Danish economy minister, said Apple's Irish tax bill implied a tax rate of 0.005 percent in 2014.

Apple intends to lodge an appeal against the Commission's ruling at Europe's second highest court this week, its General Counsel Bruce Sewell and Chief Financial Officer Luca Maestri told Reuters in an interview at the company's global headquarters in Cupertino.

The iPhone and iPad maker was singled out because of its success, Sewell said.

"Apple is not an outlier in any sense that matters to the law. Apple is a convenient target because it generates lots of headlines. It allows the commissioner to become Dane of the year for 2016," he said, referring to the title accorded by Danish newspaper Berlingske last month.

Apple will tell judges the Commission was not diligent in its investigation because it disregarded tax experts brought in by Irish authorities.

"Now the Irish have put in an expert opinion from an incredibly well-respected Irish tax lawyer. The Commission not only didn't attack that - didn't argue with it, as far as we know - they probably didn't even read it. Because there is no reference (in the EU decision) whatsoever," Sewell said.

Sheltering Profits

The European Commission accused Ireland in 2014 of dodging international tax rules by letting Apple shelter profits worth tens of billions of dollars from tax collectors in return for maintaining jobs. Apple and Ireland denied the accusation.

The Commission's tax demand angered the U.S. government, which accused the EU of grabbing revenue intended for U.S. coffers.

Apple also intends to challenge the EU enforcer's basis for its case, arguing that the "crazy notion of non-residency" was chosen on purpose to produce a punitive amount.

Other arguments the EU could have used could have been based on transfer pricing - the pricing strategy between a company's units - or the "arm's length" principle adopted by companies to sell and buy from affiliates as if they were unrelated firms.

"Both of those other two theories at least could be fleshed out, but they produced much lower numbers," Sewell said.

He added it was not possible for Apple to comply with the EU decision because it would mean Ireland violating its own past tax laws setting different rules for residents and non-resident companies.

The Irish government is also appealing against the European Commission's tax demand. It believes it must protect a tax regime that has attracted many multinational employers to the country.

Apple plans to tell the court that the Commission erred when it ruled that the head office of Irish-registered units Apple Sales International (ASI) and Apple Operations Europe existed only on paper, with no justification for the billions of euros it posted in untaxed profits.

Sewell said the fact that an entity was a holding company with no employees on its books did not mean it was inactive and it could be actively managed by employees of its parent company.

"So when Tim Cook, who is the CEO of our company, makes decisions that impact ASI, the Commission says we don't care because he is not an ASI employee, he is an Apple Inc employee. But to say that somehow Tim Cook can't make decisions for ASI is a complete mis-statement of corporate law, it's a misunderstanding of how corporations operate," he said.

"Absurd Theory"

Maestri said the Commission over-estimated the importance of the company's European headquarters in Cork in the south of Ireland.

"(Vestager) is arguing that the base on which we should pay taxes in Ireland is essentially all the profits we generate outside the United States ... in a place that doesn't do any engineering, doesn't generate any intellectual property for us," he said, adding it was an "absurd theory."

The company hopes U.S. president-elect Donald Trump will enact reforms to tackle tax avoidance which have led to trillions of dollars in profits being held abroad by U.S. companies, Sewell said.

Europeans, he said, were operating under a localized tax system, while the United States had a global deferred system.

"The difference between those two creates exactly the kind of loophole that the Commission has now been able to exploit," he said.

Trump's White House victory moves Apple and other big U.S. corporations closer to winning a big tax break on $2.6 trillion in foreign profits, experts say.

Currently, a law lets U.S. companies hold foreign profits overseas without paying U.S. corporate tax on them, unless those profits are brought into the United States.

Corporations have $2.6 trillion stashed abroad under this law. Apple topped the list with $200 billion of profits held overseas, according to March estimates by Citizens for Tax Justice, a corporate income tax watchdog group in Washington. (Graphic:

Article Link To Reuters:

Stocks Get Trump Bounce, But Not The Real Economy

Consumer, businesses haven’t changed their behavior early on.

By Jeffry Bartash
December 19, 2016

Stock prices soared and soared after Donald Trump's election, but the real economy?

U.S. stocks have repeatedly sailed to record highs in anticipation of a more business-friendly Trump White House backed by a Republican Congress. But there’s no evidence so far that businesses and consumers have acted with similar glee.

It’s no shock. Major reports leading up to Christmas, including this week’s look at investment and consumer spending, reflect snapshots of the economy in November as the election was taking place.

And even though surveys show a more buoyant attitude among consumers and executives, it’ll take at least several months to learn if that translates into more investing, hiring and spending.

“Is this just a temporary euphoria brought on by the election and the promise of meaningful change, the holidays, or a stock market at record highs? Only time will tell,” noted Scott Anderson, chief economist of Bank of the West.

Certainly there’s plenty of room for improvement. Take business spending.

Although orders for long-lasting products are forecast to rise in November, a key measure included in the durable-good report shows investment has fallen 4.3% in the past 12 months. Indeed, investment has been weaker in the past two years than anytime since the Great Recession.

President-elect Donald Trump has vowed to cut corporate taxes, reduce regulations and ratchet up government spending on large public-works projects. Those promises have excited the corporate world and it could spur more investment in the future, but executives are likely to wait for more details before they take the plunge.

The same is probably true of consumers. Households don’t spend like they used to, and it’s unrealistic to expect them to alter their behavior until they see how the new president’s approach affects their paychecks or ability to find work.

Still, households have been doing their part. Consumers have propped up the economy even as the two other key pegs, business investment and trade, lag well behind. The government is expected to report consumer spending rose a solid 0.3% in November, helped by gradually rising wages.

That leaves government. Yet Washington just can’t inject tens of billions of dollars into the economy even under a new administration. Congress rarely moves quickly and it won’t be until late spring or early summer that the spigots start to open.

Once the spigots open, though, federal spending could juice the economy for some time to come.

“The U.S. is poised to spend big in coming years while almost no one else is in the same boat,” said Doug Porter, chief economist of BMO Financial Group.

If Trump gets his way, the current economic expansion that’s now 90 months old, and is the fourth longest ever, might go on for at least several more years. That could bring it within reach of the record 120-month expansion that occurred from 1991 to 2001.

The bigger challenge, though, is not the length of the expansion but its speed.

The U.S. hasn’t grown 3% annually since 2005, an 11-year stretch that is the longest in modern history. That’s thin gruel for Americans used to an economy that whose historic growth rate is 3.3%. And one of the chief reasons Trump pulled off his surprise upset.

Article Link To MarketWatch:

New Reality: Politicians Talk, Stock Shares Drop

By Peter Schroeder
The Hill
December 19, 2016

Companies well -versed in navigating legislative and regulatory hurdles are increasingly finding their stock price under assault from Washington.

A growing willingness by politicians to call out particular companies — and for traders to seize on those comments to try and turn a profit — has created wild stock swings in recent months.

Nowhere has the phenomenon been seen more clearly than with Donald Trump. The president-elect has relished in his ability to directly challenge companies in a very public way, most often through Twitter.

On Dec. 6, Trump picked a fight with Boeing, saying he wanted to cancel a contract with the manufacturer to deliver a brand new Air Force One in the coming years because costs were “out of control,” exceeding $4 billion.

Boeing quickly responded that is only has a $170 million government contract to plan for new planes, and the company’s CEO contacted Trump directly to hash things out.

But the damage was done: the tweet was enough to drive down Boeing’s stock price in the seconds after it was sent.

Trump’s encore performance came days later, when he declared costs tied to the F-35 program, built by Lockheed Martin, “out of control” and pledged that those costs would be slashed once he took office. Lockheed’s stock, like Boeing’s, plunged.

While Trump’s affinity for picking fights is widely known, he isn’t the only prominent politician who has moved the needle on Wall Street.

Both Hillary Clinton and Bernie Sanders had an effect on stock prices during the presidential campaign, with both training their attention on the pharmaceutical industry.

In August, Clinton sent the stock of EpiPen manufacturer Mylan into a nosedive when she joined the growing political chorus criticizing the company for hiking the price of the lifesaving allergy medication. The company’s stock fell as much as 5.5 percent after her message went out.

She exerted similar influence in September, driving down biotechnology stocks after she lamented “price-gouging” in the industry.

Sanders took a similar approach in October, targeting the pharmaceutical company Ariad for raising the price of one of its leukemia drugs. That company’s stock slid as much as 15 percent after the criticism.

The immediacy with which politicians can now broadly disseminate a message, without filter or context from the media, can have a clear market impact.

And with financial professionals constantly searching for a new way to trade faster, an offhand remark from a politician can move billions of dollars in value in seconds.

Bloomberg, which sells pricey terminals that deliver lightning-fast information to financial professionals, has laid out for clients how to integrate Trump’s tweets into their endless feed of headlines and economic data that informs their trades.

But in this era of immediate market reaction to political remarks, it’s an open question whether a critical remark for a politician can have a lasting impact on a stock price.

Trump’s Boeing tweet drove down the company’s stock shortly after it was sent, but the company’s stock had actually gained in value by the end of that day’s closing, and is actually up 1.8 percent since Trump threatened to kills it valuable contract.

The pain was felt a bit more acutely at Lockheed Martin, whose stock fell $4 billion in value in the first minutes after the message, and is down a little more than 1 percent since Trump picked that fight.

Criticism from politicians can also have an upside. Vanity Fair said Friday that its subscriptions rose 100-fold after Trump directed his ire at the magazine one day prior, according to Poynter Trump, perhaps angry that the publication had run a critical review of New York’s Trump Grill, said Thursday the magazine was ailing.

“Has anyone looked at the really poor numbers of @VanityFair Magazine,” tweeted Trump. “Way down, big trouble, dead!”

Similarly, subscriptions to news organizations like The Washington Post and The New York Times have climbed following Trump’s elections, after he spent months condemning the media at his rallies.

Article Link To The Hill:

The Obama Legacy That Can’t Be Repealed

By Robert J. Samuelson
The Washington Post
December 19, 2016

There is no mystery about Barack Obama’s greatest presidential achievement: He stopped the Great Recession from becoming the second Great Depression. True, he had plenty of help, including from his predecessor, George W. Bush, and from the top officials at the Treasury Department and Federal Reserve. But if Obama had made one wrong step, what was a crushing economic slump could have become something much worse.

In the coming weeks, we’ll be swamped with analyses of Obama’s legacy. His foreign policy will be critiqued, as it is already. Once in the White House, Donald Trump may trash some of Obama’s favorite policies: the Affordable Care Act, the program on climate change, the Dodd-Frank law on financial regulation. All this may wrongly foster the notion that Obama accomplished almost nothing.

Put this down to partisanship, selective memories or both. It is Obama’s unfortunate fate that the high-water mark of his presidency occurred in the first months, when the world flirted with financial calamity. The prospect of another Great Depression — a long period of worsening economic decline — was not far-fetched.

In its just-released annual report, the White House’s Council of Economic Advisers (CEA) explains why. Recall the dreadful numbers.

In the first quarter of 2009, as Obama was moving into the White House, monthly job losses averaged 772,000. The ultimate decline in employment was 8.7 million jobs, or 6.3 percent. Housing prices and stock values were collapsing. From their peak in February 2007 to their low point, housing prices dropped 26 percent. Millions of homeowners were “underwater” — their houses were worth less than the mortgages on them. Stock prices fell roughly by half from August 2007 to March 2009.

There was no guarantee that the economy’s downward spiral wouldn’t continue, as frightened businesses and consumers curbed spending and, in the process, increased unemployment. The CEA presents a series of charts comparing the 2008-2009 slump with the Great Depression. In every instance, the 2008-2009 downturn was as bad as — or worse than — the first year of the Great Depression: employment loss, drop in global trade and change in households’ net worth.

The starkest of these was the fall in households’ net worth (people’s assets, such as homes and stock, minus their debts, such as mortgages and credit-card balances). It dropped by $13 trillion, about a fifth, from its high point in 2007 to its trough in 2009. This decline, the CEA notes, “was far larger than the reduction [adjusted for inflation] . . . at the onset of the Great Depression.”

What separates then from now is that, after 18 months or so, spending turned up in 2009 while it continued declining in the 1930s. This difference reflected, at least in part, the aggressive policies adopted to blunt the downturn. The Fed cut short-term interest rates to zero and provided other avenues of cheap credit; the Troubled Asset Relief Program (TARP), enacted in the final months of the Bush administration, poured money into major banks to reassure the public of their solvency.

Still, Obama’s role was crucial. Against opposition, he decided to rescue General Motors and Chrysler. Throwing them onto the tender mercies of the market would have been a huge blow to the industrial Midwest and to national psychology. He also championed a sizable budget “stimulus.” Advertised originally as $787 billion, it was actually $2.6 trillion over four years when the initial program was combined with later proposals and so-called “automatic stabilizers” are included, the CEA says.

More generally, Obama projected reason and calm when much of the nation was fearful and frazzled. Of course, he didn’t single-handedly restore confidence, but he made a big contribution. So did the underlying flexibility and resilience of the U.S. economy.

In its report, the CEA contends that the recovery from the Great Recession is mostly complete. This seems plausible. Since the low point, employment is up 15.6 million jobs. Rising home and stock prices have boosted inflation-adjusted household net worth by 16 percent. Gross domestic product — the economy — is nearly 12 percent higher than before the financial crisis.

Many Americans still seem disappointed. They feel insecure and shortchanged. The financial crisis and Great Recession left deep scars that haven’t yet been fully healed by a recovery that often seemed halting and unreliable. They also don’t give Obama much credit because they disagree with him on other issues or disapprove of the general contentiousness of his presidency. Any semblance of bipartisanship broke down.

As a result, his impact is underestimated. Suppose we had had a second Great Depression with, say, peak unemployment of 15 percent. Almost all our problems — from poverty to political polarization — would have worsened. Obama’s influence must be considered in this context. When historians do, they may be more impressed.

Article Link To The Washington Post: