Tuesday, May 16, 2017

Tuesday, May 16, Morning Global Market Roundup: Asian Stocks Briefly Hit Two-Year Highs As Outlook Darkens

By Saikat Chatterjee
May 16, 2017

Asian stocks briefly climbed to a fresh-two year high on Tuesday on the back of an overnight rise in Wall Street, while oil extended gains after major producers Saudi Arabia and Russia said supply cuts needed to continue into 2018.

But investors are growing increasingly wary of the broader market as valuations look stretched and with the latest rally taking place in thin volumes and led by just a few sectors.

"We are approaching a short-term resistance as the breadth of this rise is very unhealthy and the market momentum looks tired," said Alex Wong, a fund manager at Ample Capital Ltd in Hong Kong, with about $130 million under management.

In Hong Kong, the broader market .HSI rose to its highest level since June 2015 on the back of extended buying into Chinese lenders and market heavyweight Tencent (0700.HK) before declining 0.6 percent.

With overall volumes declining and share valuations looking extremely stretched, investors are growing cautious. Hong Kong's technology sector, for example, is the most expensive, trading at a price-to-earnings multiple of more than 42 times.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged down 0.1 percent after hitting its highest level since June 2015 in opening trades. Australian stocks were among rare gainers in the region due to strength in commodity-linked shares. Oil steadied above the $52 per barrel level after hitting its highest level in more than three weeks on Monday, after Saudi Arabia and Russia said that supply cuts needed to last into 2018, a step towards extending an OPEC-led deal to support prices for longer than first agreed. [O/R] Global benchmark Brent crude LCOc1 rose 0.4 percent at $52 per barrel. U.S. West Texas Intermediate (WTI) crude futures CLc1 were up 0.4 percent at $49.03 per barrel.

Brent crude has gained nearly 9 percent over the last week though some analysts were skeptical about the durability of the rally despite the proposed supply curbs. "That is going to be easier said than done, it appears, with U.S. production running at its fastest pace since August 2015 and data yesterday confirming that Chinese growth momentum continues to moderate," ANZ strategists wrote in a daily note. Chinese growth cooled in April according to a variety of economic indicators ranging from factory output to retail sales as authorities clamped down on debt risks in an effort to stave off a potentially damaging hit to the economy. In currencies, the U.S. dollar =USD nursed deep losses after a weak U.S. manufacturing report trimmed expectations of a Federal Reserve rate increase next month, a key factor behind the dollar's gains in recent weeks.

The euro edged up 0.1 percent to $1.0988 EUR=> after gaining 0.4 percent on Monday. The dollar eased 0.3 percent against the yen near 113.47 JPY=, after rising 0.4 percent on Monday. The dollar =USD was steady at 98.83 against a trade-weighted basket of its peers after falling more than 1 percent in the last three sessions. The New York Federal Reserve's barometer on business activity in the state unexpectedly fell in May, sinking into negative territory for the first time since October.

"I think people want to wait and see," said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore. Expectations of a rate increase in June fell to 74 percent compared to 84 percent last week, according to the CME Fedwatch. A risk-on undertone meant gold XAU= posted meager gains with the precious metal changing hands at $1,234 per ounce.

Article Link To Reuters:

Hedge Funds Are Dumping Gold Bets At Fastest Rate Since 2008

By Susanne Barton
May 16, 2017

Expectations for another boost in U.S. interest rates are wearing down gold bulls. Hedge funds and other large speculators cut long positions in bullion futures and options by the most in more than eight years last week. Traders have been exiting as Federal Reserve officials signal higher borrowing costs this year and political uncertainty in Europe eases, reducing demand for gold as a store of value.

Article Link To Bloomberg:

Oil Prices Build On Gains On Expectation Of Extended Crude Supply Cut

By Henning Gloystein 
May 16, 2017

Oil prices rose on Tuesday, extending gains after a joint announcement by top producers Saudi Arabia and Russia to push for an extension of supply cuts until the end of March 2018.

Brent crude futures were at $51.95 per barrel, up 13 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $48.98 a barrel, up 13 cents, or 0.3 percent from their last settlement.

In order to rein in a glut, Saudi Arabia and Russia said on Monday that they agreed to the need for a 1.8 million barrels per day (bpd) crude supply cut to be extended for nine months, until the end of March 2018.

However, there is no final deal yet despite the pledge by Saudi Arabia - the world's top exporter and de-facto leader of the Organization of the Petroleum Exporting Countries (OPEC) - and top producer Russia, as the 12 remaining OPEC members and other producers participating in the cuts have to agree to the extension during a meeting on May 25.

"It remains to be seen whether all countries participating in the deal will agree with the Saudi-Russian stance," said Sukrit Vijayakar, director of energy consultancy Trifecta.

James Woods, global investment analyst at Australia's Rivkin Securities said that oil supplies would likely remain plentiful despite an extended cut.

"As we have seen over the past six months, rising U.S. production and record inventories have kept upside limited and a nine month extension at this stage is unlikely to break that," he said.

U.S. bank Goldman Sachs said the deal "will likely further extend the oil price rebound... although the rally so far... has remained modest compared to the move that occurred last year when the OPEC cuts were first announced."

Prices are up by 2 percent since the announcement of the planned extension on Monday, compared with an over 15 percent jump in the two days following the announcement of the initial cut on Nov. 30, 2016.

Goldman said that beyond the ongoing rise in U.S. oil production, which is up over 10 percent since mid-2016 to 9.3 million bpd, output will increase by OPEC members who were exempt from the cuts, or where supply disruptions had ended, including Libya and Nigeria.

The bank said that "these combined volumes could largely offset the benefit of the extended cuts."

Goldman retained its average Brent price forecast for the third quarter of 2017 at $57 per barrel.

Crude oil inventories in the United States are expected to fall for a sixth straight week, by 2.3 million barrels, according to a Reuters poll of seven analysts ahead of weekly inventory reports from the American Petroleum Institute and the U.S. Energy Information Administration.

Article Link To Reuters:

Oil Prices, Up 13% In Only Seven Days, Can Extend Their Gains

Russia is on board with production cuts as seasonal supply declines are nearing.

By Thomas H. Kee Jr.
May 16, 2017

After reaching a capitulatory bottom in overnight trading on Cinco de Mayo, oil prices are up sharply.

The rationale matters, but in many ways momentum matters more in the oil industry. That applies to both directions.

When oil prices were peaking around April 19, right before the slide into May 5, the rationale had everything to do with an expected six-month extension of the OPEC agreement to cut production. The declines that started afterward happened because Russia did not immediately vocalize support.

Fear settled into the market, and investors who were long oil unwound positions. Back then, the data suggested bullish oil bets were higher than they had ever been. This created the downside momentum that was initiated by Russia’s inability to vocalize support.

Russia needed to meet with its producers before it was able to do that, and it took about two weeks for them to meet with them, and that created a void — no good news and plenty of questions. In the meantime, there was a barrage of negative news about oil, stemming from the supply side of the equation. Shale producers were in focus, and the U.S. supply glut seemed unyielding.

However, the supply increases were normal based on seasonal trends, but without expectations that this production cut would be extended, no one cared. Supply certainly took center stage, and the seasonality was forgotten. This is what helped fuel the downside momentum.

West Texas Intermediate crude (WTI) CLM7, +0.27% fell 18% in 17 trading days, and it was brutal. As of last week, long oil positions were back at their pre-OPEC-deal levels (last November). The data suggest that almost all of the bullish positions that were there on, or about, April 12 had been closed, and a significant short interest had developed.

However, since the overnight session on Cinco de Mayo, WTI is up 12.5% in only seven trading days. Upside momentum has already started in a space that is historically very volatile.

The rationale for the increase had everything to do with Russia, the same catalyst for the declines.

On May 5, Saudi Arabia offered an opinion after meeting with Russia the day before. The opinion was that Russia would be on board with an extension of the OPEC deal. Russia subsequently acknowledged the same, and on May 15 Russia and Saudi Arabia issued a joint statement not only suggesting that they were supporting an extension, but that they were supporting an extension beyond what the market expected on April 12.

On the supply side of the equation, we will soon enter the seasonal period when supply levels decline significantly. And although our model does not match that proposed by the U.S. Energy Information Administration (EIA), the agency’s is actually more bullish than ours. We also identify material deficits that will begin very soon.

Shale producers will continue to ramp up production, but they cannot match demand growth alone, and warnings of material deficits in 2020 even with normal OPEC production exist. The EIA says the lack of large projects and the inability of shale to pick up the slack by itself is the reason.

Oil investors care more about these issues in the near term:

• Bullish bets were significantly unwound

• Big bearish bets were placed.

• WTI is up 12.5% in seven days.

• Russia is back on board.

• Momentum is up.

• A nine-month extension is likely.

• Seasonal supply declines are on the horizon.

• Material deficits are starting or about to start.

Almost immediately, significant deficits will begin. These will come as shale producers continue to ramp up supply, and the oil market is going to get more than it wanted back on April 19.

Oil trades with momentum, and currently momentum is on the upside. Oil also undershoots and overshoots given its momentum moves, and we’re expecting it to overshoot as this next cycle continues and deficits begin to dominate the headlines. We expect oil-related ETFs like United States Oil Fund LP USO, +2.21% and iPath S&P GSCI Crude Oil Total Return Index ETN OIL, +1.93% to increase measurably even after the recent seven-day run.

Article Link To MarketWatch:

'No Deal Yet' In Mexican Trade Talks With Ross Seen As NAFTA Warm-Up

By Adriana Barrera 
May 16, 2017

U.S. Commerce Secretary Wilbur Ross and his Mexican counterpart failed to make progress in talks on Monday to resolve a sugar trade spat before the complicated renegotiation of the North American Free Trade Agreement (NAFTA) due later this year.

"There's no deal yet," sugar chamber head Juan Cortina, who took part in the talks, told Reuters, saying "no" when asked if progress was made in any area relating to the impasse over Mexican exports.

The sugar talks are being closely watched as the two nations prepare for more complex negotiations over NAFTA, which U.S. President Donald Trump wants to ditch if he cannot secure better terms for Americans.

Ross and Mexican Economy Minister Ildefonso Guajardo agreed to continue "open dialogue" over the coming days, Mexico's economy ministry said in a statement, but it was unclear when the delegations would next meet.

The two sides previously set a June 5 deadline for ending a standoff that could escalate to tit-for-tat duties.

They also discussed dates for renegotiating NAFTA in light of Robert Lighthizer's confirmation as the U.S. Trade Representative last week, a development necessary for Trump to trigger a 90-day consultation period before the renegotiation can begin.

On Thursday, Mexico's foreign, finance and interior ministers are due to meet their U.S. counterparts in Washington, in preparations for the NAFTA talks as Mexico has insisted that all parts of the bilateral relationship be discussed along with trade.

Guajardo met with business leaders as well as U.S. officials as part of a major lobbying campaign launched by Mexico aimed at making it harder for Trump to trash a trade agreement that underpins Mexico's economy.

The U.S. sugar industry pressed the U.S. Commerce Department late last year to withdraw from a 2014 agreement that sets prices and quotas for U.S. imports of Mexican sugar unless the deal could be renegotiated. The U.S. sugar lobby wants Mexico to export less refined sugar, sources have told Reuters, a position emboldened since Trump took office.

The current agreement caps Mexico exports of refined sugar at 53 percent of total sugar exports to the United States; the proposal would slash that to just 15 percent. Raw sugar would make up the remainder.

Guajardo told Ross it was important to find a solution that maintains the balance of sweeteners in both markets, the ministry said.

Mexico's agriculture minister has said Mexico would be willing to react in-kind to duties imposed on its sugar, possibly targeting U.S. fructose, for which Mexico is a major market.

Article Link To Reuters:

Ransomware Attack Again Thrusts U.S. Spy Agency Into Unwanted Spotlight

By Dustin Volz 
May 16, 2017

An unprecedented global cyber attack that infected computers in at least 150 countries beginning on Friday has unleashed a new wave of criticism of the U.S. National Security Agency.

The attack was made possible by a flaw in Microsoft's Windows software that the NSA used to build a hacking tool for its own use - only to have that tool and others end up in the hands of a mysterious group called the Shadow Brokers, which then published them online.

Microsoft Corp President Brad Smith sharply criticized the U.S. government on Sunday for "stockpiling" software flaws that it often cannot protect, citing recent leaks of both NSA and CIA hacking tools.

"Repeatedly, exploits in the hands of governments have leaked into the public domain and caused widespread damage," Smith wrote in a blog post. "An equivalent scenario with conventional weapons would be the U.S. military having some of its Tomahawk missiles stolen."

Some major technology companies, including Alphabet Inc's Google and Facebook Inc , declined comment on the Microsoft statement.

But some other technology industry executives said privately that it reflected a widely held view in Silicon Valley that the U.S. government is too willing to jeopardize internet security in order to preserve offensive cyber capabilities.

The NSA did not respond to requests for comment.

The NSA and other intelligence services generally aim to balance disclosing software flaws they unearth against keeping them secret for espionage and cyber warfare purposes.

On Monday, senior administration officials defended the government's handling of software flaws, without confirming the NSA link to WannaCry, the tool used in the global ransomware attack.

"The United States, more than probably any other country, is extremely careful with their processes about how they handle any vulnerabilities that they're aware of," Tom Bossert, the White House homeland security adviser, said at a press briefing on Monday.

Other tools from the presumed NSA toolkit published by the Shadow Brokers have also been repurposed by criminals and are being sold on underground forums, researchers said. But they appear to be less damaging than WannaCry. It is not known who is behind the Shadow Brokers.

Derek Manky, global security strategist at cyber security firm Fortinet, said he thinks WannaCry is probably the worst that will come from the Shadow Brokers’ publicly dumped toolkit, though the group may have held back from public revealing everything it obtained

“Out of that batch, it is probably a high-water mark,” Manky said.

"We Knew It Could Be A Problem"

Security experts said the NSA had engaged in responsible disclosure by informing Microsoft of the flaw at some point after learning it had been stolen and a month before the tools leaked online.

Users who do not patch their systems and the Shadow Brokers were more directly responsible for the attack than NSA, they said.

The Department of Homeland Security began an "aggressive awareness campaign" to alert industry partners to the importance of installing the Microsoft patch shortly after it was released in March, an agency official working on the attack said.

"This one, we knew it could be a problem,” the official told Reuters.

"NSA should be embarrassed – they’ve had a lot of damaging leaks," said James Lewis, a former U.S. official who is now a cyber expert at the Center for Strategic and International Studies. Still, he said, "Microsoft needs to admit that the 20th century is over, it's a much more hostile environment, and that hobbling the NSA won’t make us any safer."

Under former President Barack Obama, the U.S. government created an inter-agency review, known as the Vulnerability Equities Process, to determine whether flaws should be shared or kept secret.

White House cyber security coordinator Rob Joyce, who previously worked in the NSA's elite hacking squad, told a Reuters reporter in April that the Trump administration was considering how to "optimize" the Vulnerability Equities Process, but he did not elaborate.

The White House did not respond to a request for comment about the status of the review process. A source familiar with the matter said equities meetings still take place but less frequently than they did under the Obama administration.

In Congress, Republican Senator Ron Johnson and Democratic Senator Brian Schatz are working on legislation that would codify the review process.

"We have reached a turning point where it is not sustainable for governments to think they can retain vulnerabilities for very long," said Ari Schwartz, who oversaw technology security issues at the National Security Council during the Obama administration.

Article Link To Reuters:

Ford To Cut Workforce By 10%

By David Shepardson and Nick Carey
May 16, 2017

Ford Motor Co (F.N) plans to shrink its salaried workforce in North America and Asia by about 10 percent as it works to boost profits and its sliding stock price, a source familiar with the plan told Reuters on Monday.

A person briefed on the plan said Ford plans to offer generous early retirement incentives to reduce its salaried headcount by Oct. 1, but does not plan cuts to its hourly workforce or its production.

The move could put the U.S. automaker on a collision course with President Donald Trump, who has made boosting auto employment a top priority. Ford has about 30,000 salaried workers in the United States.

The cuts are part of a previously announced plan to slash costs by $3 billion, the person said, as U.S. new vehicles auto sales have shown signs of decline after seven years of consecutive growth since the end of the Great Recession.

The Wall Street Journal reported Monday evening that Ford plans to cut 10 percent of its 200,000-person global workforce, but the person briefed on the plan disputed that figure. The source requested anonymity in order to be able to discuss the matter freely.

Ford declined to comment on any job cuts but said it remains focused on its core strategies to "drive profitable growth".

"Reducing costs and becoming as lean and efficient as possible also remain part of that work," it said in a statement. "We have not announced any new people efficiency actions, nor do we comment on speculation."

Ford plans to emphasize the voluntary nature of the staff reductions. Ford said April 27 when it reported first-quarter earnings that it planned to cut $3 billion in costs.

"We are continuing our intense focus on cost and the reason for that is not only mindful of the current environment that we're in, but also I think preparing us even more for a downturn scenario," Chief Executive Mark Fields told analysts in a conference call at that time.

Jobs Jobs Jobs

During his election campaign President Trump was highly critical of the auto industry's use of Mexican plants to produce vehicles for the U.S. market.

Since taking office, Trump has regularly focused on creating jobs in sectors like the automotive industry, though he has released few concrete plans to do so.

Following criticism from Trump, in January Ford scrapped plans to build a $1.6 billion car factory in Mexico and instead added 700 jobs in Michigan.

In March, Ford said it would invest $1.2 billion in three Michigan facilities and create 130 jobs in projects largely in line with a previous agreement with the United Auto Workers union.

Trump pounced on that announcement before Ford could release its plans.

"Major investment to be made in three Michigan plants," Trump posted on Twitter. "Car companies coming back to U.S. JOBS! JOBS! JOBS!"

Article Link To Reuters:

Why Stock-Market Investors Are Falling Back In Love With Europe

Is region due for period of extended outperformance?

By William Watts
May 16, 2017

U.S. investors are taking notice of European stocks, and they like what they see.

The victory by centrist Emmanuel Macron in France’s presidential election May 7, easily dispatching far-right euroskeptic Marine Le Pen, reassured many that the tide of anti-establishment sentiment sweeping across the U.K. and the U.S. last year has ebbed—at least for now. Indeed, many investors appeared to have come to that conclusion well before the votes were cast in France.

Improving earnings combined with subdued political risks saw European equities enjoy their largest weekly inflow on record last week, noted analysts at Bank of America Merrill Lynch, citing EPFR data.

Scott Clemons, chief investment strategist at Brown Brothers Harriman, is taking an incremental approach, having “dialed up” client exposure to Europe since last summer.

The European economy seems to have finally found its footing, he said, in a phone interview. “If there’s a little hesitation in my voice, it’s because it seemed to have found a footing several times over the past six or seven years,” only to retreat somewhat.

But at the margin, purchasing managers indexes look better and overall signs of economic activity continue to pick up, leaving Clemons confident in a turn for the better. Indeed, the Markit eurozone composite purchasing managers index hit a six-year high of 56.8 in April, marking the 46th consecutive month of expanding private-sector activity across the region. A PMI reading of 50 or above indicates healthy economic expansion.

And that is being reflected in corporate earnings, which are showing signs of life, the Brown Brothers Harriman strategist said.

European equities also remain cheap relative to the U.S., he notes, with U.S. companies trading at around 22 times trailing 12-month earnings versus 17 times for European companies.

U.S. stocks have been the primary driver of global equity market gains in the years since the financial crisis. Now, investors are increasingly scouring for equities outside the U.S. to provide leadership.

European stocks have already seen some outperformance in 2017, with the MSCI Europe ex-U.K. index is up around 15% in dollar terms year to date, versus a 6.9% rise for the MSCI U.S. index and a 7.3% rise for the S&P 500 SPX, +0.48% The pan-European Stoxx 600 index SXXP, +0.09% is up nearly 14%.

Those gains may make some analysts wary about chasing European stocks in the near term.

“In the short run, strengthening economic data and reduced political uncertainty look priced in,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a Friday note.

Indeed, there are risks to chasing European yield, analysts said.

While there is reason to be optimistic about eurozone stocks, the region’s recent outperformance leaves equities vulnerable to a near-term mean reversion, making him reluctant to “chase the [eurozone] equity market higher from here.”

Clemons acknowledged there was potential for a near-term setback, but said that long-term investors should view any such pullback as an opportunity.

On average, client equity portfolios stand around 60% U.S. and 40% international, he said. And around 15% of that international allocation is made up of European stocks, up from around 8% in the middle of last year.

“I think if we got a pause or a correction, we would use that as an opportunity to bump those numbers up a little,” he said.

Article Link To MarketWatch:

U.S. Stats Officials Say Measurements Of GDP, Inflation Are Off

Prices overstated, economic growth understated, paper says; Research suggests Fed inflation target could be too low.

By Craig Torres
May 16, 2017

Top officials from two U.S. government economic-statistics agencies said their measurement tools are understating growth and overstating some components of inflation by modest amounts, while cautioning that this doesn’t explain the sluggish expansion in recent years.

“The Bureau of Labor Statistics and Bureau of Economic Analysis agree that price index mismeasurement continues to lead to understated growth in real output over time,” five current and former officials from the agencies wrote in a paper published May 3 in the American Economic Association’s Journal of Economic Perspectives and presented last week at a meeting of the BEA’s advisory committee.

Economists for years have questioned whether statistical agencies are keeping up with changes, resulting from an increasingly digitized and innovation-based economy, that improve the quality of goods and services. The answer: It’s hard, especially in technology and medical services where innovations can be rapid and the results hard to capture. Health-care spending represented about 17.5 percent of gross domestic product in 2014, they note.

Despite the BLS’s improvements in capturing changes in the economy, “our quality corrections are not as complete as they could be, so they are not taking into account some of the innovations that are actually going into the goods,” said Erica Groshen, one of the paper’s authors, who served a four-year term as BLS commissioner that ended in January.

The methods for improved accuracy haven’t been implemented for reasons including “high computational intensity and cost” and the need for larger sample sizes, according to the paper.

The U.S. economy has grown by about 2.1 percent a year during the expansion that began in 2009, compared with 2.8 percent during the previous expansion, according to the BEA.

Groshen’s co-authors include Brian Moyer, director of the Bureau of Economic Analysis, which publishes the GDP data; BEA senior economist Ana Aizcorbe; and two BLS officials, Ralph Bradley and David Friedman. The BLS publishes data including consumer prices and employment.

Price Measures

Looking at the personal consumption component of GDP, the authors find that price measures likely show an overstatement of 0.2 percentage point in 2000, rising to 0.26 percentage point in 2015. If inflation is overstated, real GDP is understated.

Combined with some mismeasurement of quality changes in computer and software investment, the total effects would mean GDP growth is understated by about 0.4 percentage point for 2000, 2005, 2010 and 2015, according to the paper.

The authors say that measurement issues are “far from new” and the magnitude and timing of their findings are unlikely to account “for the pattern of slower growth in recent years.”

Still, the overstatement of inflation would raise an important policy question for the Federal Reserve, which U.S. central bankers themselves are asking: Is the 2 percent target too low?

On an annual basis, the personal consumption expenditures price index has risen 2 percent or more just once since April 2012, which is one reason why Fed Chair Janet Yellen has raised interest rates just three times since December 2015. The economic recovery began in June 2009.

Inflation Picture

“For GDP and productivity growth,” the paper’s conclusions “make a lot of sense but don’t really change the overall picture of a productivity slowdown,” said Julia Coronado, president of MacroPolicy Perspectives LLC in New York and a former Fed economist. “It is more of a game changer for thinking about inflationary pressures.”

Groshen, a former New York Fed economist, said it’s hard to conclude what the optimal rate of inflation should be. Economists generally agree that it should be low, and consumers and businesses should have confidence that it will remain so.

“If there are bigger measurement issues than people had appreciated, you could argue for a higher target, and a bigger band of tolerance around it,” she said in an interview Monday.

Article Link To Bloomberg:

Reports Of Trump Sharing Classified Info Point To Growing Fear Of Him

-- The Washington Post reported that President Donald Trump divulged highly classified information during his meeting with Russian officials last week.
-- White House officials pushed back, saying Trump didn't discuss intelligence sources or methods of collection.
-- The Post report may mean Trump's support from Republicans will keep eroding.

May 16, 2017

After firing the FBI director investigating his campaign last week, President Donald Trump added a warning: James Comey had better hope there are no tapes of their conversations.

Now, in an explosive Washington Post story, the U.S. intelligence community has hit back — hard. Current and former intelligence officials told The Post that the president, perhaps inadvertently, had revealed highly classified information about Islamic State to the Russian government.

That report increases the chance that Trump's support from Republicans will keep eroding. And it increases the impossible-to-quantify threat to the president's ability to complete a full four-year term. One indication: Senate Foreign Relations Committee Chairman Bob Corker, a Republican from Tennessee, said the Trump White House was in a "downward spiral."

The news will "add fuel to fire" both about Trump's ties to Russia and "to those harboring doubts as to Trump's fitness to be president," said Richard Haass, who heads the Council on Foreign Relations and previously served as a national security aide to both presidents Bush. Haass said Trump's actions "could jeopardize security by alerting enemies, burning sources and making allies less willing to share sensitive intel."

Nor can Trump, who has likened U.S. intelligence officials to Nazis for their handling of information about his associates and Russian interference in the 2016 election, assume that today's disclosures will end attempts by those officials to hold him accountable.

"They're truly frightened about him," said Bruce Jentleson, a Duke University professor who served as a foreign policy aide in both the Obama and Clinton administrations. Noting that an inadvertent disclosure of classified information to Russian officials would demonstrate "incompetence, impetuousness" and "mania," Jentleson added, "I'm scared, too."

The refusal of Republicans to defend Trump in the wake of the Post story shows his support from partisan allies wearing thin. That's damaging on its own to the president's ability to achieve his agenda, among other consequences.

Moreover, it signals political problems that magnify chances for Democrats to regain control of the House of Representatives in 2018 mid-term elections. If they do, Trump would face a serious risk of impeachment proceedings, which a small number of Democratic lawmakers are already suggesting.

As with many controversies involving Trump, this one has provided more questions than answers. What makes it especially hazardous is that it involves a compromise of national security information involving both Moscow, for decades the foremost menace to the U.S., and ISIS, which Americans now see filling that role.

"Until we know what he actually shared, it's a bit reckless to speculate," said Jim Steinberg, a national security aide to the Obama and Clinton administration, about the Post story. "But with Trump, it's possible the leaker deserves the Medal of Freedom."

Article Link To CNBC:

Fed's New Normal Balance Sheet Could Be Huge

-- A bigger Fed balance sheet may mean better long-term interest rates, but if it's wrong it could mean higher inflation and higher rates.
-- The Fed has yet to announce a plan to run off its $4.4 trillion balance sheet.-- Market participants in the CNBC Fed Survey expect the process to begin in January 2018.

May 16, 2017

While Federal Reserve officials have said they plan to begin a process to normalize their balance sheet, the end result is likely to be a balance sheet that is anything but normal.

Interviews with Fed officials, and public statements they've made suggest the Fed's new normalized balance sheet could end up being three times as large as it was before the financial crisis. And it could be bigger than that.

The Fed has yet to announce a plan to run off its massive $4.4 trillion balance sheet, but market participants in the CNBC Fed Survey expect the process to begin in January 2018, months sooner than previously forecast. Some Fed officials have made no secret of their intentions to announce a plan later this year to reduce the balance sheet. That plan could include a target for the new normal level.

The balance sheet refers to the portfolio of securities — in large part various types of Treasury debt and mortgage-backed securities — that it has purchased.

The reduction most likely will come not from selling bonds but by allowing securities that mature to simply roll off. The Fed currently reinvests the proceeds, a process that will end during the balance sheet runoff. What central bank officials have not agreed to is at what pace they will downsize and what size they consider appropriate.

In an effort to stimulate the economy in the aftermath of the Great Recession, the Fed cut its benchmark interest rate to zero and began buying up government and mortgage-backed securities to drive down interest rates further. The Fed stopped adding to its balance sheet in 2014 and it now stands at more than $4.4 trillion, compared with around $850 billion before the crisis.

But because the economy has grown and the financial world has changed so much since then, officials say there is no going back to the old level. More likely, these officials say, the Fed will aim for a balance sheet size of $2.5 trillion, or a reduction over several years of about $2 trillion.

A bigger Fed balance sheet on a more permanent basis is potentially good news for long-term interest rates. It means the Fed will have fewer bonds to unload, and so exert less upward pressure on interest rates. But if the Fed's calculations are wrong, it could mean higher inflation and higher rates.

The biggest reason why there's no going back to the old balance sheet is currency. For a variety of reasons, the amount of currency in circulation has grown 7 percent a year on average over the past five years, or 3 percentage points faster than in the five years before the crisis. People are simply expressing a desire to hold more cash — ironic in a financial world that is growing more digital — and the central bank's job is to simply meet that desire for cash passively.

About $1.5 trillion of cash is currently in circulation and, if current growth rates continue, that level will be north of $2 trillion in the next five years, providing a floor for just how small the balance sheet can get.

Other factors will combine to keep it large. Unlike before the crisis, the Treasury now keeps most of its money on account at the Fed. At the end of 2007, the Treasury kept just $4.5 billion at the Fed; by the end of 2016, it was $374 billion. Most banking experts think this is a good idea. Commercial banks, which used to service the Treasury's general account, are now subject to capital and liquidity requirements that make holding the Treasury account too costly. The Fed doesn't have to follow those rules.

The same is true for foreign central banks, which hold an additional $250 billion on account at the Fed. Both Treasury and foreign central bank deposits are essentially considered "hot money," meaning it can be quickly withdrawn, threatening liquidity at commercial banks. So experts think it should be on account at the Fed.

Add all three major sources together — currency and Treasury and foreign central bank deposits — and the minimum size of the balance sheet is already easily at $2.5 trillion.

And some argue it should be bigger still.

Some economists have suggested a major reason for the financial panic in 2008 — or at least one that made it substantially worse — was a lack of high-quality assets in the banking system. So a large Fed balance sheet, providing a place where banks can secure high-quality assets to park their money overnight, can help provide financial stability.

Former Fed Chairman Ben Bernanke wrote in a recent blog post: "There are reasonable arguments for keeping the Fed's balance sheet large indefinitely, including improving the transmission of monetary policy to money markets, increasing the supply of safe short-term assets available to market participants, and improving the central bank's ability to provide liquidity during a crisis."

Bernanke added, "It's not unreasonable to argue that the optimal size of the Fed's balance is currently greater than $2.5 trillion and may reach $4 trillion or more over the next decade."

Opponents of a large balance sheet say the Fed should reduce it as much as possible so it doesn't become a victim of politics, where Congress or the executive branch could mandate that the balance sheet be used to buy certain types of securities to solve fiscal problems. They also worry that such a large balance sheet is potentially inflationary.

More than $400 billion of just Treasury debt is scheduled to mature next year, and maybe as much as $200 billion in mortgage-backed securities could be paid off. So a decision this year to simply halt all reinvestment could mean the balance sheet takes a major step toward the new normal in just a single year.

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Could The Iranian Economy Sink Rouhani?

By Djavad Salehi-Isfahani
Project Syndicate
May 16, 2017

For a “managed democracy,” Iran holds remarkably unpredictable presidential elections. And the upcoming election on May 19 is no exception, given that the incumbent, Hassan Rouhani, is facing two tough conservative challengers.

Rouhani’s opponents are Mohammad Bagher Qalibaf, the mayor of Tehran, who garnered one-third as many votes as Rouhani in the 2013 election; and Ebrahim Raisi, a high-ranking cleric who is considered to be a possible successor to Iran’s Supreme Leader, Ayatollah Ali Khamenei. Both candidates have sharply criticized Rouhani’s economic record.

When Rouhani was elected in 2013, Iran was suffering from 35% inflation, the national currency had depreciated by two-thirds in the previous year, and international sanctions were crippling the economy. Oil exports and output of automobiles – Iran’s leading manufacturing industry – had each declined by two-thirds, and restless industrial workers were demanding back pay.

Rouhani had campaigned against former President Mahmoud Ahmadinejad’s populist policies, promising to put jobs and production before redistribution. He said that he would control inflation, negotiate a deal with the West to end the sanctions, and restore macroeconomic stability.

By any reasonable standard, he delivered: inflation is in the single digits for the first time in three decades; sanctions have been lifted in accordance with the 2015 nuclear deal; and the exchange rate has been stable for four years. But, unfortunately for Rouhani, many Iranians who had expected their living standards and employment prospects to improve as a result of these successes are now feeling disappointed.

To be sure, the economy has started to grow again, after contracting for two years. But there is disagreement about the current recovery’s breadth and durability. Because much of the recent growth has come from a doubling in oil production, it has not increased most household incomes, or created new employment opportunities. Thus, International Monetary Fund monitors who visit Iran twice a year have projected 6.6% growth for the 2016-2017 fiscal year, but only half that for the 2017-2018 fiscal year.

Survey data show that, outside of Tehran, average real (inflation-adjusted) household expenditures fell during the first two years of Rouhani’s term, while poverty rose. In the 2015-2016 fiscal year, there were almost one million more people below the poverty line than when Rouhani took office.

And yet these outcomes do not necessarily amount to broken promises. When voters rallied behind Rouhani’s call for lower inflation, they may not have realized that prices rising at a slower rate would also mean slower income growth. And the lay public was not alone: even one of Rouhani’s economic advisers initially boasted that people were 20% better off because the rate of inflation had declined by 20 percentage points.

Moreover, Rouhani has pursued a tight fiscal policy that deepened the recession and delayed the recovery. He has kept the government’s rate of fixed investment at around 5% of GDP, which is twice what it was under Ahmadinejad, but still too low. Government fixed investment is the traditional driver of economic growth in Iran, and has been as high as 20% of GDP in good times.

Making matters worse, Iran has a major investment bottleneck, owing to collapsing real-estate values and a frozen banking system. Iran’s banks are still saddled with bad loans forced on them by Ahmadinejad to finance his populist projects. And the Central Bank of Iran has failed to get credit flowing again, even though it has been pumping money into the economy and increasing liquidity by 26% per year.

As a result, real interest rates have risen to above 10%, choking off private investment. With the state unwilling to spend, and the private sector unable to borrow, total investment fell by 9% in the first nine months of the 2016-2017 fiscal year, after falling by 17% during the same period the previous year.

Despite renewed economic growth, unemployment actually increased in the last four years. Although the economy created more than a half-million jobs each year, new entrants to the labor force pushed up the unemployment rate, from 10.1% to 12.1% – and from 24% to 29% for workers aged 15-24.

Khamenei has led the charge against Rouhani’s record on jobs. In a speech in March marking the Iranian new year, he called for a year of “production and employment,” and urged the next president to create jobs with local resources, rather than look for assistance abroad.

Rouhani’s economic strategy has clearly failed younger Iranians, who account for 60% of the unemployed, and who generally favored him in the 2013 election. But Iran’s youth will likely overlook Rouhani’s economic-policy shortcomings, and vote for him again, because they prefer his more relaxed social-policy positions to his conservative rivals’ stern moralizing.

Older Iranians, however, might not be so forgiving. Youth unemployment affects everyone, but particularly the adults who must house and feed the jobless. According to 2015-2016 survey data, of the 65% of men under the age of 35 who lived with their parents, 85% were single, and 24% were unemployed. Marriage and employment are the two defining elements of adult life in Iran. Without them, many young people have turned to crime and drugs, which has had far-reaching adverse effects.

Rouhani has also hiked energy prices by 50%, without increasing cash transfers to the poor. We do not know the extent to which the poor supported Rouhani in 2013; but they are less likely to do so this time. Rouhani severely criticized Ahmadinejad’s cash-transfer policy, which was designed to compensate for lost bread and energy subsidies. But even if Ahmadinejad’s overzealous attempt to deliver “the oil money to peoples’ dinner tables” added to inflationary pressures, it also seems to have reduced poverty and inequality significantly.

Still, Rouhani is expected to win re-election, not least because every president of the Islamic Republic has served two terms. But if he loses, his economic policies – which delivered too little, too late – will be to blame.

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Germany Will Lose If Macron Fails

By Hans-Helmut Kotz
Project Syndicate
May 16, 2017

When Emmanuel Macron won the French presidential election, many Germans breathed a loud sigh of relief. A pro-European centrist had soundly defeated a far-right populist, the National Front’s Marine Le Pen. But if the nationalist threat to Europe is truly to be contained, Germany will have to work with Macron to address the economic challenges that have driven so many voters to reject the European Union.

This will not be easy. In fact, within a couple of days of the election, core planks of Macron’s economic platform were already under attack in Germany. For starters, his proposed reforms of eurozone governance have been met with substantial critics.

Macron’s campaign manifesto embraced the idea of more eurozone federalism, characterized by a shared budget for eurozone public goods, administered by a eurozone economics and finance minister and accountable to a eurozone parliament. It also called for greater coordination of tax regimes and border controls, stronger protection of the integrity of the internal market, and, in view of the rising threat of protectionism in the United States, a “made in Europe” procurement policy.

An attempt at re-opening the debate about Eurobonds, or the partial mutualization of eurozone public-sector liabilities, was viewed as a pie-in-the-sky suggestion, mostly just a distraction. And, incidentally, it appears nowhere in Macron’s platform. Far more disturbing to German pundits and policymakers is Macron’s desire for Germany to make use of its fiscal capacity to boost domestic demand, thereby reducing its massive current-account surplus.

These are not new ideas: the European Commission, the International Monetary Fund, Macron’s predecessors, and economists throughout Europe have advanced them often. And, just as predictably, Germany’s government has roundly rejected them, relying on reasoning that, like its counter-arguments, is well rehearsed.

For the most part, German economists and officials believe that economic policy should focus almost exclusively on the supply side, diagnosing and addressing structural problems. And German officials also regularly suggest that their economy is already performing at close to its supply-determined limits.

In fact, far from viewing the current-account surplus as a policy problem, the German government sees it as a reflection of the underlying competitiveness of German firms. It is the benign upshot of responsible labor unions, which allow for appropriate firm-level wage flexibility.

The accumulation of foreign assets is a logical corollary of these surpluses, not to mention an imperative for an aging society. Indeed, German policymakers view as essential a reduction of Germany’s debt-to-GDP ratio toward the 60% ceiling set by European rules. When, if not in good times, does one have the chance to save?

This stance does not align particularly smoothly with Macron’s economic program. While Macron’s program includes significant proposals for addressing supply-side issues with the French economy, it also favors output stabilization and, more important, increased spending in areas like public infrastructure, digitization, and clean energy to boost potential growth.

Despite Macron’s decisive victory, he faces an uphill battle implementing his economic agenda. Even if the National Assembly, to be elected in June, endorses his reform program, street-level resistance will be no less fierce than it has been over the last few years.

Germany, however, has good reason to support Macron’s supply- and demand-side reforms. After all, France and Germany are deeply interdependent, meaning that Germany has a stake in Macron’s fate.

While it is true that the German government cannot (fortunately) fine-tune wages, it could, out of sheer self-interest, provide for its future by investing more in its human and social capital – including schools, from kindergartens to universities, and infrastructure like roads, bridges, and bandwidth. This approach would reduce the private user cost of capital, thereby making private investment more attractive. It would also create domestic real assets, reducing Germany’s exposure to foreign credit risk. A lower current-account surplus implies a more sustainable net-financial-liability position for Germany’s partners.

If Germany and Macron don’t find common ground, the costs to both will be massive. No malicious external actor is imposing populism on Europe; it has emerged organically, fueled by real and widespread grievances. While those grievances are not exclusively economic, the geography of populism does fit that of the EU’s economic malaise: too many Europeans have been losing out for too long. So, if Macron fails to deliver on his promises, a Euroskeptic like Le Pen could well win France’s next election.

To avoid this outcome, Macron must be firmer than his predecessors in pursuing difficult but ultimately beneficial policies. He might take a page from former German Chancellor Gerhard Schröder’s playbook. In 2003, Schröder prioritized reforms over rigorous obedience to the EU’s Stability and Growth Pact. Additional fiscal leeway was needed to smooth the economy’s adjustment to the bold labor-market reforms that he was introducing. The decision to prioritize reforms over obstinate rule-following proved to be a good one.

Now is Macron’s Schröderian moment. He, too, appears to have opted for reasoned pragmatism over the blind implementation of rigid rules (which cannot make sense under any circumstances). Fortunately, policy principles are not written in stone, not even in Germany. Recall that the German government adamantly rejected the eurozone banking union and the European Stability Mechanism, both of which were ultimately launched (though some say it was too little, too late).

Europe is experiencing a seismic shift, with its political system being undermined from within (and becoming vulnerable to Russian pressure from without). Fear of the “other” and perceptions of trade as a zero-sum game are taking hold. These circumstances call for bold and committed action, not only by France, but also by Germany, which, ultimately, has the most to lose.

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America Still Is -- And Should Remain -- The ‘Indispensable Nation’

No, Donald Trump hasn’t fundamentally changed U.S. foreign policy.

By David French  
The National Review
May 16, 2017

What do Americans on both sides of the aisle mean when they call the U.S. the “indispensable nation”? It’s simply this: that without America maintaining its post–World War II role as the ultimate guarantor of the safety and security of the Free World, the world is more likely than not to revert to the historical mean of regional and perhaps even global conflict.

Acknowledging that the U.S. is “indispensable” does not mean that we’re the world’s hegemon, controlling all the Earth’s peoples from Washington, D.C. It does not mean that different administrations at different times haven’t chosen to retreat from this or that peripheral commitment. It does depend, however, on the understanding that American retreat necessarily means — in key strategic areas — the advance of powers hostile to American interests and hostile to international peace and security more broadly.

Writing in The New Republic, Jeet Heer thinks that Donald Trump is well on his way to destroying America’s status as the world’s indispensable nation — after just four months in office. And Heer is not alone. He cites multiple foreign-policy thinkers who are not only proclaiming America’s strategic demise; they’re already anointing international substitutes, such as China and Germany. Even worse, Heer is celebrating the new international landscape — believing it’s high time that the U.S. take a lesser role in world affairs. He thinks it’s time for other regional powers to fill the vacuum.

Heer’s analysis is fundamentally flawed on both counts. First, it’s simply wrong that Trump has fundamentally changed anything about America’s strategic approach abroad. For all Trump’s tweets and worrisome campaign rhetoric, since he’s been in office, his administration has reaffirmed its commitment to NATO, accelerated the fight against ISIS and other Islamic jihadists, enforced Obama’s “red line” against the use of chemical weapons in Syria, rushed missile-defense batteries to South Korea, and announced its intention to expand and modernize a military that was already the most powerful in the world. While all these decisions may dismay some of President Trump’s more isolationist supporters, in real-world terms, they mean exerting more American power abroad, not less.

Second, Heer glosses over the Obama administration’s beta test for American withdrawal. Remember “leading from behind”? Remember the Iraq retreat? In many ways, Barack Obama came into office with a worldview that echoed Heer’s. Obama believed that American power was in many ways responsible for the world’s ills, and that less American influence could well lead to less strife and conflict. Yet in every strategically important arena where America stepped back, our nation’s rivals stepped forward. From the genocidal nightmare in Syria and Iraq to China’s aggressive moves in Southeast Asia to Russia’s military aggression in Ukraine and Syria, American retreat or hesitation emboldened enemies, not friends.

By the end of his second term, Obama had become a miniature George W. Bush, launching combat operations in Libya, Somalia, Syria, Iraq, Yemen, Afghanistan, and Pakistan. He’d sent troops forward in Poland and Estonia. Obama had finally learned the enduring, eternal lesson of foreign affairs. The operative word in the phrase “great power” is “power,” and absent that power the greatness or morality of a nation is of little count in international affairs.

In reality, Heer and others are engaging little more than a fantasy-land intellectual exercise without bothering to realistically explore the alternatives to American engagement. What happens to international trade and stability if America yanked the U.S. Navy off the high seas — leaving Western democracies with minimal ability to respond to regional instability and ceding the balance of power to those countries with the largest land armies? No nation can project power like the United States, and even if Britain, France, and Japan decided to reassert their historic international roles, it would take well over a decade of emergency efforts to design, build, and deploy naval forces even a fraction of our size.

Let’s put this another way. The international order can stand even if any given friendly regional power fails. It cannot stand if the U.S. abdicates. Germany can fail to meet its defense obligations, yet NATO can still deter Russia. The South Korean military could melt away, yet the U.S. could defeat North Korea. But if the United States retreats from these key strategic regions, can any allied regional power (or coalition) truly step up and guarantee stability?

The international order can stand even if any given friendly regional power fails. It cannot stand if the U.S. abdicates.

What happens to international stability if America reneged on its commitments to NATO, South Korea, or Japan? What if the U.S. decides to leave the Middle East? Does Heer legitimately believe that the immediate beneficiaries would be anyone other than Russia, China, Iran, and the barbaric North Korean regime? Yes, Germany has economic power, but it is utterly unable to take effective action beyond even its immediate borders, and without allied help its own army can’t even protect its own nation. There are certain military realities, and absent resort to their nuclear deterrent, nations such France and Britain are less equipped to defend, say, Poland than they were in 1939.

During the campaign, intelligent critics of Trump’s proposed, more isolationist, foreign policy asked a consistent question: If America retreats, who advances? There are strategic backwaters (such as post–Cold War Latin America — left more benign after Cuba and the Soviet Union were neutered) where that question is less relevant, but in every strategically vital region in the world, the answer to that question in the short and medium term is quite simple: Our enemies. They’re the only nations with the will and the power to take advantage of American weakness.

Like it or not, America is indispensable to the preservation of an international order that has not only kept the world broadly at peace (certainly it has avoided catastrophes such as World War II, World War I, or even devastating conflicts such as the Napoleonic Wars), it actively defeated an aspiring hegemonic power in the Soviet Union without a military cataclysm. Anyone — whether he be named Donald Trump, Steve Bannon, or Jeet Heer — who thinks that the United States can meaningfully change its international commitments without incurring an unacceptable level of risk not just to international peace and stability but to the prosperity and well-being of our own citizens is not living in the real world.

It’s true that President Trump has made statements that have made our allies unnecessarily nervous about American plans and intentions. It’s true that Trump is erratic. But he hasn’t diminished American power, and he certainly hasn’t changed the reality of international dependency on American power. America is the indispensable power, and not even Donald Trump can change that fundamental strategic fact.

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Trump's Classified Disclosure Is Shocking But Legal

Why federal laws that criminalize the revealing of secrets don’t apply to the president.

By Noah Feldman
The Bloomberg View
May 16, 2017

Oh for the days when Donald Trump wasn’t taking the presidential daily brief -- and didn’t know highly classified information that he could give to the Russians. But a bit bizarrely, Trump’s reported disclosure of Islamic State plans to two Russian officials during an Oval Office visit last week wasn’t illegal.

If anyone else in the government, except possibly the vice president, had revealed such classified information that person would be going to prison. The president, however, has inherent constitutional authority to declassify information at will. And that means the federal laws that criminalize the disclosure of classified secrets don’t apply to him.

If this doesn’t make much sense to you, I feel your pain. To understand the legal structure of classification and declassification requires a brief journey into the constitutional law of separation of powers. That’s not always especially fun. But at this juncture in U.S. history, it’s essential. Not since Richard Nixon’s administration has separation of powers been so central to the fate of the republic.

The authority to label facts or documents as classified rests with the president in his capacity as a commander in chief. Or at least that’s what the U.S. Supreme Court said in a 1988 case, Department of the Navy v. Egan.

Justice Harry Blackmun, who wrote the opinion, said that the executive’s “authority to classify and control access to information bearing on national security … flows primarily from this constitutional investment of power in the President and exists quite apart from any explicit congressional grant.”

Blackmun’s idea that the president has an inherent right to decide who gets access to classified information seems to imply the converse: that the president has the inherent authority to declassify information, too. Although there’s no case on this point, scholars took that view during the years of the George W. Bush administration, when the president was thought to have declassified some information that was leaked to the news media by White House aide I. Lewis “Scooter” Libby.

It makes sense. If it is up to the president to decide what can’t be disclosed, it should be up to him to decide what can be.

That still leaves the question of whether the president would need to issue a formal order of declassification before revealing the information. According to the report in the Washington Post, Trump pretty clearly didn’t do that: He just made a judgment that he wanted to pass on the information to Russian Foreign Minister Sergei Lavrov and Ambassador Sergey Kislyak. Indeed, it seems altogether conceivable that he made the decision in the moment, without thinking through its practical consequences, much less the classification status of the information. (White House National Security Adviser H.R. McMaster denied the Post’s report Monday night, saying, “At no time were intelligence sources or methods discussed, and the president did not disclose any military operations that were not already publicly known.”)

It would be nice to say that, just as the president authorizes classification through a formal executive order, he should have to issue a similar statement to declassify. But that’s probably too formalistic. In constitutional terms, an executive order is just a presidential order reduced to writing for the benefit of the rest of the executive branch. The president likely can’t be bound by an executive order, whether his or an order from the proceeding president.

If you’re following closely, you’ll have noticed an anomaly: The president can classify and declassify. But the president can’t send people to prison for disobeying his order. That requires a federal law passed by Congress, and a conviction before a judge. Thus, under the separation of powers, the president has inherent authority to fire his own employees for disclosing classified information, but lacks the power to punish them criminally without Congress and the courts.

That law exists: 18 U.S. Code Section 798, if you care to look it up. It makes it a federal crime to communicate “classified information” to an “unauthorized person.” The catch is that the law defines classified information as information determined classified by a U.S. government agency, and similarly defines an unauthorized person as someone not determined authorized by the executive branch.

That puts Trump in the clear insofar as he has an inherent authority to declare information unclassified.

The law goes on to criminalize any disclosure of classified information that’s “prejudicial to the safety or interest of the United States or for the benefit of any foreign government to the detriment of the United States.” At first blush that language would seem arguably to apply to Trump’s disclosure. But once again, the clause depends on disclosure of classified information -- and Trump can simply say he declassified the information when he gave it to the Russians.

A twist with potential legal relevance might arise if someone else -- like the leaker of this story -- repeated classified information after Trump effectively declassified it. That person would have a compelling claim to be exempt from criminal prosecution also. This might matter if Trump decides to go after the leaker criminally.

So go ahead, be shocked by Trump’s disclosure. I know I am. Whether it reflects a studied or instinctive pro-Russian position or simply unthinking bad judgment, it seems to be a highly unusual and poor presidential move. But it’s protected by the constitutional power that comes with getting elected president of the United States.

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