Friday, February 24, 2017

Oil Falls As Stockpiles Rise For Seventh Week

By Aaron Sheldrick 
February 24, 2017

U.S. oil prices fell on Friday after official data released late on Thursday showed stockpiles rose last week for a seventh straight week, although losses were muted as inventory growth was well below expectations.

There were also signs that traders are starting to shift crude stored on tankers in Asia and tanks in the U.S.

U.S. West Texas Intermediate CLc1 was down 16 cents at $54.29 by 0728 GMT (2:28 a.m. ET). WTI was on track for a weekly gain of about 1.6 percent, which would be its biggest increase over a week this year.

Brent crude LCOc1 was down 19 cents at $56.39 and was on track for a weekly gain of about 1 percent.

U.S. crude inventories USOILC=ECI rose by 564,000 barrels in the week to Feb. 17, up for a seventh week, although below analysts' expectations for an increase of 3.5 million barrels, the Energy Information Administration (EIA) said. [EIA/S]

The Organization of the Petroleum Exporting Countries and producers including Russia have pledged to cut production by around 1.8 million barrels per day (bpd) to tackle a global glut that has kept prices depressed since 2014.

While OPEC appears to be sticking to its deal, producers that were not part of the deal, particularly U.S. shale drillers, have increased output, driving the growth in inventories in the United States, the world's biggest oil consumer.

"Current oil prices are neither sustainable for OPEC or the industry," AB Bernstein said in a note on Friday. "As such, inventories will have to fall, which we expect will be clearer in the spring after the seasonal build."

This is starting to happen in the U.S., where traders are draining the priciest storage tanks as strengthening markets make it unprofitable to store for future sale and cuts in global production open export opportunities.

In Asia, traders are selling oil held in tankers anchored off Malaysia, Singapore and Indonesia.

More than 12 million barrels of oil has been taken out of storage in tankers berthed off Southeast Asian countries this month, shipping data in Thomson Reuters Eikon shows.

Traders have been benefiting from a market feature known as contango where prices for later delivery are higher than those for immediate dispatch. But the future premium is falling and future prices may slip below spot prices, known as backwardation.

"Tightening fundamentals will push the crude market into backwardation in the coming months," BMI Research said in a note. This "will benefit participants in the paper market but hamper the profits of oil traders who are unable to exploit the cash and carry arbitrage."

Article Link To Reuters:

Saudi Arabia's Oil Wealth Is About To Get A Reality Check

Wood Mackenzie said to estimate valuation at $400 billion; Aramco IPO underpins Saudi Arabia’s economic overhaul.

By Javier Blas and Wael Mahdi
February 24, 2017

Saudi Arabia has said oil giant Saudi Aramco is worth more than $2 trillion, enough to consume Apple Inc. twice, and still have room for Google parent Alphabet Inc.

The kingdom may have to settle for less. A lot less.

Industry executives, analysts and investors told Bloomberg their analysis -- based on oil reserves and cash flow projections under different tax scenarios -- suggests Aramco is worth no more than half, and maybe as little as a fifth, of that amount. This means Saudi Arabia would earn a fraction of the $100 billion implied by its valuation if it sells 5 percent to the public in 2018, as planned.

For example, Wood Mackenzie Ltd. came up with a rough valuation of Aramco’s core business of $400 billion, according to clients who attended a private meeting at the oil consultant’s City of London office this month and asked not to be named. The Edinburgh-based company, popular for its analysis and valuation of energy companies and assets, declined to comment.

An Aramco spokesperson said the oil producer doesn’t comment on rumors or speculation.

While there’s a lot of guesswork involved in sizing up a company that’s never divulged financial statements and may have its tax rate cut before the initial public offering, this valuation gap reveals the hurdles Saudi Arabia could face in preparing for the post-oil era.

A profitable IPO is meant to anchor a sovereign wealth fund that will, if things unfold as envisioned, generate enough investment income at home and abroad to dominate state revenue by 2030. Demand for oil will peak just before then, according to Royal Dutch Shell Plc projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Doubts Emerge

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second-biggest worldwide, before the IPO.

Oil’s Future

By that logic, though, Russian producer Rosneft PJSC’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil Corp., the world’s largest publicly traded energy producer, would be 53 percent smaller than it is.

“I didn’t know that the value of an oil company was a multiplicator of the reserves of the company," Total SA chief executive officer, Patrick Pouyanne, told investors on a Feb. 9 conference call. Several factors should be “discounted” before “we’ll see what will be the real value of" Aramco, he said.

The rationale also assumes Saudi oil, due to last about 73 years if pumped at the existing pace, will be viable for decades even if global warming curbs the world’s appetite for crude.

Toyota Motor Corp. wants to rely on hydrogen to all but replace traditional-engine models by 2050. Use of gasoline, which accounts for one in four barrels consumed globally, is already peaking according to the International Energy Agency. Officials including Bank of England Governor Mark Carney have warned investors it’s a matter of time before reserves are "stranded" in the ground.

The second factor throwing doubt on the Saudi valuation is the centrality of tax and dividend policy in assessing a company’s fair value. Aramco, formally known as Saudi Arabian Oil Co., pays a 20 percent royalty on revenues and an 85 percent income tax. Levies this big reduce cash available for dividends to shareholders, diminishing the appeal to overseas investors.

Different Math

Wood Mackenzie, according to two clients, said it based its calculation on the current tax rate, a cost of capital of 10 percent and an in-house oil-price forecast. It used a so-called discounted cash flow method to value Aramco’s upstream business, which is very sensitive to taxation.

So if Aramco CEO Amin Nasser follows through with plans he unveiled in Davos last month to lower taxes "to be aligned with other listed companies," Wood Mackenzie’s estimate also stands to rise. But the scope for loosening levies may be limited because oil is the lifeblood of a budget the government is struggling to balance due to depressed oil prices.

Wood Mackenzie’s estimate also doesn’t factor in Aramco’s downstream, or refining, operation. That business is similar in capacity to that of Texas-based Valero Energy Corp., which has a market value of about $30 billion.

Two Apples?

Another caveat is that traders tend to demand discounts for political risks surrounding state-linked companies. A corruption scandal ensnaring Brazil’s Petroleo Brasileiro SA sent shares sliding to a 16-year low early last year. Investors in Rosneft, meanwhile, have to contend with sanctions that limit the stock’s upside versus emerging-market peers.

Allianz Global Investors, which owns energy shares including Exxon, Shell and BP Plc, is unlikely to buy Aramco stock at the IPO, according to energy analyst Rohan Murphy. “We have generally found investing in companies so closely tied to the state to be unattractive," he said.

While Saudi Arabia is relatively stable in the turbulent Middle East, it’s not immune to concern that decisions on oil output will be guided more by geopolitics than what’s best for minority shareholders.

The kingdom’s oil wealth also enabled it to appease its 32 million people as unrest flared regionally during the so-called Arab Spring. At issue is whether Saudi royals can sustain this calm as the government slashes fuel subsidies and imposes value-added taxes.

In the end, Aramco’s market size may struggle to equal two Apples and a Google in rankings of the world’s biggest companies.

Article Link To Bloomberg:

Dream Of Offshore U.S. Wind Power May Be Just Too Ugly For Trump

Builders of windmills at sea prepare for major lobbying battle; Trump says the contraptions are ugly, monstrous and kill birds.

By Joe Ryan and Jennifer A Dlouhy
February 24, 2017

Offshore wind companies have spent years struggling to convince skeptics that the future of U.S. energy should include giant windmills at sea. Their job just got a lot harder with the election of Donald J. Trump.

The Republican president -- who champions fossil fuels and called climate change a hoax -- has mocked wind farms as ugly, overpriced and deadly to birds. His most virulent criticism targeted an 11-turbine offshore project planned near his Scottish golf resort that he derided as “monstrous.”

Companies trying to build in the U.S., including Dong Energy A/S and Statoil ASA, are hoping to change Trump’s mind. They plan to argue that installing Washington Monument-sized turbines along the Atlantic coast will help the president make good on campaign promises by creating thousands of jobs, boosting domestic manufacturing and restoring U.S. energy independence.

“We are a billion-dollar heavy industry that is set to build, employ and invest,” Nancy Sopko, manager of advocacy and federal legislative affairs for the industry-funded American Wind Energy Association, said in an interview. “We have a great story to tell to this administration.”

Significant Stakes

The push to win over the Trump administration comes as offshore wind is on the brink of success in North America after a decade of false starts. Costs are falling dramatically. Deepwater Wind LLC completed the first project in U.S. waters in August. And in September, the Obama administration outlined plans to ease regulatory constraints and take other steps to encourage private development of enough turbines to crank out 86,000 megawatts by 2050. That’s about the equivalent of 86 nuclear reactors.

“We are an industry on the rise,” Thomas Brostrom, Dong’s general manager of North America, said in an interview. “We want very much to come in and explain to the new administration what we can do for job creation and energy independence.”

A White House spokeswoman did not respond to requests for comment.

The stakes are significant. Dong, Statoil, Deepwater and other companies secured a total of 11 leases to build offshore wind farms. To move forward, developers will need permits from multiple agencies and, in some instances, federal grants to refurbish ports. For instance, Deepwater’s 30-megawatt wind farm off Rhode Island benefited from a $22.3 million U.S. Transportation Department grant to upgrade piers and terminals for use as a staging area.

Talking Points

To be clear, installing turbines at sea requires years of planning, and Trump may be out of office by the time some developers need federal approvals. State governments, meanwhile, remain the biggest drivers of renewable energy development, because they can mandate that utilities get a certain amount of power from offshore wind or other sources.

Nevertheless, offshore developers need a basic level of cooperation in Washington to keep the nascent industry moving forward. "They don’t want to lose the progress that they’ve made,” said Frank Maisano, a Washington-based energy specialist for the lobbying firm Bracewell LLP.

Shoring up Trump administration support will require developers to shed climate change talking points and dispel any notions that offshore wind is an environmental relic of the Obama administration, said Timothy Fox, an analyst at Washington-based ClearView Energy Partners LLC. It may help that two of the biggest developers -- Dong and Statoil -- have deep roots in offshore oil and gas.

Jobs will be at the crux their message. Erecting 600-foot (183-meter) turbines along the Eastern seaboard may boost employment in struggling port towns from South Carolina to Maine, generating an estimated 31,000 jobs in the Mid-Atlantic alone, according to the National Renewable Energy Laboratory. And if the industry booms, turbine manufacturers including Vestas Wind Systems A/S and Siemens AG have said they may open U.S. factories.

Key Figures

"Logically there should be a good match here with the Trump administration," Kit Kennedy, the Natural Resources Defense Council’s director of energy and transportation, said in an interview. "We will see if ideology gets in the way."

Persuading the president himself could be challenging. The bare-bones energy plan posted on the White House website calls for increasing coal, oil and natural gas production -- but makes no mention of wind or other forms of clean energy. Trump in 2012 tweeted: “Not only are wind farms disgusting looking, but even worse they are bad for people’s health.”

Ultimately it’s unclear whether Trump’s 140-character appraisals of wind energy will translate into U.S. policy, or if they were simply reactions to windmills potentially spoiling views from his golf course in Aberdeenshire, Scotland. Either way, the commander-in-chief’s personal support may not be crucial for developers in the U.S.

The key figures for offshore wind companies to persuade are deputy secretaries, directors and others within the Interior and Energy departments. A central player is the yet-to-be-named director of the Bureau of Ocean Energy Management, an Interior Department agency responsible for granting leases to offshore oil, gas and wind developers.

Potential Allies

The industry may already have a few key allies. Rick Perry, Trump’s proposed energy secretary, oversaw a record expansion of wind energy during his time as Texas governor. And at least one high-ranking official who has supported offshore wind at the Bureau of Ocean Energy Management -- Acting Director Walter Cruickshank -- remains in place.

“We have a lot of experience with this,” said Danish ambassador Lars Gert Lose, who is helping Fredericia, Denmark,-based Dong with lobbying efforts. “There is a misconception that wind energy is all driven by climate change. But this is a very competitive industry.”

Article Link To Bloomberg:

Oil Sold Out Of Tanker Storage In Asia As Market Slowly Tightens

By Mark Tay
February 24, 2017

Traders are selling oil held in tankers anchored off Malaysia, Singapore and Indonesia in a sign that the production cut led by OPEC is starting to have the desired effect of drawing down bloated inventories.

Yet in the short-term, the crude released from tankers will weigh on markets and possibly undermine OPEC's goal of achieving a balanced market by mid-2017.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers outside the group, including Russia, announced late last year that they would cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017, looking to drain a glut that pulled down prices from over $100 per barrel in 2014 to around $56.50 currently LCOc1.

"OPEC's strategy is targeting inventories – given the scale of the overhang, the market won't rebalance in six months – we expect an extension into (the second half of 2017)," said Energy Aspects analyst Virendra Chauhan.

As OPEC's cuts start to leave some demand unmet, a hefty 6.8 million barrels of crude has been taken out of tanker storage from Linggi, off Malaysia's west coast, in February, shipping data in Thomson Reuters Eikon shows.

An additional 4.1 million barrels and another 1.2 million barrels have been taken out of storage on tankers in Singaporean and Indonesian waters, the data shows.

Dancing Contango

In the short-term, the flood of crude from floating storage will add to supplies coming into Asia from as far away as the Americas and Europe.

In the longer-term, however, clearing oil out of inventories like tankers is part of OPEC's goal to rebalance markets.

"Inventories will continue to decline driven by the combination of production cuts and the strong demand growth," U.S. bank Goldman Sachs said this week in a note to clients, adding that it expected Brent prices to rise slightly in the second quarter, to $59 per barrel.

Traders charter supertankers like Very Large Crude Carriers (VLCC), in which they can store up to 2 million barrels of oil for extended periods of time, when a market situation known as contango is in place, with prices for later delivery higher than those for immediate dispatch.

The January to June 2017 contango in the forward curve was almost $3 per barrel, compared to a June premium of under half a dollar now.

With prices further out into 2018 and beyond even falling, the curve has fallen into what traders call backwardation, which makes it unattractive to store oil on chartered tankers.

"Dancing contango is now not a profitable thing to do, so we've sold out," said one oil trading manager who, until recently, held crude stored in a tanker. He spoke on condition of anonymity due to the commercial sensitivity of the issue.

Article Link To Reuters:

World's Best Returns Since 1900 Came From These Markets: Chart

By Selcuk Gokoluk
February 24, 2017

Between 1900 and 2016, the world economy moved from telegraphy to smartphones, horse-drawn carriages to supercars and from letter press to Internet. But throughout this period, a few countries produced the highest average returns for investors in stocks and bonds. According to a study by Credit Suisse Group AG and the London Business School, the best equity markets over the past 117 years were commodity-rich nations such as South Africa, Australia, the U.S. and Canada, while Denmark and Sweden yielded the highest bond returns.

Article Link To Bloomberg:

Tesla's 'Close To The Edge' Cash Foretells Capital Raise

By Alexandria Sage
February 24, 2017

Tesla Inc (TSLA.O) Chief Elon Musk has taken big risks repeatedly since going public in 2010, but investors were spooked on Thursday after he said the electric car company could get "close to the edge" as it burns cash ahead of its crucial Model 3 launch.

Facing yet another cash crunch, Tesla will likely be forced to head to Wall Street for more capital, analysts said. Shares tumbled 5.8 percent on Thursday, their biggest intraday percentage fall in eight months.

Musk told investors after the company released its fourth-quarter results on Wednesday that the upcoming Model 3 sedan, the $35,000 mass-market vehicle on which the company's future profitability hinges, requires no additional outside funding as it readies for production this year.

"But we get very close to the edge," Musk said. "So we're considering a number of options but I think it probably makes sense to raise capital to reduce risk."

Tesla had $3.39 billion in cash and cash equivalents at the end of 2016, but most of that comes from a May stock offering, cash from its SolarCity acquisition and nearly $1 billion in draws on its credit facilities.

The company spent $448 million in cash on operating activities in the fourth quarter.

Tesla's warning of an expected $2 billion to $2.5 billion in capital expenditures in the first half of 2017 for the Model 3 leaves potentially less than a $1 billion cushion for Tesla, at a time of "high levels of execution risk," wrote Morgan Stanley analyst Adam Jonas.

Analysts estimated the company will seek $1 billion to $2.5 billion in capital in the near term.

Tesla, which has had negative cash flow since 2014 and has posted a quarterly profit only twice since going public, has repeatedly gone to Wall Street for fresh capital.

"The automotive business is an extremely capital intensive business and we keep seeing companies who are thinking of getting into it underestimate that," said Autotrader senior analyst Michelle Krebs, citing moves by Apple Inc and Alphabet's Google to back off aggressive forays into the sector.

Individual model launches for established car companies do not carry the same hazards as for Tesla because the risk is less concentrated.

"No single launch is a 'bet the company' launch" for established automakers, said Michigan-based auto manufacturing consultant Michael Tracy, citing larger capital reserves. "If you're Tesla, every time you're stepping up to the plate, financially it's extremely risky."

Additionally, Musk's need for speed in getting the Model 3 in the hands of approximately 373,000 reservation holders after volume production begins in September means he "has to ramp up faster than any other automaker would want to do," Tracy said.

Article Link To Reuters:

May's Tories Score Historic U.K. Election Win Over Labour

First governing-party gain in special election for 35 years; Victorious Conservative lays defeat at Labour leader’s door.

By Robert Hutton
February 24, 2017

U.K. Prime Minister Theresa May demonstrated her dominance of Britain’s political landscape in a special election that saw her Conservative Party make a historic gain, taking a seat from the opposition Labour Party.

The Tories won Copeland, in northwest England, with 44 percent of the vote. May’s Conservatives won the district for the first time since its creation in 1983 -- an achievement all the more remarkable because it’s exceptionally rare for British governing parties to gain seats in such special elections.

The last prime minister to make a special election gain was Margaret Thatcher in 1982. But that Tory win in South London followed a Labour split and the defection of the sitting lawmaker. Matt Singh, of the NumberCruncherPolitics blog, said historians had to go back to 1878 to find a comparable upset.

While May will be happy to take credit for the success, the winning candidate, Trudy Harrison, attributed it to Labour leader Jeremy Corbyn. Still, Corbyn will take comfort from the result of another election in Stoke-on-Trent Central yesterday, where his party saw off a challenge from the pro-Brexit U.K. Independence Party to hold the seat.
‘Truly Historic’

“What has happened here tonight is a truly historic event,” Harrison said in her victory speech. “It’s been very clear talking to people throughout this campaign that Jeremy Corbyn doesn’t represent them. They want a party which is on the side of ordinary working people.”

Labour had fought the campaign arguing that it was best placed to protect a local hospital. The Tories argued that Corbyn was hostile to nuclear power, a large source of local jobs.

“The Copeland vote had two very important local issues -- nuclear power and National Health Service reorganization -- the first of which worked against a Corbyn-led Labour and the other in favor,” said Colin Talbot, professor of politics at Manchester University. “The former proved more important.”

Holding Stoke

Labour earlier in the night held the district of Stoke-on-Trent Central, beating UKIP’s new leader, Paul Nuttall. UKIP had hoped to do well in a seat that voted strongly to leave the European Union, and to exploit Corbyn’s weakness to show that it was a serious threat to Labour in its working class heartlands.

In that election Labour’s Gareth Snell won with 37 percent of the vote, down slightly from the 2015 general election. Nuttall was second, with 25 percent of the vote, barely ahead of the Conservatives’ 24 percent.

That the special elections were called at all was a blow to Corbyn. Both were the result of the sitting member of parliament deciding to take up a job outside politics, not something that often happens in parties seen as headed for power.

But despite the disastrous result for Corbyn, and a campaign in which Nuttall struggled to cope with the spotlight, both party leaders may be likely to hang on. UKIP is already on its third leader in six months, and unless the former incumbent Nigel Farage can be persuaded to give up his broadcasting career and return, there is no obvious successor.

Corbyn won the Labour leadership with a landslide in 2015, and then easily fought off a leadership challenge last year. His lawmakers passed a vote of no confidence in him, but they may be reluctant to challenge him again unless they’re sure that the minds of ordinary party members have changed.

“They say half a loaf may be better than none but in Labour’s case, I’m not so sure,” said Tim Bale, professor of politics at Queen Mary, University of London. “Only losing one seat rather than two makes it less likely that the party will fully get the message that, unless it somehow contrives to get shot of Corbyn, then it’s heading for disaster at the next general election.”

Article Link To Bloomberg:

Geopolitical Black Swans Are The Stock Market’s Biggest Risk

Trump’s unpredictability and eagerness to upset the apple cart raise the chance of a crisis-induced swoon.

By Howard Gold
February 24, 2017

The S&P 500 index is up almost 10% since Election Day, as the Trump rally rolls on.

I think this is a continuation of the stock market’s SPX, +0.04% bull run that began in March 2009, but this time, as I’ve written, the catalyst is political: the prospects that a Trump Administration will cut regulations and taxes and stimulate the economy with a big infrastructure program.

How much of that will Congress pass? Who knows? But with earnings growth resuming and investors already factoring in three hikes in the federal funds rate this year, only a sudden burst of inflation or the prospects of recession could derail this market. I don’t expect either.

What’s more likely is heightened geopolitical risk, the proverbial black swan, and here I think President Trump’s unpredictability and eagerness to upset the apple cart, especially internationally, raise the chance of a crisis-induced market swoon.

Consider what’s happened recently:

Three Russian fighter jets buzzed a U.S. destroyer in the Black Sea for several hours earlier this month while the vessel was conducting “routine operations in international waters,” a U.S. official told Fox News.

•A Russian spy ship was spotted in international waters 70 miles off the coast of Delaware

Russia declared it would not return Crimea, which it annexed after an invasion of the eastern Ukrainian region, nor would it even discuss the matter.

•Most seriously, Russia has deployed new ground-launched cruise missiles, in violation of the Intermediate-Range Nuclear Forces Treaty, signed in 1987 by President Ronald Reagan and Soviet leader Mikhail Gorbachev. The new system could “substantially increase the military threat to NATO nations,” The New York Times reported.

North Korea tested a new medium-range ballistic missile, likely capable of reaching South Korea and Japan but not the continental United States. North Korea says it has conducted five successful nuclear-weapons tests since 2006. Underscoring the regime’s ruthlessness, the half-brother of dictator Kim Jong Un was assassinated in Malaysia, and one of the suspects works at the North Korean embassy.

•In January, Iran, too, tested a medium-range ballistic missile, which the U.S. said was in violation of U.N. resolutions. In response, the Trump administration slapped additional sanctions on Iran.

These don’t include other potential hot spots like the islands China claims in the South China Sea or the Sunni Arab Middle East, the cauldron that never stops boiling over.

The Russian situation is most complicated because of continuing investigations into alleged contacts between the Trump campaign and Russian officials in the months before the presidential election. Retired Lt. General Michael Flynn was fired as the president’s national security adviser following reports he had talked with the Russian ambassador to the U.S. both before and after Trump’s election and had misled Trump officials about the extent of those contacts.

Trump has repeatedly stated he wants good relations with Russia, and hasn’t had a bad word to say about autocratic President Vladimir Putin. But at his press conference last week, he acknowledged the investigations have complicated his efforts.

“I think Putin probably assumes that he can’t make a deal with me anymore because politically it would be unpopular,” the president said. “Because look, it would be much easier for me to be tough on Russia, but then we’re not going to make a deal.”

Robert Legvold, a professor emeritus at Columbia University, said Russian-U.S. relations are very complicated, even under an administration that has been as friendly as this one has.

Legvold, whose book “Return to Cold War” appeared in paperback last year, said Russia’s annexation of Crimea marked the beginning of a new Cold War between Russia and the West.

“It’s fundamentally different from the original Cold War, but it does have characteristics that are similar to the early years of the Cold War,” he told me in a telephone interview. “What Putin is determined to do is overthrow what he calls the post-Cold War order” in which the dominant superpower U.S. essentially called the shots.

Now, Russia and China are aggressively asserting their interests, often in defiance of the U.S., and so are rogue states like Iran and North Korea, both favorite Trump targets.

Iran, of course, lies right by the Strait of Hormuz, the chokepoint through which 20% of the world’s traded oil moves. And North Korea’s belligerent, paranoid regime has nukes and missiles that can reach South Korea and probably Japan.

“I am deeply concerned about the failure of major powers to figure out ways to move forward in serious ways—for example, North Korea,” said Legvold. “The major powers are not doing what they need to do.”

That “every man for himself” environment makes it easier for a crisis to get out of hand.

“The second you get any of this foreshadowed, even before it begins happening it’s going to affect markets,” said Legvold.

That’s why I see geopolitical black swans, which by definition can’t be predicted, as the biggest risks to the market today.

Article Link To MarketWatch:

U.S. Companies Decry Trump Action On Transgender Student Rights

By Daniel Trotta 
February 24, 2017

U.S. companies led by tech firms Yahoo Inc (YHOO.O), Apple Inc (AAPL.O) and Microsoft Corp (MSFT.O) criticized the Trump administration's decision to revoke Obama administration guidance that allowed transgender public school students to use the bathroom of their choice.

Their statements evoked the opposition expressed by many businesses last year when the state of North Carolina passed a law that forces transgender people to use public restrooms matching their gender assigned at birth.

The resulting boycotts have cost North Carolina more than $560 million in economic activity, according to the online magazine Facing South.

Companies lacked the same opportunity to protest with their dollars in this instance, since the Trump administration action pertains to schools, but still signaled they stood with the Obama policy of using the federal government to expand transgender civil rights.

"It's ultimately going to come down to the business community to stop it because it's so bad for business," said Christopher Gergen, chief executive of Forward Impact, an entrepreneurial organization based in Raleigh, North Carolina.

In unveiling the new direction on Wednesday, Trump administration officials argued that transgender policies should be an issue for the states to decide.

"The action taken by the administration is troubling and goes against all that we believe in," Yahoo said in a statement.

Social conservatives have hailed the decision by the Justice and Education departments to defer transgender bathroom policies to the states, calling it a victory for privacy and traditional values.

But companies have tried to persuade state and local governments to side with transgender people.

"We support efforts toward greater acceptance, not less, and we strongly believe that transgender students should be treated as equals," Apple said in a statement.

Microsoft President Brad Smith looked to history as a guide, referencing the date that the Emancipation Proclamation took effect, when President Abraham Lincoln declared freedom for slaves.

"Since Jan. 1, 1863, the federal government has played a vital role in protecting the rights of all Americans. Let's not stop now," Smith said on Twitter.

Twitter and Square CEO Jack Dorsey joined other tech firms criticizing the Trump administration's position.

"Rolling back rights for transgender students is wrong," Dorsey said in a tweet on Thursday. "Twitter and Square stand with the LGBTQ community, always."

In response to the North Carolina law, companies such as Deutsche Bank (DBKGn.DE) and PayPal (PYPL.O) canceled expansion plans, costing the state jobs.

By invoking states' rights, the Trump administration is potentially emboldening legislatures in other states that are considering laws similar to North Carolina's HB2.

Article Link To Reuters:

Trump’s Attempt To Massage Economic Data Isn’t New. But There’s A Better Way.

By Charles Lane
The Washington Post
February 24, 2017

The first thing you need to know about the latest controversy involving President Trump’s alleged attempt to manipulate economic data for political purposes is that Bernie Sanders probably would have done the same thing, and quite possibly Hillary Clinton, too.

Mainstream economists recoiled at a Wall Street Journal report Tuesday that said Trump appointees at the Office of the U.S. Trade Representative want official trade balances between the United States and various countries rejiggered to make bilateral trade deficits seem larger — and, by implication, Trump’s protectionist policies more necessary.

On his blog, Harvard University’s Greg Mankiw, a former adviser to President George W. Bush and author of a leading economics textbook, responded simply: “You’ve got to be kidding me.”

Per long-standing international economic practice, the headline figure for the balance of trade between the United States and any other nation has been expressed as the difference between two numbers: the value of U.S. imports from that trading partner and the value of U.S. exports to it.

For years, however, left-wing critics of NAFTA and other trade agreements have said that this data point distorts the deals’ actual impact. In 2014, 14 Democratic members of the House — including current party-chair candidate and 2016 Sanders supporter Rep. Keith Ellison (Minn.) — wrote to President Barack Obama’s trade representative demanding that he adopt the same math that Trump is reportedly contemplating. One of the first to defend Trump this week was Lori Wallach, a left-wing anti-NAFTA activist at Public Citizen.

Do they have a point? Well, kinda sorta. The headline numbers lump together made-in-the-USA exports with goods produced in third countries that enter the United States on their way elsewhere. Example: Samsung TVs from South Korea land at Long Beach, Calif., and get trucked to Tijuana, perhaps after a little repackaging.

Since these “re-exports” by definition aren’t made by American workers, critics argue that it’s more accurate, in terms of trade’s impact on U.S. jobs, to focus on the difference between purely made-in-the-USA exports and imports that remain in the United States.

This would dramatically alter reported trade balances with Mexico and Canada, to which nearly half of all U.S. re-exports go — since those nations border us and don’t have tariffs, thanks to NAFTA. The 2016 U.S. trade deficit with Mexico would have been not $63.1 billion but $115.4 billion, the Journal noted.

The problem is that, no matter how you count it, a bilateral trade deficit (or surplus) per se is neither good nor bad — unfashionable though it may be to restate that basic tenet of economic theory amid the current left-right protectionist convergence.

NAFTA undoubtedly displaced American workers in certain sectors, just as it also created new job opportunities elsewhere — including in the vast logistical chain through which re-exports flow. And it enabled U.S. consumers to access various desirable goods at lower prices than they could have otherwise.

The benefits are diffuse and the job losses concentrated and acutely felt, of course — a fact of politics, not economics, that Trump’s data massage seems designed to exploit. (No final decision has been made, the administration told the Journal.)

There’s no legitimate full-disclosure issue here, since the data Trump and his progressive bedfellows prefer is already available from the U.S. International Trade Commission. What they want is the trade representative’s imprimatur on their ideology.

Meanwhile, the rigid distinction between U.S.-made goods — which “create jobs” — and all others is breaking down due to global supply chains. Economist Lee Ohanian of UCLA has reported that the production process for certain goods takes them back and forth over the U.S.-Mexico border 14 times before they’re ready for market.

Many imports from China are assembled from inputs made in other countries. Example: the iPhone, whose components come from Japan, Korea, Germany and, indeed, the United States.

Ideally, trade figures would take the iPhone apart, so to speak, awarding each country in the chain credit for the value its workers added. Analysts at the World Trade Organization and Organization for Economic Cooperation and Development are working on just such a “trade-in-value-added” concept.

Their results are tentative, and not fully up to date, but still suggestive: The United States’ value-added trade deficit with Japan in recent years was larger than the conventionally measured one; by contrast, U.S. deficits with China, Mexico and Canada are actually smaller in value-added terms.

Economist Yingying Xu of the Arlington-based Manufacturers Alliance for Productivity and Innovation calculates that the United States actually ran 2009 surpluses in manufactured goods trade with Canada and Mexico, in value-added terms.

If free-trade critics inside and outside the Trump administration want information-rich, consistent measures of 21st-century trade flows, they should support innovations such as trade-in-value-added — instead of perpetuating the same old political numbers games. Obviously, that’s a big if.

Article Link To The Washington Post:

If Trump Doesn’t Start Leading Congress, It’ll Get Nothing Done

By Rich Lowry
The New York Post
February 24, 2017

President Trump gives the impression of having done everything in his first month in the White House — except think about Congress.

A couple of months ago, there were congressional Republicans reluctantly on the Trump train who would’ve welcomed such neglect. They believed Trump might be a figurehead president. He’d tweet, give speeches and wear red hats, while they set the agenda. He’d “sign our stuff,” as some put it, but otherwise leave them alone.

This turned out to be wholly mistaken. First, it underestimated Trump’s ability to establish air, sea and land dominance in the nation’s political conversation to the exclusion of all other GOP voices. Second, it failed to appreciate how necessary presidential leadership is to getting anything done on Capitol Hill.

At this rate, congressional Republicans won’t send the president anything significant to sign, let alone set the agenda.

Trump has totally eclipsed congressional Republicans with a flurry of executive orders, Twitter outrages, White House meetings and all-around melodrama that drive the political debate hour by hour. Watching cable news, you could be forgiven for occasionally forgetting that there is a co-equal branch of government called Congress, except insofar as its members are forced to react to whatever Trump is saying or doing.

Trump has created a sense of action bordering on headlong momentum through the sheer force of his frenetic personality.

Some of the motion is significant. He nominated to the Supreme Court Judge Neil Gorsuch, who will get confirmed and represent an enduring achievement. Trump’s commitment to begin enforcing the immigration laws again is a signature departure from the status quo.

But many of the Trump-initiated battles of the first month — over crowd sizes, illegal votes, fake news and the rest of it — have fed the perpetual outrage machine with pleasingly empty calories.

Normally, a new president spends his early days proposing legislation and shepherding it through Congress, then — assuming success — regaling in signing ceremonies. This isn’t part of the job that Trump has yet embraced, or shown much awareness of. But it’s not proving a boon to his party’s legislators.

Congress is naturally fractious and insular, and left to its own devices will often spin its wheels or make shortsighted decisions. The foray out of the box by House Republicans this year was going to be the elimination of Congress’ own independent-ethics office. The next step after that was going to be to repeal ObamaCare without a replacement.

Neither was a good idea, and each reflected greater concern for internal congressional dynamics than political reality. Trump, correctly, dissented from both moves.

That Congress listened — backing off on abolishing the ethics office and now moving toward simultaneously repealing and replacing ObamaCare — suggests the enormous sway Trump has. Yes, his approval ratings are historically low for a new president and distinctly middling for a president at any point.

Yet his hold on the GOP base is formidable, and his core supporters are nothing if not vociferous. Couple that with his prodigious media megaphone, and Trump could break isolated senators or members of Congress resisting his congressional agenda like a twig.

If, that is, he has such an agenda.

No one knows what his infrastructure plan is. Or what he wants on the ObamaCare replacement, which will badly divide Republicans (one reason that Republican leaders hoped to sidestep it). Or where he comes down on the contentious issue threatening the ultimate passage of tax reform, the border-adjustment tax that House Republicans support but faces stiff opposition in the Senate.

These aren’t details, but core questions that must be resolved if Trump is going to have a successful first year legislatively. It’s not time to panic. Trump could address all of this in his speech to the joint session of Congress next week. And the wheels are turning on Capitol Hill, especially in the House. But every day that passes means Republicans have lost a little momentum and risk losing the political window for major changes.

If Trump turns out simply not to have any interest in legislation, it likely won’t augur a period of strong congressional governance, but of drift and perhaps outright failure. Capitol Hill is dependent on Trump, not just to sign bills, but to lead.

Article Link To The New York Post:

Democrats In Denial

The Democratic Party refuses to come to terms with Obama's failures.

February 24, 2017

Democrats are struggling to reconcile an existential contradiction. They know that something has gone terribly wrong with their party and that it must adapt to new political realities. But they also know Hillary Clinton won 3 million more votes than Donald Trump, and that grassroots Democrats are energized—spontaneously crowding Republican town halls, marching in the streets, and paralyzing airports. Which means that some Democrats are now certain it’s not their party but the country that must change. This confused line of thought was on display at Wednesday night’s debate among candidates vying to chair the Democratic National Committee. This paralyzing cognitive dissonance has put the Democratic Party on a path toward an eerily familiar sort of internecine turmoil.

The next DNC chair will not only be tasked with recovering from three (out of the last four) disastrous election cycles but also from a crippling scandal that cost the former chair—Representative Debbie Wasserman Schultz—her job. Given those circumstances, the race has been remarkably cordial. This contest is nothing like the ugly and divisive process the Republican National Committee endured in race to replace their party chairman in 2009. The internal debate in which Democrats is not dissimilar from the one that preceded the rise of the Tea Party.

The race for what amounts to a glorified fundraiser is an unusually crowded one. Eight candidates clogged the stage last night, with the clearest division between mainstream Democrats and insurgent reformers. More conventional candidates like former Obama Labor Secretary Tom Perez and the radical alternative to the status quo, Representative Keith Ellison, did their best to coast through the affair. Save for a biography and affectation that Democrats in the era of Trump find attractive, South Bend Mayor Pete Buttigieg was similarly underwhelming. A handful of also-rans on the stage were among the more notable attendees, not because they have a prayer of winning over the 400 or so Democrats who vote for DNC chair but for what they represent.

Former Fox News contributor and “Rock the Vote” president Jehmu Greene channeled the id of the Democratic Party’s activist wing. She dubbed Trump a harbinger of fascism and “the single biggest threat to our freedoms” since King George III, advocated his impeachment, and alleged in a all-but-open fashion that his election was illegitimate. U.S. Air Force Veteran and former state-level candidate Sam Ronan channeled the anxieties of Bernie Sanders voters, who still regard the 2016 primary process as a “rigged” one that disenfranchised progressive voters. Both seemed to receive a warm reception from the audience of Democratic Party men and women. As Buttigieg observed with unconcealed trepidation, Democrats would not be well served by a “factional struggle between the Bernie wing and the establishment wing.” But civil war seems very much in the offing.

Wednesday night’s affair indicated two things: The first is that the party’s prospective leaders seem to see the energy bubbling up from the grassroots in opposition to President Trump as a cure-all. Each of these candidates leaned heavily into the notion that Trump represents an existential authoritarian threat. They failed to take into account the fact that neither Trump nor the GOP-led Congress has done much of anything. Coming just one week after the White House was compelled to abandon its executive order restricting immigration, fire its national security advisor, and lose a Cabinet nominee to opposition among their supposed allies, the definition of what constitutes authoritarian fascism is becoming unrecognizably broad.

Second, it is clear that the Democratic Party is finding it difficult to come to terms with the fact that it finds itself in the worst position it has been in institutionally since before the New Deal and that the party’s decimation occurred under Barack Obama. In broad strokes, the contest between Ellison and Perez has become a referendum on Barack Obama’s tenure—one Obama seems likely to win. In the entire debate, only South Carolina Democratic Party Chairman Jaime Harrison (who dropped out today in favor of Perez) had the courage to say outright that the party had been decimated between 2009 and 2017 and the Obama’s Organizing for America had hamstrung local party machinery and rendered local efforts dysfunctional.

It would be a display of pigheaded determination for the Democrats to pretend their political predicament is not of their own making and to refuse to acknowledge the validity of its base voters’ concerns. It would be insane for a political party that has lost over 1,000 seats in eight years not to make a course correction. It would be malpractice for a political party to invite the same conditions that led to civil war among its opponents just a few years back. Yet this is the trajectory on which the Democratic Party finds itself.

The Democrats do not necessarily have to change in order to benefit from a swing in the political pendulum in their direction. Still, it appears blind to its predicament. It is one visible to every Republican who watched the rise of the Tea Party with both apprehension and optimism. Until and unless Democrats come to terms with the failures of the Obama era, they are sleepwalking into a period of chaos. As Republicans will attest, what–or who—might emerge from that process will be anyone’s guess.

Article Link To Commentary:

The Big Idea For Middle America: Think Small

By Conor Sen
The Bloomberg View
February 24, 2017

There's a common sentiment, especially among people who remember the halcyon mid-century, that the middle class and middle America have been hollowed by globalization. That may be true. If so, it's great news for younger Americans -- because thanks to those same forces of globalization, the hollowed-out communities in the middle of the country are now attractive places to build a life.

For those who got to enjoy their high wages, factory towns surely provided a lot of economic benefits. But with the benefit of hindsight, we can see how unsustainable the whole relationship was. The factories and their manufacturing jobs were the only reason the towns existed. Without the factories there wasn't enough economic activity to sustain the towns, and workers with options moved elsewhere.

Because of how painful the transition costs have been for a large number of communities, it can be hard to see what opportunities now exist in some of these places. This story about Water Valley, Mississippi, can shed some light on one possibility. Water Valley's population peaked in 1920, so its development was shaped before the post-war era governed by sprawl and the automobile. Its historic Main Street was dilapidated but still existed.

Importantly, land was cheap. Dirt cheap. While annual office rents in high-flying metro areas like the San Francisco Bay Area can go for over $100 a square foot, with buildings selling for well over $1,000 per square foot, on Water Valley's Main Street dilapidated old buildings could be bought for as low as $8 per square foot. It took only around 20 of Water Valley's residents to have a big impact on turning around the community's historic district by renovating around 30 of its 100 historic commercial buildings.

While small towns may have lost their well-paying factory jobs to automation and outsourcing, they now exist as potential cheap platforms for globalization. What sustained these communities used to be high wages. Today, the opportunity is ultra-cheap consumption and production.

Someone can open a coffee shop importing the best coffee beans from around the country or the world. Craft breweries have always preferred to set up shop where the land is cheap rather than in sparkling expensive urban downtowns. Entrepreneurs in agrarian communities can coordinate with local farmers to create local food markets and restaurants. Residents can organize and elect competent, forward-thinking leaders; it's amazing what a good mayor and a handful of city council members or county commissioners can do. Ideas for redevelopment, planning and governance have never been more readily shared and perfected than they are now in this online era. Investing oneself in a small community earning not much money seems no crazier than working 80-hour weeks in a big city earning a lot of money but paying it all toward rent and child care.

Too often in America we look for grand-scale catalysts to fix big problems, and we give short shrift to iterative improvements. There doesn't always have to be a single big idea that revolutionizes a local economy -- a new factory or a corporate relocation or a streetcar or the next billion-dollar internet company. What kept the lights on in urban America during their low point in the 1970s wasn't Google offices or brunch spots offering $6 avocado toast; it was immigrant-run convenience stores and bodegas selling cheap goods. Maybe the way to bring back smaller communities isn't waiting for a hero, but rather making countless small improvements and building on the assets already in place.

Cheap land and labor. All of the distribution tools of the internet. A handful of residents ready to make their communities better. And hundreds and hundreds of incremental improvements. That's what will get small-town America back on track, not yearning for the past or blaming foreigners.

Article Link To The Bloomberg View:

Yes, Mass Deportations Are Coming. And We Know Why.

By Francis Wilkinson
The Bloomberg View
February 24, 2017

There are two main questions about President Donald Trump's recently issued immigration policies. First, is the administration embarking on a campaign of mass deportations of undocumented immigrants? Second, if so, why?

Trump's executive orders on border security and immigration require aggressive deportations, which are facilitated by loosening definitions of criminal behavior and making it easier to affix the "criminal" label to almost any undocumented immigrant.

Undocumented immigration is a risky business. From illegal border crossings to making fraudulent representations -- using a phony Social Security number, for example -- many undocumented immigrants improvise to survive. Somewhere along the line, most break a law -- even if it's by driving with a broken tail light. Under Trump's new orders, any such offense is grounds for deportation.

On Feb. 20, Department of Homeland Security Secretary John Kelly issued two implementation memos that lay out clear directions and protocols for mass deportations.

"We are charged with faithfully executing the laws of the United States and we will not exempt classes or categories of removable aliens from potential enforcement," he wrote. Indeed the only class of undocumented immigrants that is clearly exempt -- for now -- is the Dreamers, the fewer than 800,000 immigrants who came to the U.S. as children and registered with the federal government under President Barack Obama.

While Trump decides the fate of Dreamers, immigration agents have been explicitly authorized to pursue other undocumented immigrants wherever they live, work, travel or assemble.

"Department personnel may initiate enforcement actions against removable aliens encountered during the performance of their official duties," Kelly wrote. If no evidence of even a minor crime exists, ICE agents may use their own judgment in determining whether an immigrant is a threat to public safety and thus subject to removal. In addition, DHS intends to enlist local law enforcement to help with deportations.

The effects of these changes on enforcement promise to be stark. Indeed, White House press secretary Sean Spicer said Tuesday that the new policies would “take the shackles off” Immigration and Customs Enforcement and Border Patrol employees.

So we have a new policy that promises to identify millions of undocumented immigrants as criminals. We have memos from the head of DHS authorizing agents to remove all such criminals. We have new policies to make enforcement actions more aggressive and removals speedier. Finally, we have a direction from Kelly "to expeditiously hire 10,000 agents and officers, as well as additional operational and mission support and legal staff necessary to hire and support their activities."

Roughly 5,800 ICE employees are Enforcement and Removal Officers. Kelly's surge would take that number to almost 16,000, with still more staff to support their removal efforts.

There isn't much doubt about what this adds up to. Trump has laid the legal basis for mass deportations, and Kelly has organized his department to conduct them. In addition, he seeks a drastically larger deportation force, the purpose of which can only be more deportations.

Speaker of the House Paul Ryan told a town hall in January that "if you're worried about, you know, some deportation force coming, knocking on your door this year, don't worry about that."

Not everyone in the audience was reassured. Because Trump had explicitly promised to deliver pain to undocumented immigrants, Ryan was pressed on the issue again. "Everybody thinks that there's some deportation force that's being assembled," Ryan responded. "That's not happening."

Implicit in Ryan's denial was the notion that a deportation force was too pointless, too arbitrary, too ugly, too thuggish for any responsible American leader to undertake. That was Jan. 12. Yet here we are.

Congress has not yet funded additional ICE agents. But even without a bigger force, deportations are poised to proceed at a rapid pace, and the targets will be arbitrary. The fear and uncertainty that arbitrary detention and deportation breeds will likely add high numbers of "self-deportations" to the growing numbers of forced deportations.

Most undocumented immigrants have lived in the U.S. for more than a decade. Several million have U.S.-born children. Others have American spouses. According to the Migration Policy Institute, about 87 percent of the undocumented population were not priorities for deportation under the Barack Obama administration's 2014 guidelines.

There are fewer undocumented immigrants in the U.S. today than when Obama was elected president in 2008. Mexico, historically the largest source of undocumented immigrants, is growing older and wealthier, sending fewer people abroad in search of work. The flow of illegal immigration has slowed significantly. As my colleague Noah Smith wrote, if there ever was an immigration crisis in the U.S., it is over.

There are legitimate questions about immigrants using illegal crossings or visa overstays to gain relative advantage over others who wait in a backlogged system. Likewise, blocking illegal immigration altogether is an impossible but understandable goal. But what is achieved by deporting millions of settled immigrants already on the inside, most of whom are integrated into families, communities and economies? (Relationships aside, the disruption to labor and housing markets is significant.) What public goal does mass deportation achieve?

During his presidential campaign, Trump said that the number of undocumented immigrants in the U.S. is far larger than the 11 million or so cited by the U.S. government and by experts at both liberal and conservative immigration groups. "I am now hearing it's 30 million, it could be 34 million, which is a much bigger problem," he said.

He repeatedly highlighted violent crime committed by immigrants, and even opened his campaign by calling Mexicans "rapists."

Trump's falsehoods and exaggerations always have a point, even if it's only self-aggrandizement or petty score settling. He hypes the numbers and dangers associated with immigrants because he wants Americans to fear the immigrants who live here, just as he wants Americans to fear the Muslim refugees seeking safety here. Meanwhile, Trump's purported reverence for "law and order" is laughably situational.

Demagogy is always frightening. But like its local variant, bullying, it's also boring and predictable. Trump sows fear and division routinely, because he benefits from directing his supporters' attention toward enemies.

He may benefit from scapegoating immigrants, but the U.S. will not. Businesses will suffer. Wealth will be lost. The character of the nation will be challenged, and likely sullied.

It's important to keep in mind, as the deportations ramp up in the months ahead, the families and lives that will be destroyed. It's equally important to remember why: not for national security, not in pursuit of law and order, not because the American public demands it, but simply because an insecure president is desperate to appear "strong," and undocumented immigrants are easily bullied.

Article Link To The Bloomberg View:

Economists In Denial

By Robert Skidelsky
Project Syndicate
February 24, 2017

Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.

Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.

It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.

Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. The reason is that most people are creatures of habit. Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand.

Central banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.

This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on recurring patterns of behavior will fail when something genuinely new happens.

Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of quantifiable risk fail when faced with radical uncertainty.

The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.

Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” Likewise, many Brits are now more confident about the future.

This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat.

The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior.

Keynes’s economics was about the logic of choice under uncertainty. He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past.

There have been a few scattered attempts to meet the challenge. In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.” Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices.

The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.” Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.”

But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. Haldane, too, seems to put his faith in larger data sets.

Keynes, for his part, didn’t think this way at all. He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. To offer meaningful descriptions of the world, economists, he often said, must be well educated.

Article Link To Project Syndicate:

Traders Drain Pricey U.S. Oil Storage As OPEC Deal Bites

By Catherine Ngai and Liz Hampton 
February 24, 2017

Traders are turning the spigots to drain the priciest storage tanks holding U.S. crude stockpiles as strengthening markets make it unprofitable to store for future sale and cuts in global production open export opportunities.

That could signal the beginning of the end for a two-year trade play that came about during an international price war and global oil glut. It is also what the world's largest oil exporters wanted to see when they agreed last year to work together in a historic supply cut to end the glut.

From Houston through Louisiana to floating storage in the Gulf of Mexico, traders are starting to ship crude out of inventories as the rising price of oil for near-term delivery erodes the profits to be had by holding onto oil for later sale.

To be sure, shipments from storage have so far made only a small dent in record U.S. crude inventories. But if prompt oil prices continue to strengthen, more storage will empty out.

"Right now, traders aren't incentivized (to store)," said Sandy Fielden, director of oil and products research at Morningstar.

"It won't all stampede out of the gate, but inventory levels will come down. What will happen is that some of it will go to refineries, but a fair amount will be exported too."

To make money by holding crude, the spread between oil prices for future months needs to be wide enough to cover the cost of leasing tank space and borrowing the money to buy the fuel to fill it. For the last two years, U.S. traders have rushed to that opportunity as those price spreads widened.

Since November, when the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers agreed to cut output, the spread, or discount of prompt barrels to later supplies known as a contango, between the front and second month U.S. benchmark CLc1-CLc2 crude price has narrowed to as little as 26 cents from 95 cents a barrel. That is no longer enough to cover the more expensive storage options, traders said.

In the Houston area, traders that took out storage at the height of capacity issues in 2015 at around $1.20 a barrel are finding it no longer economical.

In the Louisiana Offshore Oil Port (LOOP), the only deep-water U.S. oil port and a major conduit for the country’s crude oil imports, drawdowns have been reflected in the costs of storing oil, traders said.

The futures contract for oil storage there LOSc1 has fallen to around 40 cents per barrel, down about half in a month and still double the difference between front- and second-month crude prices.

One of the most expensive storage options is to hold oil on tankers at sea. During the massive build up in inventory through 2015 and 2016, even some of that was profitable.

Floating storage is now falling. In the U.S. Gulf, crude in offshore tankers fell to 26 million barrels last week from 35 million barrels a month ago, according to data provider ClipperData.

Not all of that crude was considered to be held in floating storage. Some of it may have simply been waiting to discharge.

The largest, and typically cheapest, U.S. storage facility is in Cushing, Oklahoma, which is also the delivery point for West Texas Intermediate (WTI) futures contract CLc1, one of the world's two most important benchmarks for oil prices.Even at Cushing, market participants are emptying storage. Stocks have fallen on average by more than 600,000 barrels per week since the end of 2016, and analysts expect another two to three million barrels to empty out in March.

The going rate for putting oil in tanks in Cushing is around 35-50 cents per barrel per month, though some secured cheaper space still considered profitable before the oil price rout began in mid-2014.

Even as traders sell from the pricier storage tanks, total inventories in the United States have reached a record level. [EIA/S]

That build up is likely due to high imports that were booked before the OPEC production cut, traders and analysts said. It takes around six week for crude from the Middle East to make its way to the United States, and further shipments should fall in coming weeks.

"There is unlikely to be much more of a tail to the increased flow from the Middle East into the U.S.," Paul Horsnell, global head of commodities research at Standard Chartered, said in a note.

Stocks have also built because refineries are piling up inventories during their seasonal maintenance periods. As they return ahead of summer demand season, inventory builds should reverse.

Record exports of U.S. crude in February and March, particularly to Asia, are also expected to boost prices and encourage shipments from storage.

Exports from the United States hit a record high of 1.22 million barrels per day (bpd) last week and domestic production rose to above 9 million bpd, the highest since April, the U.S. Energy Administration Agency said.

"With those two together, the U.S. is becoming an export juggernaut," said John Kilduff, partner at New York energy hedge fund Again Capital.

Article Link To Reuters:

VX Used In Airport Murder Of Kim Jong Nam Kills In Minutes

By A. Ananthalakshmi and Liz Lee 
February 24, 2017

VX, the chemical used in the airport murder Kim Jong Nam, is one of the deadliest chemical weapons created by man. Just 10 milligrams of the nerve agent or a single drop enough to kill in minutes, experts say.

With the texture and feel of engine oil, VX was first produced in the United Kingdom in the 1950s. It can cause convulsions, loss of consciousness, paralysis and respiratory failure in minutes.

Its only known use is as a chemical warfare agent: VX is classified as a weapon of mass destruction by the United Nations.

"You can think of VX as being a pesticide on steroids, this is an extraordinarily toxic substance. Roughly 1/100th of a gram, a third of a drop, on someone’s skin, will kill them,” said Bruce Bennet, defense researcher at California-based RAND Corporation.

Malaysian police said on Friday that VX was found on the body of Kim Jong Nam, the estranged half-brother of North Korean leader Kim Jong UN, and they are investigating how the chemical entered the country.

VX and other nerve agents were believed to have been used in chemical warfare during the Iran-Iraq War in the 1980s. In 2015, traces of VX and sarin - another nerve agent - were found at a military research site in Syria that had not been declared to the global chemical weapons watchdog.

Hard To Produce

Sarin gas was used in Syria, killing hundreds in deadly attacks in 2013, and by members of a Japanese doomsday cult in their deadly 1995 attack on a Tokyo subway.

But VX is known to be much more potent than sarin and other nerve agents because of its persistency. Sarin evaporates from the skin surface but VX does not.

The chemical is hard to produce but a few countries are known to make it and remain in possession of it. The United States and Russia still have some VX stockpile.

South Korean analysts have identified sarin and VX as the focus of a North Korean chemical weapons program. Pyongyang has denied that.

Symptoms after contact with VX in vapor form will appear within a few seconds, and within a few minutes to up to 18 hours after exposure to the liquid form, said John Allum of forensic science firm Hawkins.

VX is considered to be much more toxic by entry through the skin and somewhat more toxic by inhalation. Any visible VX liquid contact on the skin, unless washed off immediately, is believed to be lethal, according to the U.S. government's Centers for Disease Control and Prevention.

Bare Hands

People may not even know they have been exposed to VX as it is tasteless and odorless. In fact, it is unlikely to have been detected by airport security or sensors if it had been brought in small amounts.

Kim Jong Nam was murdered at the main Kuala Lumpur airport last Monday while he was waiting in the departure hall to take a flight to Macau, where he was known to be living with his family for years under Chinese protection.

He had spoken out publicly against his family's dynastic control of the isolated, nuclear-armed state. South Korean and U.S. officials say North Korean leader Kim Jong Un likely ordered the assassination of his half brother.

North Korea unsuccessfully tried to prevent an autopsy on the body, accusing Malaysia of working with South Korean and other "hostile forces." Pyongyang has said Malaysia should be held responsible for killing one of its citizens, though it has not acknowledged the victim is Kim Jong Un's half-brother.

Malaysian police say two women are believed to have attacked Kim Jong Nam, using their bare hands to wipe his face with a liquid. The women were then instructed to wash their hands off afterwards.

The two women and a North Korean have been detained in Kuala Lumpur. Police are searching for seven other North Koreans, four of whom are believed to have fled to Pyongyang.

Article Link To Reuters:

EU Expects Home-Team Advantage In Brexit Talks

Thorny issues like financial settlement and citizens’ rights after Brexit will dominate initial rounds of talks.

By Maia de La Baume and Ryan Heath
Politico EU
February 24, 2017

The European Commission intends to conduct Brexit negotiations with the U.K. government in Brussels, rather than alternating with London, and sees the talks taking place in “rounds” as has been the case with EU trade deals, according to officials in Brussels.

The Commission and European Council’s plans for handling the divorce are beginning to take shape as they await official notification of Britain’s departure via Article 50, expected in mid-March. Officials at both institutions clearly expect to have the home-team advantage and to make a strong initial impact on the U.K. by bringing up some of the toughest issues, including Britain’s bill for leaving the European Union, in the early stages of play.

In Brussels’ view of how the negotiations will pan out, the U.K’s financial settlement with the EU, the rights of EU citizens in the U.K. and vice versa, and the future of the U.K.’s borders with the EU will be among the eight initial areas for discussion.

That order of priorities would push any talk of parallel negotiations on the future EU-U.K. trading relationship to 2018 at the earliest, an example of how the apparently bureaucratic issue of how to format the talks will have huge political implications both for Theresa May’s government — which is keen to show Britons they will have a bright future outside of the EU — and Brussels, which will instinctively want to discourage other countries from leaving.

The Commission wants to structure any future EU free-trade deal with the United Kingdom as a “mixed agreement,” mirroring the format of the EU-Canada trade deal approved this year, one of the EU officials said. That would enable parliaments across the EU to veto parts of the text — the same way Belgium’s Walloons held up the Canadian deal — while keeping other elements as the exclusive competence of the EU.

That could be a particular concern for London, as it could delay an agreement and subsequent trade deal with the remaining EU27 while individual countries could hold up a deal on issues ranging from access for U.K. financial institutions to the rights of EU workers in Britain.

“If you have lived in the U.K. for years, you have acquired rights, and these can’t be contested, and same for Brits living in the EU” — an EU official

The issue with the greatest risk attached is that of the financial bill to be presented to the U.K. as it leaves the EU.

The figure, which the EU estimates to be around €60 billion, cannot be precisely calculated until the day the U.K. leaves the EU, Commission officials told national diplomats in Brexit coordination meetings that were held on February 6.

In the meantime, the European Commission and some national governments are already split on how Britain’s payment should be determined

While the Commission’s Brexit negotiator Michel Barnier wants to avoid giving the impression that any such calculation is designed to punish Britain for leaving, some national governments — including France and Germany — are in no mood to find ways to reduce the financial impact on the Brits. Those countries reject the idea of reducing the payment to be made by the U.K. by deducting its notional share of the EU’s estimated €154 billion in assets, such as property, cash and other financial holdings.

From the U.K. side, a point of tension will be whether it should pay any of its existing commitments (for example, contributions to the EU’s 2014-2020 budget) beyond the date at which it leaves the EU. National diplomats have discussed 2023 as a possible final due date for the payment.

Guaranteed Residency

At a February 22 meeting of Commission officials, diplomats from the 27 countries that will remain in the EU, and members of the European Parliament, the main topic of discussion was the reciprocal rights of EU citizens living in the U.K. and British citizens living in Europe. The Commission and EU diplomats agreed both categories of people should be guaranteed the right of residency in the country where they are living on the date of U.K. withdrawal, said one EU official close to the talks.

“The question was how do we count? And when do we start counting? From the notification or withdrawal? The Commission agreed that the withdrawal would be a relevant date,” said the official, adding that the pension rights of both categories of people should also be protected. “If you have lived in the U.K. for years, you have acquired rights, and these can’t be contested, and same for Brits living in the EU.”

Representatives of countries including Austria, Belgium, Denmark, Spain, Finland, France, Germany, Hungary, Italy, Poland, Slovakia and Portugal had expressed in the February 6 meeting that the Brexit agreement must guarantee such rights in writing to ensure they are upheld by Britain.

One month ahead of the U.K.’s self-imposed deadline for triggering the start of negotiations, other basic questions remain unanswered. While Barnier will lead negotiations for the EU and Brexit Secretary David Davis for Britain, it’s unclear how involved they will be in day-to-day negotiations.

Barnier has yet to receive any official mandate from the EU’s national leaders, and will in any case have to report back to them for instructions on a regular basis. He will receive his negotiating mandate only in April, at a summit of EU leaders called to discuss the triggering of Article 50.

Of the two chief negotiators, the Frenchman appears to have the tougher challenge. While Theresa May is quick to rebuke ministers who stray from her hardline Brexit message, Barnier has to satisfy 27 national leaders, and has toured EU capitals to seek a unified position on what his mandate will be, before it is subjected to a Council vote on a qualified majority basis. He is now in the middle of a second tour of capitals, this time to engage with national parliaments, including Germany’s Bundestag on March 7.

The interplay between the negotiators and national capitals promises to be fraught: Once technical agreement has been reached on any point up for negotiation, national leaders may be tempted to re-litigate elements that prove political contentious, or even to take over the talks directly if their underlings fail to agree. Officials on both sides of the Channel are extremely sensitive about what information reaches the public domain during the negotiations, particularly on sensitive issues such as the U.K.’s final bill for leaving the EU.

Article Link To Politico EU: