Monday, December 26, 2016

Dollar Edges Up On Bargain Hunting After Sagging Over The Holidays

By Shinichi Saoshiro 
December 27, 2016

The dollar inched up against the yen and euro on Tuesday as some investors emerged out of the holiday lull to hunt for bargains as the market entered the last trading stretch of the year.

The euro slipped 0.2 percent to $1.0435 EUR= after climbing overnight to $1.0469.

The dollar was up 0.3 percent at 117.420 yen JPY= after slipping to a six-day low near 117.000 the previous day in reaction to slightly lower U.S. yields. The 10-year Treasury note yield US10YT=RR rebounded from the previous day's decline to shore up the dollar.

The yen showed little reaction to Japan's inflation data, which saw core consumer prices mark the ninth straight month of annual declines in November.

Movements were limited with financial markets in Sydney, Hong Kong and London still closed on Tuesday for the Christmas holidays.

"There isn't much in the form of fresh incentives moving the market right now. The dollar is seeing some participants buy on dips that formed as it sagged through the Christmas break," said Koji Fukaya, president of FPG Securities in Tokyo.

The U.S. currency had climbed to a 10-month high of 118.660 yen mid-month on the back of the Trump rally, during which it benefited from expectations of higher interest rates to match the incoming president's stimulatory economic policies.

But the dollar, which surged more than 10 percent against the yen since Trump's U.S. election win in November, has recently lost some of its momentum.

Some in the market now expect a deeper downward correction to grip the greenback, with the rise in U.S. debt yields slowing and concerns over Trump's protectionist statements taking some shine off the dollar.

"Trump's policies are understood to be conducive to inflation and a stronger currency. But a higher dollar would be a significant setback to the U.S. economy seemingly in the ending stages of an expansion," wrote Makoto Noji, senior strategist at SMBC Nikko Securities.

"Therefore, the Trump administration and the Federal Reserve would have to stick to a cautious monetary policy stance to prevent the dollar from appreciating excessively. We thus expect a very gradual downtrend for dollar/yen."

For now the dollar index added 0.1 percent to 103.100 .DXY, clawing back towards a 14-year high of 103.650 marked a week ago.

The Australian dollar was down 0.3 percent at $0.7175 AUD=D4, inching back towards a seven-month low of $0.7160 plumbed late last week on concerns over China's economic growth.

The New Zealand dollar fell 0.2 percent to $0.6882 NZD=D4, paring the gains made the previous day. The kiwi was close to $0.6863, a near seven-month trough plumbed on Friday against the broadly stronger dollar.

The U.S. currency also rose against the pound, which slipped 0.2 percent to $1.2272 GBP=D4, putting it closer to a 1-1/2-month low of $1.2230 set on Friday.

Article Link To Reuters:

ECB Tells Monte Dei Paschi It Needs To Raise $9.2 Billion

By Silvia Aloisi
December 27, 2016

The European Central Bank has told Monte dei Paschi it needs to plug a capital shortfall of 8.8 billion euros ($9.2 billion), higher than a previous 5 billion euro gap estimated by the bank, the lender said on Monday, confirming what sources told Reuters.

Last Friday the Italian government approved a decree to bail out Monte dei Paschi (BMPS.MI) after Italy's No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase.

The bank said on Monday it had officially asked the ECB last Friday for go ahead for a "precautionary recapitalization".

A precautionary recapitalization is a type of state intervention in a struggling bank that is still solvent. It means only a modest bail-in of investors though the government can buy shares or bonds only on market terms endorsed by EU state aid officials in Brussels.

In its reply, the ECB said it had calculated the capital it believed the bank needed on the basis of a shortfall emerging from European stress test of large lenders earlier this year.

In those tests Monte dei Paschi was the only Italian bank to come short under an adverse scenario.

The ECB said the lender was solvent but signaled the bank's liquidity position had rapidly deteriorated between the end of November and December 21, Monte dei Paschi said.

"The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB's calculations and introduce the measures for a precautionary recapitalization...," it said.

The bank's problems date back several years but successive Italian governments have failed to tackle the issue, which became a political taboo this year with new EU rules banning state bailouts unless private investors take losses first.

The European Commission said on Friday it would work with Rome to establish conditions were met for a bailout of Monte dei Paschi.

But on Monday ECB policymaker Jens Weidmann said plans for a state bailout of Monte dei Paschi should be weighed carefully as many questions remain to be answered.

Italy's market watchdog Consob said last week the bank's shares and securities would be suspended from trading until the conditions of a state bailout become clear.

Article Link To Reuters:

Yuan Trading Volume Soars In Sign Of December Outflow Pressures

Daily average turnover surges this month as currency drops; Increase suggests capital exodus is accelerating: RBS

By Tian Chen
December 27, 2016

The onshore yuan’s surging trading volume is another piece of evidence that capital is fleeing China at a faster pace.

The daily average value of transactions in Shanghai climbed to $34 billion in December as of Monday, the highest since at least April 2014, according to data from China Foreign Exchange Trade System. That’s up 51 percent from the first 11 months of the year. The increase suggests quickening outflows, given that data in recent months showed banks were net sellers of the yuan, according to Harrison Hu, Singapore-based chief greater China economist at Royal Bank of Scotland Group Plc.

This month’s jump in trading volume signals sentiment has kept deteriorating since November, when the nation’s foreign-exchange reserves shrank by the most since January. The Chinese currency is headed for its steepest annual slump in more than two decades and when the year turns, authorities will be faced with a triple whammy of the renewal of citizens’ $50,000 conversion quota, prospects of further Federal Reserve interest-rate increases, and concern that U.S. President-elect Donald Trump may slap punitive tariffs on China’s exports to the world’s largest economy.

“Capital outflow pressures will stay, and in near term, we should monitor the impact upon the reset of the annual quota," said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. The pressures will likely ease toward the end of the first quarter as foreign flows into China’s bond market quicken, she said.

December’s flurry of yuan transactions in Shanghai comes in a tough month for owners of China’s financial assets. The Shanghai Composite Index of stocks is down 4 percent and an index of Chinese government bonds is headed for its biggest monthly decline in almost six years. The yuan has weakened 0.9 percent this month to 6.9487 per dollar.

Policy makers have set stronger-than-expected fixings and tightened capital controls to prevent the yuan from entering a vicious cycle of sharper depreciation and faster fund exodus. The People’s Bank of China has stepped up efforts to guide expectations on the exchange rate, Ma Jun, chief economist at the monetary authority’s research bureau, said in a statement Thursday.

Trading volume in the yuan will probably keep rising next year amid continued outflows and as companies, individuals and banks manage their foreign-exchange holdings more aggressively, said RBS’s Hu. "But the situation won’t likely spin out of control as PBOC will keep capital curbs tight," he said.

Article Link To Bloomberg:

Japan Consumer Prices Slump In November, Look For 2017 Rebound

By Leika Kihara 
December 27, 2016

Japan's core consumer prices marked the ninth straight month of annual declines and household spending slumped in November, data showed on Tuesday, suggesting that the economy still lacks enough momentum to jump-start inflation toward the central bank's ambitious 2 percent target.

Core consumer prices in Tokyo, a leading indicator of nationwide price trends, fell at the fastest pace in nearly four years, highlighting the challenges policy-makers face in eradicating Japan's sticky deflationary mindset.

But analysts expect inflation to accelerate next year reflecting a recent rebound in oil costs and yen declines that push up import prices, easing pressure on the Bank of Japan to top up an already massive stimulus program.

"It's clear trend inflation was weak until December because prices were falling for many non-energy items," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"But inflation will turn positive and may accelerate to around 1 percent in summer or autumn next year. That's bad news for consumers but good news for the BOJ as it tries to achieve its price target."

The core consumer price index, which includes oil products but excludes volatile fresh food prices, slipped 0.4 percent in November from a year earlier, government data showed, compared with a median market forecast for a 0.3 percent fall.

Core consumer prices in Tokyo, available a month before the nationwide data, fell 0.6 percent in December from a year earlier, as weak clothing sales forced retailers to cut prices.

It was the biggest annual drop since February 2013, when prices fell by the same margin, and exceeded the 0.4 percent drop projected by analysts in a Reuters poll.

Spending Still Weak

Japan posted a third straight quarter of annual expansion in July-September and analysts expect growth to pick up in coming quarters, thanks to a recent pick-up in exports and factory output driven by improvements in emerging economies.

The BOJ offered an upbeat view of the economy at its rate review last week, while the government raised its assessment of the economy for the first time in nearly two years.

Policy-makers hope that prospects of a sustained recovery will prompt companies to boost wages and household spending - a particularly soft spot in Japan's economy, the world's third-largest.

Separate data showed the jobs-to-applicants ratio rose to 1.41 from 1.40 in the previous month, matching a median market forecast and reaching the highest level since July 1991.

But household spending fell 1.5 percent in November from a year earlier to decline for the ninth straight month, suggesting that slow wage growth was keeping consumers from shopping.

A pick-up in inflation may prove to be short-lived if the rising cost of living hurts consumption, some analysts say.

The BOJ has repeatedly pushed back the timing for achieving its inflation target with more than three years of aggressive money printing having failed to spur public expectations that prices will rise ahead.

Article Link To Reuters:

What Trump Could Do For Inner-Cities

For all the talk about gentrification, the real issue has been decades of concentrated poverty—and HUD policies have done little to help change that and sometimes worsened the problem.

By Joel Kotkin
The Daily Beast
December 27, 2016

When Donald Trump described the “devastating” conditions in America’s inner cities, emphasizing poor schools and lack of jobs, he was widely denounced for portraying our urban centers in a demeaning and inaccurate way, much as he had been denounced previously for his supposed appeal to “racial exclusion” when he asked black voters “what the hell do you have to lose” by backing him.

To be sure, Trump was tromped in big cities nationwide, losing by stupendous margins, but he actually did a little better than Mitt Romney among black and Hispanic voters, according to exit polls. Still, some urbanistas embraced the idea that even if Trump had won in the electoral college, “the city is ours,” as New York Magazine put it. And our America, those voices maintained, was doing great and would continue to do great even without a friend in the White House.

But as we saw in November, something isn’t so just because the coastal cocooners say it’s so. In reality, if we go beyond the big-city boosterism that dominates media coverage, poverty, crime, and economic stagnation still characterize many urban core neighborhoods even as many downtown districts have recovered. For all the talk about gentrification, concentrated urban poverty has been a persistent and growing problem, with 75 percent of high-poverty neighborhoods in 1970 still classified that way four decades later.

Racial and class inequality is very much alive even in the most “progressive” cities. In New York, the poster child for urban revitalization, poverty and homelessness have worsened, in large part due to soaring housing costs. Since 2007, median rents in the city have gone up 8.5 percent while median renters’ incomes have gone down by 6.8 percent. Particularly shocking have been rent rises at the edge of gentrification, in places like Brooklyn’s Williamsburg—where rents have risen 80 percent since the 1990s.

In most urban areas, particularly outside New York and a few other cities, the much ballyhooed “back to the city” movement — mindlessly overblown by the national media — impacts basically the downtown cores, which account for roughly 1.3 percent of the national population, a percentage they have held since 2000. Some inner-ring communities — often right next to the urban core — have lost population in those 16 years. Overall, the outer suburbs and exurbs, home to more than 40 percent of the metropolitan population, have added population at more than five times the rate of urban cores.

The same pattern applies to jobs. Though some cores have gained some employment, that’s been offset by big losses in the surrounding urban neighborhoods for an overall decline in the number of jobs in and around most city centers.

Bottom line: The suburbs and exurbs disdained by most urbanists and Democratic politicians continue to add residents and jobs as inner cities continue to languish.

In fact, roughly 80 percent of all job growth since 2010 has been in suburbs and exurbs. And tech, supposedly newly focused on the urban core, still concentrates largely in dispersed, suburban environments from Silicon Valley to Austin to Raleigh.

Rather than clustering downtown, most rapid growth is now in what may be seen as post-suburban cities, places like Irvine, California, Overland Park, Kansas, or Frisco, outside Dallas, where single family neighborhoods and cars co-exist with dense office parks and often expanding town centers. And with millennials now entering their thirties in greater numbers, these communities, generally safe and with good schools, seem to be growing in popularity much faster than the inner cities. These are unfortunate facts for Democrats, who have long celebrated, sometimes garishly, cities’ glaring problems—thus helping make Trump’s campaign comments sound that much more reasonable.

Trump’s pick of Ben Carson to run the Department of Housing and Urban Development has horrified some retro-urbanists who point to his lack of experience with housing issues, let alone running a $50-billion-a-year agency. Yet given the obvious failures of existing policies, an outsider may prove something of a blessing—if he comprehends the nature of the challenge.

During the past decade, urban boosters have hailed “the rise of creative class,” reflected by the migration of educated millennials to “hip and cool” cities including New York, San Francisco, Seattle, and Portland. Yet as Richard Florida, who coined the term “creative class” has since observed, gentrification has not made life better for most urbanities, as the rise in housing costs has outpaced that in wages, making those cities even less affordable. The creative class certainly improved selected parts of urban America, but for the most part urban poverty, including homelessness and hunger, has barely been dented by gentrification and in some cases may have been made worse.

This poor result reflects the failure of urban policies that have been promoted by the very interests—particularly real-estate speculators and big-city politicians who count on them—that most strenuously oppose Trump and his pick of Carson in particular. Those policies include redevelopment that often serves to push inner-city residents from their homes—with HUD in the worst cases trying to lure poorer populations out of their cities altogether.

Those moves happened even as more upwardly mobile minorities headed in huge numbers to the periphery. Since 2000, notes demographer Wendell Cox, more than 95 percent of the minority population growth in the 52 largest metropolitan areas has been in suburban and exurban areas.

In Portland, minority neighborhoods close to downtown have been resettled, with encouragement from the progressive government, by upscale hipsters. Indeed, the largest reductions of African-American populations, and occasionally of Latinos as well, have taken place in precisely the bluest cities such as Seattle, Boston, and San Francisco in what becomes a genteel exercise in whitewashing.

Even in more diverse cities such as Chicago, notes urban analyst Pete Saunders, city policies have been designed that force poorer, largely minority areas out of areas that, in essence, are considered too valuable for such populations. The results of dislocation, Saunders notes, has created a kind of progressive apartheid, where blacks and other minorities are driven away from neighborhoods that have been their home for generations. He describes Chicago poignantly as “one third San Francisco and two-thirds Detroit.”

Increasingly, at least in the centers of the greatest hipster infestation, minorities and working class families are being driven into less desirable areas, often further from work locations. This helps create new social tensions and, in many places, notably Chicago, more social unrest, and now the most murders in more than two decades. Overall, the rate of violent crime in urban cores remains almost four times higher than the national average, according to FBI data. The worst violence, and the sharpest upticks over the decade have been in cities with large black populations, including Detroit, Oakland, St. Louis, Memphis, Cleveland, and Atlanta.

Left out of the urban revival, minority and poor communities face diminishing opportunities while others prosper. This is true not only in places like Chicago, notes researcher Daniel Hertz, but also in New York where class and race inequality are much higher than in the rest of the country. Generally speaking, it’s the bluest and largest cities that suffer the worst levels of inequality.

Indeed despite the media spin, in the core cities of the 51 metropolitan areas, 81 percent of the population increase over the past decade was under the poverty line, compared to 32 percent of the suburban population increase. Despite talk about “suburban ghettos,” the poverty rate in the suburbs remains roughly half that of urban centers (20.9 percent in core compared to 11.4 percent in the suburbs as of 2010). Crime rates in core cities, meanwhile, remain over three times higher than in the suburbs.

No surprise that discrete and genteel “ethnic cleansing”—in the form of HUD “affirmative action” or taxpayer funded redevelopment—appeals to many urban boosters. In contrast, the much sought after hipster and wealthy childless adults thrill developers and mayors; they love a population that will pay a premium to live there and that doesn’t need good schools or working-class jobs.

If lack of commitment to pre-existing failure offers some hope to Trump and Carson, the non-existence of a programmatic agenda represents the significant downside. Trump, after all, hardly built his career in fighting poverty; his business of building luxury high-rises hardly made him a natural ally to the diminishing ranks of working- and middle-class urbanites.

Certainly, the new HUD should abandon its agenda of redirecting populations, or forcing high density on reluctant communities, whether in the poorer urban neighborhoods or the more comfortable suburbs. But there needs to more. One hopeful sign—particularly for cities in the heartland—would be attempts to keep industrial jobs in what’s left of the manufacturing economy, the loss of which has devastated cities such as Milwaukee. Similarly Trump’s stand against H-1B visas could help keep some white-collar positions in the hands of citizens residing in our cities, including on the coasts.

Other steps could be taken to reawaken the grassroots economy, particularly in hard-hit poorer neighborhoods. This might include such things deregulating some businesses, like in cosmetology, and making it easier for new restaurants and shops. Yet these things cannot be mandated from Washington; it will take some rise in the level of business savvy of our elected leaders in cities. Perhaps most critical will be addressing the escalating crime rate in many cities, where by far the vast majority of victims are minorities, as Trump himself pointed out.

Other parts of the potential Trumpian urban agenda, such as charter schools and vouchers, long supported by his Education Department nominee Kathy DeVos, could help address poor urban education, arguably the biggest reason why families don’t stay in cities like Chicago with their dysfunctional schools. Federal support for educational reform is vastly preferable to the kind of anti-charter agenda that, for example, Hillary Clinton, with her incestuous ties to the teacher unions, would have promoted.

Similarly, a shift away from “one size fits all” transportation policies might allow communities to build public transit options, ranging from bus rapid transit to innovative dial-a-ride services. Under the old regime, money tended to go into light rail and trolley projects designed to appeal to upscale riders and developers; a better focus on inner city needs might be actually helping working class people actually get to work as quickly and easily as possible, at reasonable cost rather than building dedicated lines that tend to push land prices up, and existing residents out.

Even if Carson can concoct such an agenda, this is unlikely to make Donald Trump popular among the retro-urbanist chattering class who have thrived under the current urban regime. But it is to be hoped that such a new approach, at very least, could finally make progressives, who control America’s big cities as virtual fiefs, reconsider policies that have led to tragic levels of impoverishment, violence, and inequality across our great urban centers.

Article Link To The Daily Beast:

China Industrial Profits Climb 14.5%, Led By Coal And Metals

Earnings rose to 774.6 billion yuan last month on price gains; Rise comes amid rebound in factory inflation, coal strength.

By Xiaoqing Pi
December 27, 2016

Profits at industrial firms in China accelerated in November, with raw material producers leading gains, as prices of products such as coal and metals continued to advance.

Industrial profits rose 14.5 percent from a year earlier to 774.6 billion yuan ($111 billion), the National Bureau of Statistics said Tuesday. That compared with the 9.8 percent increase in October. Earnings in the first 11 months climbed 9.4 percent to 6.03 trillion yuan.

Earnings posted the second-strongest gain in more than two years as factory inflation rebounded to a five-year high in November on surging coal and metal prices. That helps manufacturers cut debt and invest more, while delaying efforts to reduce excess capacity.

"Profits of industrial companies have continued to rise this year, but they still face challenges to improve their efficiency," the NBS said in a statement. "Profit gains depend excessively on price rebounds for raw material sectors such as oil processing or steel."

Raw material producers contributed 68 percent of the industrial profit gains in the first 11 months from a year earlier, NBS said. Earnings from coal mining rose 157 percent in the first 11 months while those for base metal processing surged 275 percent.

Not all sectors showed gains. Industries such as oil and gas drilling and power supply saw profit declines in the first 11 months.

Article Link To Bloomberg:

For Trump, A Clash Of Deals, Policy In China

By Simon Denyer and Jonathan O'Connell 
The Washington Post
December 27, 2016

Donald Trump calls China an “enemy” of the United States, a threat and an international pariah whose modus operandi is to lie, cheat and steal — but for at least eight years his hotel chain has been trying to do business here.

Although negotiations have yet to bear fruit, Trump Hotels has made confident predictions this year about opening 20 or 30 luxury hotels in China. It is an ambition that would involve the company in direct negotiations with a Communist Party that the president-elect professes to fundamentally distrust.

On Dec. 12, Trump tweeted that he would do “no new deals” during his time in the White House. It is not clear what that means for Trump Hotels as a company, and both the Trump Organization and the Trump transition team declined to comment for this article.

If Trump Hotels goes ahead with its efforts to expand to China, or even if it only lays plans to do so after his term in office, it could hugely complicate one of the most important foreign policy relationships Trump will have to negotiate during his presidency. And the suspicion that Trump as president might be trying to badger China or butter it up to promote his business there risks coloring perceptions of his every move in regard to Beijing — even those that are completely aboveboard.

“It’s very hard for foreign politicians to do business in China,” said Liu Xuemei, vice president of New World Development’s Huamei Real Estate Development. “If you want to do politics, don’t try doing business in China.”

Liu said it isn’t hard to throw up a building in China; the difficulty lies in all the procedures involved in buying land and getting permission to build on it.

“It’s a lot of trouble,” she said. “If your relationship with China isn’t good, there’s no way your papers and permits will be approved. The Chinese government is hard to deal with, so buildings are hard to build.”

The complications for Trump of mixing business and politics were thrown into sharp relief Dec. 2 when he accepted a congratulatory phone call from Taiwan’s President Tsai Ing-wen, a move that infuriated the Chinese government in Beijing and overturned decades of diplomatic protocol.

A representative of the Trump Organization made a business trip to Taiwan in October, according to media reports linked to the woman’s Facebook page. And the Taiwan News and other media outlets reported last month that someone professing to represent the company had held talks with the mayor of Taoyuan in September about an airport development project.

The Trump Organization said after Trump’s phone call with Tsai that it had no plans for expansion in Taiwan and that there had been no authorized visits to push for a development project.

Trump’s business interests up to now have pointed in the other direction, with the money to be made in mainland China dwarfing any potential business deals with Taiwan.

Trump’s interest in China dates to late 2005, when he began applying for trademarks there for the “Trump” brand for a variety of businesses, including hotels and real estate. Even that was hard, and it took him a decade to get his name trademarked for hotel and real estate services, a victory he won about the time of the presidential election.

In 2008, Trump Hotels was reported by the South China Morning Post to have joined forces­ with one of China’s largest property developers, Evergrande Real Estate, and the Hong Kong-based Orient Property Group to bid on the development of a landmark office tower in the southern city of Guangzhou. The deal fell apart a month later when Evergrande pulled out, according to NPR.

In 2012, the Trump Hotel Collection opened an office in Shanghai with 10 employees, its first in Asia.

“The Trump development team has identified Greater China as our top priority among high-potential emerging markets,” Todd G. Wynne-Parry, a senior vice president of global hotel development and acquisitions, said in a news release the following year, while Chief Operating Officer Jim Petrus said the group aimed to open 30 hotels by 2020.

The term Greater China usually refers to mainland China, Hong Kong and Taiwan.

Just before the U.S. election, in October, Trump Hotels chief executive Eric Danziger was quoted in Chinese news media as telling an Asia Pacific hospitality conference in Hong Kong that the group was still aiming to open Trump hotels in 20 to 30 cities in China and Scion hotels in more cities — but this time without specifying a target date. “There will definitely be Trump hotels in big Chinese cities like Beijing and Shanghai,” he was quoted as saying.

But if Danziger is right, those projects could either fall apart or become a liability if Trump doesn’t keep the U.S.-China relationship on an even keel.

“State-owned real estate companies play a big role in the Chinese real estate industry, and private firms also take their cues from government hints,” said Liao Jun, vice president of Vanke Oriental Properties. “If U.S.-China relations go bad, it will be impossible for him to hope to do business in China.”

And any Trump hotels that have been opened by that point would face serious pressures.

“People with money and status in China care deeply about their reputation,” Liu said. “If China is engaged in a trade war or exchanging hostile words with Trump, you can forget about doing business in China after staying at a Trump hotel.”

Why has it proved so difficult for Trump Hotels to get a foothold in China? For one thing, the Chinese luxury hotel market that Trump executives have been so eager to enter is enduring a downturn sparked by the government’s campaign against corruption, according to real estate executives who track the market. Some hotels have even moved to shed their star ratings so officials can continue to stay at them, they say.

The Trump brand is not a “street name” in China, said Daniel Voellm, a Hong Kong-based managing partner of HVS, a hotel industry consulting and research firm. “To my knowledge, most of what he does is branding rather than actual development.”

Vanke’s Liao agreed. “I have been in the real estate market for decades, but I didn’t know about Trump until I went to Las Vegas two years ago, and the tour guide pointed out a golden shining Trump hotel,” he said. “My understanding is that in terms of international brands, people trust hotels like Marriott and Sheraton more in China — they still think of Trump Hotels as a bit sketchy and unheard of.”

Trump’s brand may be better known in China now, but ethics advisers for past presidents say trading on his position, particularly with foreign partners or clients, would raise serious questions about conflict of interest and possibly violations of the emoluments clause of the Constitution barring gifts or profits from foreign leaders.

Along with his “no new deals” pledge, Trump has said that he will put his businesses in the hands of his adult sons, Don Jr. and Eric.

Trump Hotels also appears to have run into the practical problems of doing business here. In 2013, it signed a memorandum of understanding with State Grid Corp. of China — an electricity company and the country’s largest state-owned enterprise — for an urban complex in Beijing including high-end hotels, serviced apartments, office space and other commercial uses, according to a person close to the deal.

That deal, for branding and management, was potentially worth between $100 million and $150 million over 15 years, Robby Qiu, a former director of Trump’s Greater China office, told the Agence France-Presse news agency.

But negotiations were put on hold after Chinese authorities opened a corruption investigation into State Grid, AFP reported. In a report issued in June 2015, China’s National Audit Office accused the company of applying for a permit to build a research and development center on the land, not a commercial venture. There is no suggestion that Trump or his companies were implicated in the inquiry.

State Grid declined to comment. At the site in the Guomao district, workers said building had continued until about six months ago and has since largely stopped.

Trump has consistently berated China on Twitter. In his 2011 book “Time to Get Tough,” he called China’s leaders “our enemy” and accused them of “ruining our way of life.”

“We shouldn’t entertain Communists and beg for a few tiny contracts,” he wrote.

But the deal with State Grid is not his company’s only dealing with a state-owned company in China that is intimately linked to the Communist Party.

In New York, records show that the state-owned Industrial and Commercial Bank of China is among the largest office tenants in Trump Tower, where it occupies the 20th floor.

The deal has been worth more than $1.5 million annually to Trump’s firm, according to the data firm CoStar Group, and it will expire in 2018, according to Bloomberg News — raising the prospect of the Trump Organization negotiating an extension with the Chinese bankers while Trump is in office. Tian Terence Deng, a spokesman for the bank, declined to comment.

In Congress, Democrats are already taking aim at Trump’s perceived conflicts of interest in his business dealing with China.

Rep. Elijah E. Cummings (D-Md.), speaking at a Dec. 14 forum at the Capitol on ethical issues raised by the incoming administration, said that it didn’t matter to him if Trump wanted to keep his name on businesses such as “The Celebrity Apprentice” but that dealings with foreign countries were another matter.

“I care about government officials in Bahrain, China, Turkey, Argentina, Singapore and elsewhere who may buy up entire floors of hotel rooms, pay higher rents at Trump Tower, lower interest rates on loans, speed up permits for development projects or take all kinds of other inappropriate actions to ingratiate themselves with the new administration,” Cummings said.

Yet there is one potential silver lining, some business leaders privately say. Perhaps Trump’s interest in doing business in China will prevent him starting a trade war with Beijing that could wreak havoc on both nations’ economies.

Article Link To The Washington Post:

Barack’s Last Bank Bash

Former villains are now victims in a final round of official larceny.

By Review & Outlook
The Wall Street Journal
December 27, 2016

The Obama Justice Department is pulling up to the ATM for one last withdrawal from banks. Having blamed U.S. financial firms for the 2008 mortgage crisis and squeezed them for more than $100 billion in settlements, the feds are now gashing foreign banks. Cases against such unsympathetic targets are sure to please progressives, but don’t expect the feds to prove any of these cases in court.

Last week Credit Suisse agreed to fork over more than $5 billion and Deutsche Bank agreed to pay more than $7 billion. Barclays refused to settle and was sued by Justice on Thursday. Good for Barclays.

Here’s hoping the British bank takes its case to trial, because Justice’s complaint is a 198-page flight from logic. The government’s lawsuit accuses Barclays of defrauding investors who bought its mortgage-backed securities in the years leading up to the financial crisis. The allegation is that the bank didn’t disclose how bad the underlying loans were. But the government acknowledges in its complaint that Barclays was also an investor in most of the securities at issue, and that it was often buying some of the riskiest slices of the deal. Was Barclays defrauding itself?

The suit goes downhill from there. The statute of limitations has run out for bringing a typical case under securities law. But the government is still able to sue Barclays under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Firrea).

Prosecutors like this law because it requires a low burden of proof and can result in huge penalties. The catch, since Firrea was created to punish savings-and-loan executives, is that it can only be used against those who have allegedly harmed a federally insured financial institution. So instead of presenting mom-and-pop investors who lost money, prosecutors have to present other banks as victims and describe how they allegedly suffered at the hands of the defendant.

For the purposes of extracting cash from Barclays, guess who the government is now calling a victim? Yes, Citibank.

For those who don’t appreciate the humor in this Beltway scam, recall that two years ago the feds used Firrea to claim that during the run-up to the same financial crisis the bank’s parent Citigroup was the villain that had misled investors in mortgage-backed securities. Justice extracted a $7 billion settlement from Citi.

In announcing that deal, then Attorney General Eric Holder called Citi’s conduct “egregious.” Mr. Holder said the bank had “contributed mightily to the financial crisis that devastated our economy” and spoke of shattered lives allegedly caused by the villainous firm. But that was so 2014.

Now we are asked to believe that this mastermind of an international plot to defraud investors was simultaneously taken in by a nearly identical plot cooked up by a rival rogue organization. Amazing. Will Citi now get some of its $7 billion back to reflect its new victim status?

There’s more. The government says Barclays had many other institutional victims, such as Fannie Mae and Freddie Mac. Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, had to acknowledge the destruction caused by these reckless “kings of leverage.” But lately the government finds them more useful as alleged victims when suing other firms.

Another alleged victim in the civil case against Barclays is IndyMac, the California liar-loan factory that used to brag about all the “nontraditional” mortgages it was originating before failing in 2008. According to Justice, IndyMac is now a victim not because it bought mortgage-backed securities from Barclays, but because it sold to Barclays lots of risky loans that were bundled into securities. Justice claims that Barclays harmed IndyMac by “creating demand” for its products. Were IndyMac executives powerless to offer anything but poorly underwritten mortgages?

Justice seems to be saying that shoddy products are the responsibility of the consumers who order them. It might be entertaining to watch government attorneys try to argue this point in court. Carried to its conclusion, this suggests that President Obama’s beloved Consumer Financial Protection Bureau has been protecting the wrong side of a financial transaction.

The worst financial abuses are these bank raids by the Obama Department of Justice. Repairing this agency and its reputation begins with an end to evidence-free money grabs against unpopular defendants.

Article Link To The Wall Street Journal:

Trump Is Being Handed A Great Economy. What Happens When It Goes South?

By Catherine Rampell
The Washington Post
December 27, 2016

Back in October, a Marketplace-Edison Research Poll found that two-thirds of Donald Trump voters didn’t trust government-reported economic data, thanks partly to their candidate’s insistence that the numbers are bogus.

Something tells me this attitude is about to change.

After all, Trump will soon take office with among the most favorable economic conditions — as measured by the government and private data sources — imaginable. And you can bet that he, and his supporters, will gleefully claim credit.

Until things go south, anyway.

For now, rose-colored economic data abound. The most recent jobs report shows the unemployment rate down to 4.6 percent. It hasn’t been this low since August 2007, several months before the Great Recession began.

Or consider a broader measure of underemployment called the U-6. This includes workers who are part-time but want full-time work, and people who’ve given up looking for work but still want it. It’s not quite at its pre-recession level, but it has also fallen dramatically.

Wages, too, have risen substantially. Adjusted for inflation, median weekly earnings for wage and salary workers were at an all-time high in the third quarter.

Gas prices remain low, as does overall inflation. Meanwhile, stocks have reached all-time highs, with the Dow Jones industrial average on the cusp of 20,000. Gross domestic product growth for the third quarter was revised upward last week, to 3.5 percent. (Apparently Trump is even making the economy great again retroactively.)

Consumers likewise seem euphoric, with multiple measures of consumer confidence recently reaching business-cycle highs. These numbers are partly driven by a sharp spike in optimism among Republicans in the weeks since the election, but even before then confidence had been trending upward.

All of which is to say: These are some brisk tail winds on which to sail into the Oval Office.

They also represent economic conditions quite different from the catastrophic ones Barack Obama inherited in 2009.

Curiously, though, Trump’s priorities seem predicated on the premise that the U.S. economy is still circling the drain. He plans to usher through a major stimulus package early in his administration, including massive personal and corporate income-tax cuts and a public-private $1 trillion infrastructure plan.

These measures are likely to further goose the economy, at least in the near term. You can bet, then, that early in his presidency, Trump will be touting all sorts of government-sourced economic data as evidence of his tremendous success.

Well, all sorts of economic data except the deficit numbers, maybe.

But here’s the risk. With so many economic metrics already so strong, there’s likely only one direction the economy can head in the medium term: down.

Recent Federal Reserve forecasts suggest that we’ve already reached close to full employment, that inflation will soon pick up and that output growth will continue to slog along at our new normal of about 2 percent.

Of course, Fed Chair Janet Yellen recently acknowledged that the delicate art of forecasting is especially challenging, given the “cloud of uncertainty” surrounding Trump’s fiscal policies. In the same news conference, she also gingerly suggested that there might not be an obvious need for fiscal stimulus right now, given how close we are to full employment. Other economic analysts have noted that stimulus at this point risks overheating the economy.

Not to mention that if Trump implemented some of the other wacky policies he’s flirted with — a trade war, mass deportation, defaulting on our federal debt obligations, returning to the gold standard — a painful recession would ensue, according to multiple private-sector economic forecasters.

Regardless, the historical record suggests that four more years of expansion are unlikely. That is, even if recoveries don’t die of old age, and even if Trump doesn’t spark a worldwide financial crisis by refusing to raise the debt ceiling, it seems reasonable to expect that we might face a recession at some point during his presidency.

So, what happens when the numbers turn against him?

Three consequences seem likely.

One, the administration will start searching for scapegoats other than Trump’s own party and its choices. Immigrants, minorities, Fed officials: Watch out.

Two, assuming Trump will have already signed a major fiscal stimulus package during an expansion, there won’t be much powder left in the keg when Keynesian stimulus is actually needed. That is, fiscal tools available to mitigate the recession will be unusually limited.

And three, the numbers will become suspect once again, and Trump may even try to mess with the official government numbers to suit his narrative. This — and not a recession, blame-gaming or impotent policy response — would cause the most enduring damage to our democracy.

Article Link To The Washington Post:

Why Dow 20,000 Isn’t A Foregone Conclusion In 2016

Dow 20,000 is facing some headwinds.

By Mark DeCambre
December 27, 2016

With all the breathless anticipation over the Dow Jones Industrial Average’s random walk to 20,000—a milestone only significant for its impact on Wall Street’s psyche—investors would think hitting the level this year was assured.

However, there are growing signs that although the Dow DJIA, +0.07% is oh-so-close to touching rarefied air, it might face sufficient resistance over the next several days to thwart its ascent. The Dow rose to within 14 points of reaching 20,000 Wednesday morning, but then faded to end the day about 60 points away, and slightly lower, along with the S&P 500 index SPX, +0.13% and the Nasdaq Composite Index COMP, +0.28% On Friday, the Dow ended mostly flat after posting its first back-to-back losses in six weeks, placing the benchmark about 70 points from the promised land.

The Jinx

The market has given so much attention to the Dow hitting the never-before-reached mark, that it may be starting to serve as a barrier to piercing through the level.

Sideways Action

The Dow has been trading in a narrow range and that could mean a lot of bouncing around just below 20,000 until year-end. MarketWatch’s Tomi Kilgore points out that the Dow on Wednesday traded at its tightest intraday range, just about 44 points, in more than two years.

Moreover, Wall Street’s fear gauge, the CBOE Volatility Index VIX, +0.09% hit a 16-month low, suggesting that markets aren’t making big bets on sizable swings in prices in the near-term. (That isn’t to say that it will take much to tip the blue-chip gauge to a milestone.)

Tax-Loss Harvesting

Although excitement over the potential that President-elect Donald Trump will enact business-friendly rules and take an ax to corporate taxes has kept the typical seasonal selling patterns in abeyance, as investors bet on lower tax rates in the coming year or two, investors have other reasons to sell.

The market forces that want to push the Dow higher are competing with market participants aiming to sell. So-called tax-loss harvesting is when investors unload holdings whose values have declined below where they were purchase. The losses realized can be used at tax time to partially offset gains from the sale of other securities.

Jimmy Lee, CEO of Wealth Consulting Group in Las Vegas, which manages $900 million, said he has been doing a lot of that for his clients. He predicts that the Dow won’t close at 20,000 in 2016 partly for that reason. “I don’t think we’ll close [at Dow 20,000] until the jobs report on Jan. 6,” he told MarketWatch.

Momentum Fading

Sven Henrich, financial blogger at NorthmanTrader, makes the case that the aforementioned low volatility in the market and a pervasiveness of irrational exuberance is the right recipe for the market’s recent uptrend to fade. This is a debatable point among Wall Street watchers. Remember, the Dow closed at another record on Tuesday, which was the 17th record since the election, and an indication that the trend may still be positive.

Relatively healthy U.S. economic reports haven’t done much to nudge the market higher either—at least not yet. A slow December holiday period, where volume and appetite for risk starts to fade isn’t helping. And although that could also mean markets are prone to volatility, market participants have indicated that there aren’t a lot of big-block trades that would help nudge the benchmark up.

Technical Resistance

Market technicians believe that the stock market’s recent moves are pointing to a so-called consolidation phase, in which the market pulls back slightly to refresh, before making another advance. Katie Stockton, chief technical strategist at BTIG in a Thursday note said as much, referring to the broad-market S&P 500 index.

“The S&P futures have seen a significant loss of short-term momentum, enough to generate the first ‘sell’ signal in the daily [moving average convergence divergence] indicator since it turned positive on November 8th,” she wrote. And if the S&P 500 is going to fade, the Dow is likely to move in step with its broader-market brethren.

Stockton added that financials, like Goldman Sachs Group GS, +0.35% which have been among the strongest performers in both the S&P 500 and the Dow’s march to records, to start to lead the market in a new phase of near-term retrenchment. The SPDR S&P Bank ETF KBE, +0.07%one popular way to bet on the financial sector, is on pace to return 30% in 2016, while another financial ETF, the Financial Select Sector SPDR ETF XLF, +0.17% has gained 22% so far this year.

At the end of the day, hitting Dow 20,000, as MarketWatch has written before, is more of a confirmation of an upward trend than a key metric, as many who follow markets have pointed out.

So, it might not matter much if it takes a little longer to scale new heights in a benchmark that tracks 30 stocks.

Article Link To MarketWatch:

Dollar Dips Vs. Yen After U.S. Yields Pull Away From Highs

By Shinichi Saoshiro 
December 26, 2016

The dollar dipped against the yen on Monday, edging lower down after U.S. Treasury yields dipped on mixed economic data.

Trading was subdued with many key markets shut on Monday for the Christmas holidays.

The greenback was down 0.2 percent at 117.300 yen JPY=. The euro was steady at $1.0457 EUR=.

Currencies took stock of the U.S. debt market, which saw the benchmark 10-year note yield US10YT=RR end lower on Friday.

The yield pulled back from 27-month peaks scaled mid-month following Friday's release of U.S. economic indicators that included strong housing and consumer confidence data but also numbers that pointed to slower household income.

"The currency market is likely to lack incentives as major markets in Asia, Europe and North America will be closed. That said, dollar/yen risks drifting below 117 on caution toward the Trump administration's protectionist policies," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

U.S. President-elect Donald Trump last week named economist Peter Navarro, known as a China hawk, to head a newly formed White House National Trade Council.

The Australian dollar was flat at $0.7178 AUD=D4 after dipping to $0.7160 on Friday, its lowest since May, following a media report saying Chinese President Xi Jinping was open to growth China's economy falling below 6.5 percent.

Australia is sensitive to the economic prospects of China, its major trading partner.

Article Link To Reuters:

Is China's Economy Past The Point Of No Return?

China’s economy is moving in wrong directions. In many ways, the rest of the world is bound to suffer as a result.

By Gordon G. Chang
The National Interest
December 26, 2016

The most important driver of events in 2017 could very well be the Chinese economy, which is shaking the country’s political system and affecting its external policies.

Beijing, which once thought it would dominate the world, has been playing defense for the last year and a half as almost no economic trend has been going its way.

Next year, China’s economy will more resemble the turbulent 2015 than the relatively calm 2016. The measures employed to stabilize the situation, which looked like they worked in the beginning of this year, have only made it more difficult for Chinese technocrats to rescue the situation in the longer term.

We start on the 14th of this month, when Janet Yellen inadvertently highlighted China’s fragility. The Federal Reserve’s hawkish comments on interest rates—the central bank signaled three rate increases next year instead of the expected two—along with the quarter-point rise in rates forced bond prices down across the world. In China, the damage was historic.

Last Thursday, just a few hours after the Fed’s announcements, futures on China’s benchmark 10-year obligation stopped trading [3] when they hit the daily down limit, the first time that has ever occurred. Trading on the five-year also was halted, another first. The People’s Bank of China, the central bank, injected the equivalent of $22 billion in short-term money, and that allowed trading to resume.

The next day, bond prices recovered in China, but only because the PBOC injected more than $57 billion. Beijing, by brute force, was able to stabilize the bond market, already rocked by defaults and cancelled offerings.

And the Chinese central bank has also muscled the currency markets by orchestrating rescues. The renminbi is ailing, down 6.9% this year against the dollar. Beijing once had ambitions of the “redback” replacing the greenback as the world’s reserve currency, but now it is merely trying to stage an orderly descent.

If the renminbi were allowed to float and if there were no capital controls, Chinese money would become worthless. China’s people and businesses certainly don’t want to hold it, and increasingly the same is true for foreigners. International use of the renminbi, even in the face of Beijing’s strenuous efforts, has declined this year.

Last year, there was $1 trillion of net capital outflow according to Bloomberg [4]. This year, despite the imposition of draconian capital controls, the outflow could approach last year’s astounding total. And those controls, which are now failing to prevent capital fleeing, are working against Beijing’s efforts to attract investment cash from the outside. Few want to invest in China because repatriation risk is high and growing.

Many people, pointing to China’s forex reserves, don’t worry about a tumbling currency. The State Administration of Foreign Exchange, the custodian of the country’s forex hoard, reports that those reserves amounted to $3.05 trillion as of the end of last month.

Yet that number is almost certainly too high. Beijing has been engaging in dubious practices designed to hide the depletion of reserves caused by the support of the renminbi. For instance, there is incomplete reporting of its use of forward contracts to mask its selling of dollars, a trick Chinese technocrats learned from Brazil in 2013.

More important, Beijing has used its reserves, which are supposed to remain liquid, for long-term investments, such as the so-called One Belt, One Road infrastructure projects, and for loans to Venezuela and other risky borrowers. The reserves have also been deployed to capitalize China Investment Corp., the country’s sovereign wealth fund. No one outside a small circle in Beijing knows the amount of these ill-liquid investments, but they amount to at least $400 billion.

Finally, SAFE’s monthly announcements of changes in the reserves are questionable. It has continually been announcing monthly declines smaller than the estimates of analysts, a sign of deliberate misreporting.

In short, China’s liquid reserves are, in all probability, substantially less than Beijing claims, which means the country may soon run out of ammunition to defend the sagging renminbi. The liquid reserves are almost certainly far smaller than the $2.8 trillion IMF guidelines recommend China maintains.

None of this would matter if China’s economy were growing fast. The official National Bureau of Statistics has announced that gross domestic product increased 6.7% in each of the first three quarters of the year. Many observers believe growth is more likely to be half that figure.

Yet even if China is growing at a 6.7% clip, the country is creating debt at least five times faster than incremental GDP. At the moment, the debt-to-GDP ratio could be as high as the 350% that George Soros noted [5] in January at Davos or the 400% that the respected Orient Capital Research in Hong Kong estimated at the beginning of this year. In any event, debt is far too high and its rate of accumulation much too quick.

Beijing can continue its rescue efforts for some time—perhaps years—because it runs an increasingly state-dominated economy, but state economies tend to fail spectacularly when they go.

Why? Underlying imbalances build up while leaders postpone downward adjustments, like they have been doing, especially since 2008. They will continue to intervene until they no longer have the ability to do so. When they no longer have that ability, their economy will go into free fall.

And the election of Donald J. Trump makes the work of Chinese leaders far more complicated. If the 45th president engineers a recovery in growth in America with lower taxes and less regulation, even more money will flow back across the Pacific and make it almost impossible for China to avoid a severe contraction.

A severe contraction has implications for Xi Jinping, China’s wilful leader. He has taken over much of the economics portfolio from Premier Li Keqiang, a long-term rival, and therefore has made himself the “Chairman of Everything.” As such, Xi has become responsible for all economic developments, but he can neither control them nor solve problems. China’s economy could very well be past the point of no return, and so Xi’s hold on power cannot be as firm as many suggest.

Already, there are hints that the country’s severe economic problems have affected the still-incomplete leadership transition from Hu Jintao to Xi. Premier Li, from the same political faction as Hu, and Xi clashed in July over the role of state enterprises in the economy [6]. In May, Xi tried to take down Li by criticizing his debt-fueled policies in the pages of People’s Daily, the most authoritative publication in China, by arranging for an “authoritative person” to warn [7] of a “systemic financial crisis.” Senior figures this year could not keep their disagreements out of sight, and the feuding is a sign of a fracturing leadership team.

Infighting at the top, over economic and other issues, affects the country’s external policies. As civilians like Xi and Li squabble, the generals and the admirals of the People’s Liberation Army are gaining political influence.

We saw hints of PLA power when Bo Xilai, one of the country’s most popular political figures, ran to the headquarters of the 14th Group Army in Kunming in February 2012, during the time of his desperate maneuverings.

Xi’s purges of Bo and the infamous Zhou Yongkang, the former internal security boss, were related to their apparent collusion with PLA elements. This collusion is what made their defiance especially dangerous to Xi.

All this suggests China’s flag officers have now eased into a powerbroker role. The military lost political power in the 1990s as China transitioned from Deng Xiaoping, a military officer, to Jiang Zemin, a civilian.

But the PLA has been making a comeback since the turn of the century as civilian leaders enlisted flag officers in their political struggles with each other, something apparent in the transition from Jiang to Hu Jintao.

And apparent in the transition from Hu to Xi. Once attaining the top spot, Xi has looked to certain officers to be the core of his political support. As a result, these generals and admirals now wield great influence over him, who relies on them for their backing. And Xi’s military support becomes more crucial to him as his popularity among civilian officials erodes, something evident from a series of acts of defiance in public in March.

At the moment, China’s general officers, pursing their “military diplomacy,” seem to be setting and implementing Beijing’s external policies, and this process has made those policies more provocative.

The weakening of China’s economy and its increasing belligerence are occurring in tandem, and the progression from one to the other appears to be related. For one thing, a deteriorating economy will undermine Xi Jinping’s bold efforts to consolidate power, and the resulting disunity will surely make China’s external posture unpredictable.

The country could turn inward, but lashing out looks more probable, especially if Chinese leaders think the decline in the economy will close a window of opportunity to achieve historic goals, like enlargement of Chinese control over neighboring lands and peripheral seas.

China’s economy is moving in wrong directions. In many ways, the rest of the world is bound to suffer as a result.

Article Link To The National Interest:

Investors Betting On Oil Price Drop Flee As Production Cuts Near

WTI short positions decline to lowest since August 2014: CFTC; OPEC, non-OPEC agree to trim almost 2 million b/d next year.

By Mark Shenk
December 26, 2016

Oil investors seem to have less reason to doubt that OPEC and other producers will make the cuts needed to balance the market.

Money managers trimmed bets on falling West Texas Intermediate crude prices to the lowest level since August 2014 as the Organization of Petroleum Exporting Countries and other crude-exporters prepare to start curbing output in January. Oil market volatility dropped to the lowest level in more than two years on Dec. 20 and futures settled at a 17-month high on Friday.

“People are excited that OPEC is going to hold firm and there will be a substantial reduction in inventories,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. “The market should rebalance in 2017.”

Hedge funds reduced short positions, or wagers WTI will drop, by 10 percent in the week ended Dec. 20, U.S. Commodity Futures Trading Commission data show. WTI declined 1.4 percent to $52.23 a barrel in the report week. Prices settled at $53.02 a barrel in New York on Friday, the highest close since July 2015.

OPEC agreed to reduce its supplies by 1.2 million barrels a day, while 11 non-members including Russia and Kazakhstan pledged to curb output by almost 600,000 a day.

“The market is fulling embracing the OPEC, non-OPEC agreement,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “They are being given the benefit of the doubt now. The big test will come with the new year when we’ll see if they make the promised cuts.”

Confident Ministers

Oil prices are set to recover next year as OPEC fulfills its output agreement, Saudi Arabia’s Energy Minister Khalid Al-Falih said in Riyadh on Dec. 22. Al-Falih’s outlook was echoed by comments made by his counterpart from the United Arab Emirates, Energy Minister Suhail Al Mazrouei, who also predicted the same day from Abu Dhabi that OPEC’s actions will result in higher prices in 2017.

Money managers’ short position in WTI dropped by 5,699 futures and options to 50,613, a fifth week of decreases. Longs, or bets the benchmark will rise, slipped 0.8 percent. The resulting net-long position climbed 1 percent to the highest level since since July 2014.

“This represents the market being in an overbought situation,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “They are very well prepared for a rise in prices, but are left vulnerable for any negative shocks.”

Fuel Markets

In fuel markets, net-bullish bets on gasoline rose 11 percent to 42,879 contracts, the highest since February 2015, as futures advanced 2.8 percent in the report week. Money managers increased net-bullish wagers on ultra low sulfur diesel by 1.6 percent to 27,406 contracts, the highest since July 2014, as futures slipped 0.4 percent.

U.S. oil companies had been using the rally to hedge their price risk for the next two years, potentially boosting output next year. Producers’ short positions, protecting against a drop in prices, decreased to 622,395 contracts, the first decline in four weeks. The number of bearish wagers had climbed to the highest since August 2007 in the prior week.

“The shale producers rushed in at the first sign of viability,” Kilduff said. “That’s played out. They locked in their profits and are now waiting to see what happens before hedging more.”

Article Link To Bloomberg:

With Cheap Oil, Petrostates Siphon Their Savings

Kazakhstan’s experience shows how fast these funds can dwindle.

By Simon Clark and Selina Williams
The Wall Street Journal
December 26, 2016

Kazakh President Nursultan Nazarbayev says the country’s sovereign-wealth fund has the money to help wean the central Asian nation off its dependence on oil revenues and build an economy of entrepreneurs.

The 76-year-old president, who led Kazakhstan to independence from the Soviet Union 25 years ago, earlier this year told visitors to the new capital city he built that “Kazakhs have never lived as well as they live today” and the nation’s savings help maintain living standards.

But since Mr. Nazarbayev created the so-called National Fund in 2000, his government has withdrawn $83 billion from it, according to a Wall Street Journal analysis of data from Kazakhstan’s central bank that was corroborated by the International Monetary Fund. The National Fund has a balance of $61 billion as of Nov. 30, down 21% from its peak in August 2014.

Leaders of petrostates from Kazakhstan to Azerbaijan, Russia and Venezuela have spent billions of dollars from sovereign-wealth funds as the relatively low price of oil has pressured government budgets. Spending the money deposited in these funds—rather than just the investment income they generate—is threatening the funds’ long-term viability.

“It’s really important for Kazakhstan and other oil-producing developing nations to convert these savings into a permanent windfall,” said Angela Cummine, an Oxford University academic and author of “Citizen’s Wealth,” a book examining sovereign-wealth funds. “It is very unwise to draw down the fund until it is depleted because then the major windfall from oil will be gone but economic problems will remain.”

Kazakh Prime Minister Bakytzhan Sagintayev acknowledged the problem in December. “If we continue spending in this way, we won’t have a National Fund soon,” he told business leaders.

The government in November published a draft decree “to prevent further reduction” of the National Fund. The government proposes spending less of it and investing more of the fund’s money in higher-yielding assets such as stocks and private equity rather than bonds, according to the draft. On Dec. 22, an official at the central bank said that the president has signed the new decree.

The scale of spending from the fund has prompted some people to express concern. That can be a risky move in a nation where, according to New York nonprofit Human Rights Watch, criticism of the government is regularly suppressed.

“It was a wise idea to create the National Fund,” Rakhim Oshakbayev, a former deputy minister for investment and development, said in an interview. “When we started spending the money in the National Fund, it was like opening Pandora’s box.”

Information on how the fund is spent isn’t readily available, Zauresh Battalova, a former Kazakh senator and democracy campaigner, said in an interview. Marek Jochec, an academic at Nazarbayev University, earlier this year published an article in a Kazakh magazine saying that the fund risks losing significant income because of its investment strategy.

Money from the fund has helped finance the construction of Astana, the new capital city, according to the government. At the center of the city’s futuristic layout is Bayterek, a gold-orbed tower that stands as a monument to Mr. Nazarbayev, containing his metallic handprint on a plinth encrusted with silver and gold.

Through a spokesman, Mr. Nazarbayev declined to comment for this article.

Sovereign-wealth funds are state-owned investment funds usually created to save surplus revenues, often collected from natural-resource exports.

Kazakhstan’s National Fund transfers billions of dollars each year to the government budget and projects, according to the central bank.

The governments of Russia, Azerbaijan and Venezuela have also spent billions from their sovereign-wealth funds in this manner.

Venezuela’s Fund for Macroeconomic Stabilization is essentially empty after the government spent almost $7 billion from the fund since its inception in 1998, according to the Venezuelan government.

Russia, the world’s biggest oil producer, has spent about $195 billion from its Reserve Fund since it was created in 2008, leaving $31.3 billion in it as of Dec. 1, according to the government. Russia also has savings in its National Wealth Fund. It has spent about $1 billion of this fund since 2008, leaving it with $71.3 billion as of Dec. 1, according to the government. A Russian government spokesman declined to comment.

Azerbaijan has spent $89.7 billion from a sovereign-wealth fund created in 1999. The fund said it had $35.8 billion left as of Oct. 1. Money was used for “strategically important infrastructure and social projects,” a spokeswoman said. The government plans to draw less money from the fund as it develops new industries, she said.

Middle Eastern nations are also under pressure to tap savings. The Saudi Arabian Monetary Authority, the nation’s central bank, said its reserves fell more than 25% to $543 billion in the two years through the end of October. Spokesmen for the Saudi and Venezuelan governments didn’t respond to requests for comment.

The size of the withdrawals threatens the existence of the funds, potentially leaving oil-producing nations more vulnerable to an extended period of low oil prices. Norway, which owns the world’s largest sovereign-wealth fund, has a rule that the government shouldn’t spend more than the fund earns from investments, to “lessen the risk of overspending.” Norway has so far spent less than 1% of its fund. There is no such rule in Kazakhstan.

Mr. Nazarbayev, Kazakhstan’s president, wrote in his autobiography that the fund he created is a “particular source of pride.” It was inspired by Norway’s fund, he wrote, and “its aim was to safeguard the country’s stable social and economic development by accumulating financial funds for future generations.”

Article Link To The Wall Street Journal:

The Trump Rally Is Young

By Dr. Michael Ivanovitch
December 26, 2016

A trade war with China -- a country with a $473 billion of bilateral trade with America in the first ten months of this year -- is an implausible assumption. But a serious conversation about the fact that Chinese exports to America represent three-quarters of that business is long overdue and entirely appropriate.

The President-elect Donald Trump is seeking a better deal for America. That should be easy to understand and support for any fair- and free-trader.

And, rest assured, Washington's intent to correct its huge trade imbalance with China is not coming as a surprise to Beijing. The Zhongnanhai mandarins know that their trade surpluses with the U.S. -- $366 billion in 2015 and $289 billion in the first ten months of this year -- are difficult issues that must be addressed. That is the substance of the problem.The rest is rhetoric.

Mr. Trump's opening salvo used legitimate trade remedies,such as import tariffs, anti-dumping investigations, and possibly other measures if China was recognized as an exchange-rate manipulator.

Tax Reform Is Crucial

China has announced that it would respond with unspecified retaliatory measures, but President Xi Jinping talked about the need for Sino-American cooperation in his congratulatory phone call to Mr. Trump. The Chinese also liked the appointment of Iowa Governor Terry Branstad as an envoy to Beijing. They called him a "friend of China" and noted that he has known Mr.Xi since 1985.

Difficult trade negotiating rounds are quite common. In this particular case, Washington also has the option of using non-confrontational measures to reduce the existing trade imbalance.

A change in the corporate taxation is one of them. That could bring back American manufacturing producing Chinese exports to the U.S.Some leaders of the U.S. Business Roundtable – a forum of 192 companies that account for most of investment activity in the United States -- doubt that a large amount of that business can be quickly repatriated. They feel confident,however, that appropriate corporate tax cuts would keep firms producing and reinvesting their profits in the U.S.

The corporate tax reform is at the top of Mr. Trump's agenda, and that is perhaps one of the most effective trade signals he can send to China. Indeed, reducing the incentive for the exodus of American manufacturing, and bringing some of it back, would also stop large technology transfers that are part of mandatory Sino-American joint ventures for American firms doing business in China.

Investors, therefore, should pay no attention to trade war noises. Mr. Trump has powerful cards to play in a trade negotiation with China,and in the discussion of political and security issues that need to be clarified.

The lack of America's clear China policy remains cloaked in buzz words like "keep them guessing," pivots and rebalancing to Asia to contain China, and what Hillary Clinton called "jazz-like diplomacy" – "situation specific" improvisations – laced with hostile gestures and rhetoric of "strategic competition."

Deal-Based Linkages

The Chinese, for their part, want a new "big power relationship," implying some kind of a Sino-American condominium in Asia and beyond.

On top of that, Mr. Trump has to deal with increasingly urgent and serious crises on the Korean Peninsula and in the South China Sea.

Maybe Mr. Trump can cut through all that with a pragmatic approach to clarify America's national interests in a situation where there are no military options between the two nuclear-armed states.

Mr. Trump will probably also see through the blind alley of "triangulation," advocated by some would-be strategic thinkers. That "advice"consists of a diplomatic effort to break up the Sino-Russian partnership.

Here is an example of what happened to such efforts in the recent past.

Using China's keen interest in German technology, Berlin was apparently commissioned to peel Beijing off its friendly relations with Russia during Mr. Xi's visit in March 2014. The Chinese were ready for the challenge. Mr. Xi was strictly business and uniquely focused on the Sino-German economic and industrial "dream team." He was so aloof to other issues that a widely read German news magazine ran a story headlined "Smiling from a distance."

Since that time, Mr. Xi has been circling around Germany on his European tours, while the German Chancellor Angela Merkel, with her nine official missions to China, remained the most frequent high-level visitor to Beijing. She is now contacting mainly with the Prime Minister Li Keqiang.

Trying the same thing over again and expecting a different result would be Einstein's definition of lunacy. The U.S. has to deal with China and Russia in different theaters.

Investment Thoughts

People peddling fears of Mr. Trump's trade wars with China are as relevant as those professing to know how many Fed rate hikes to expect next year.

Mr. Trump won't be sidelined by pipe dreams of "big power games." He is on the same page with China in the search of stable and fair trade relations. Beijing understands that Mr. Trump holds the winning cards, and that he is ready to use them.

Closer to home, the Fed should not overestimate the strength of the key growth drivers in an economy advancing at a lethargic annual rate of 1.5 percent in the first three quarters of this year. With 15 million people out of work, or without stable employment, the actual jobless rate is double the officially reported rate of 4.6 percent. Incomes are also showing some weakness. Real hourly compensations in the first nine months have grown only 1.5 percent from the year earlier. Over the same interval, the growth of the real disposable household income has slowed down to 2.9 percent from 3.6 percent in the same period of 2015.

Apart from that, the dollar's 5.6 percent trade-weighted appreciation over the last six months is technically equivalent to a considerable monetary tightening. The Fed, therefore, may wish to refrain from a recent acceleration of liquidity withdrawals in order to play along with new fiscal, structural and trade policies -- which have yet to be defined.

In spite of these uncertainties, the prospect of America's growth-oriented economic policy offers some of the best and safest equity market values in the world.

Article Link To CNBC:

Stocks Could Suffer As Trump Trade Policy Takes Shape

By Rodrigo Campos
December 26, 2016

The year-end stocks rally on the heels of the election of Donald Trump as U.S. president was built on expectations of reduced regulations, big tax cuts and a large fiscal stimulus.

Now signs are emerging from the Trump camp that harsher trade policies that could jeopardize the honeymoon are likely in the offing, and investors would be well advised to give those prospects more weight when gauging how much further an already pricey market has to run.

By naming China hawk Peter Navarro as head of a newly formed White House National Trade Council, the incoming administration is signaling Trump's campaign promises to revisit trade deals and even impose a tax on all imports are very much alive.

Among the policies favored by Navarro and Trump's pick for commerce secretary, Wilbur Ross, who has the president-elect's ear on a range of economic issues, is a so-called border adjustment tax that is also included in House Speaker Paul Ryan's "Better Way" tax-reform blueprint.

If implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve's 2 percent target and drive a 15 percent surge in the dollar.

Analysts calculate that, all else being equal, a 5 percent increase in the dollar translates into about a 3 percent negative earnings revision for the S&P 500 .SPX and a half-point drag on gross domestic product growth. The dollar index .DXY has already gained more than 5 percent since the U.S. election.

Harsher trade policies may not cause a full economic slowdown, "but I'd expect a localized recession in manufacturing and smaller gains in factory employment as well," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

He said the border tax could trigger retaliation, pouring uncertainty into the market.

"Even if the drafters of the legislation have pure intentions, other countries could use this as a pretext for propping up or subsidizing their own favorite industries."

Top Economy Risk

Stocks have rallied broadly since Nov. 8, with the S&P 500 advancing by 5.7 percent and the Dow Jones Industrial Average .DJI surging nearly 9 percent to brush up against the 20,000 mark. Some sectors, such as banks .SPXBK, have shot up nearly 25 percent in the post-election run.

U.S. equities have gotten substantially pricier from a valuation vantage as well. The forward price-to-earnings ratio on the S&P 500 has risen by a full point since Election Day, from 16.6 to 17.6, Thomson Reuters data shows. That makes stocks about 17 percent more expensive, relative to their earnings potential, than their long-term average multiple of around 15.

Small caps have gotten pricier still. The forward multiple on the Russell 2000 has risen to 26 from 22 on Nov. 8, up 18 percent, while the index price has climbed 14 percent.

S&P 500 earnings are expected to rise 12.5 percent next year, according to Thomson Reuters Proprietary Research estimates. Anything that impedes companies from achieving that target, such as a bump from a trade spat or further dollar appreciation in anticipation of new trade barriers, would undermine equity valuations.

In the latest Reuters poll of U.S. primary dealers, economists at Wall Street’s top banks cited Trump’s evolving trade policies over other factors, such as fiscal policy, a strong dollar and higher interest rates, as the greatest risk to the near-term economic outlook.

The idea of a tax on imports "should alarm people," according to Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

"If we do have a trade war that's going to be a major negative" for stocks, he said, adding that the upward momentum in equities, alongside the lack of participation due to the upcoming holidays, have so far prevented a repricing but "we could cap the rally here, that could very well happen."

O'Rourke said technology, a sector that represents the globalization trade, would be among the hardest hit by taxing imports.

Deutsche Bank's auto sector equities analyst estimated the border tax could slam other industries that rely on global supply chains, with the cost of a new car, for instance, jumping by as much as 10 percent.

Article Link To Reuters: