Thursday, May 18, 2017

Thursday, May 18, Morning Global Market Roundup: Asia Falls As White House Turmoil Spoils Risk Sentiment, Dollar Bruised

By Shinichi Saoshiro
May 18, 2017

Asian stocks fell on Thursday and the dollar was stuck near six-month lows against a basket of currencies as uncertainty mounted over U.S. President Donald Trump's future following reports that he tried to interfere with a federal investigation.

Spreadbetters expected European stocks to follow suit, forecasting a lower open for Britain's FTSE, Germany's DAX and France's CAC.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.5 percent.

Japan's Nikkei shed 1.4 percent, Australian shares lost 1.1 percent and South Korea's KOSPI declined 0.4 percent. Shanghai and Hong Kong's Hang Seng also fell.

Equities in Asia took cues from Wall Street, where the Dow and S&P 500 both sank about 1.8 percent overnight following reports that Trump tried to influence a federal probe.

The allegations have not only thrown doubt over the future of the pro-growth policies that Trump promised, but they have raised the possibility he could end up leaving the presidency.

A small but growing number of Trump's fellow Republicans called on Wednesday for an independent probe of possible collusion between his 2016 campaign and Russia, and one even mentioned impeachment.

The region's shares showed little reaction to news that former FBI chief Robert Mueller was appointed to investigate alleged Russian interference in the 2016 U.S. election, although the S&P mini futures were a shade higher while the dollar bounced modestly against the safe-haven yen.

The greenback was up 0.4 percent at 111.200 yen after hitting a three-week low of 110.530. It was still down a significant 2 percent on the week.

"The appointment appears to be an attempt at tackling the problem early. While it is a bit of good news, further investigations are needed and it still remains to be seen what those could reveal. As such, the markets are still faced with uncertainty," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

In other political developments, trouble mounted for Brazilian President Michel Temer, who was recorded discussing payments to silence testimony by a potential witness in the country's biggest-ever graft probe.

An exchange-traded fund of Brazilian equities was down more about 8 percent in Tokyo, where it is traded.

In currencies, the euro extended its overnight surge to touch $1.1174, its highest since November before pulling back slightly to $1.1142.

"There are two implications from the latest developments in Washington, first being the possibility of congressional procedures reaching an impasse and second is the potential of Trump being forced out," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"But judging by how steeply the dollar has fallen, participants may have already priced in much of the negative news regarding Trump. The dollar could even benefit with the market thinking of post-Trump scenarios."

The dollar index against a basket of major currencies was flat at 97.604, not far from a six-month trough of 99.333 reached the previous day.

The U.S. currency was hurt as Treasury yields declined significantly with allegations against Trump lowering economic stimulus hopes.

The benchmark 10-year Treasury yield was at 2.239 percent after going as low as 2.209 percent overnight, its lowest since April 21.

With Treasury yields falling, the gap between U.S. and German government debt yields reached its narrowest in more than six months on Wednesday, as a tumultuous week in Washington contrasted with a sense of improved political stability in Europe. [GVD/EUR]

In commodities, oil prices dipped after settling at a two-week high overnight. An ongoing effort by OPEC to cut production has partially propped up oil but prices remain under pressure from still plentiful supplies. [O/R]

Brent crude slipped 0.3 percent to $52.05 a barrel.

Gold hovered near a two-week high thanks to the weaker dollar and the risk aversion gripping the broader markets.

Spot gold hit $1,263.02 an ounce, its highest since May 1.

Article Link To Reuters:

Oil Prices Dip As Supply Remains Ample Despite Output Cuts

By Henning Gloystein 
May 18, 2017

Oil prices dipped on Thursday, weighed down by plentiful supply despite ongoing efforts led by OPEC to tighten the market by cutting production.

Brent crude LCOc1 was down 18 cents, or 0.3 percent, from its last close at $52.03 per barrel.

U.S. West Texas Intermediate (WTI) crude CLc1 was down 16 cents, or 0.3 percent, at $48.91.

The downward correction eroded gains from the previous session when prices rose on the back of a drawdown in U.S. crude inventories and a slight dip in American production.

The U.S. Energy Information Administration said on Wednesday that crude inventories USOILC=ECI fell 1.8 million barrels for the week to May 12, to 520.8 million barrels.

However, the drawdown was smaller than expected, and many traders say there is still more oil in the system than the market can absorb.

"The fall in stockpiles undershot the expectation of a 2.36-million draw," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

"OECD stocks were up 24.1 million barrels (in Q1 2017) due to a large build in January," BMI Research said.

"This leaves OECD stocks 307 million barrels above their five-year average going into Q217."

In order to achieve the target of reducing these stocks to their five-year average over an extended nine-month period of supply cuts, BMI said that inventory drawdowns would have to average 25.6 million barrels per month in the three last quarters of the year.

Overall oil supplies remain ample, with large amounts of crude from the United States and other producers being shipped to the big consumer regions in northern Asia, undermining the OPEC-led efforts to tighten the market.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia have pledged to cut production by almost 1.8 million barrels per day (bpd) during the first half of 2016, a deal likely to be extended until the end of March 2018.

Other producers have been quick to fill any supply gap.

Shipping data in Thomson Reuters Eikon shows that U.S. oil exports to Asia have soared from just a handful of tankers per quarter throughout 2015 and 2016, to 10 tankers in the first quarter of this year, a figure expected to rise.

North Sea oil shipments to Asia have also been at record highs this year, with 19 tankers delivering in Q1, and a similar amount expected to go to Asia in the second quarter.

Article Link To Reuters:

War With North Korea Could Increase Smartphone Prices, Disrupt Global Trade And Widen US Debt

By Nyshka Chandran
May 18, 2017

Pricier consumer electronics, disrupted global trade and higher U.S. federal debt are among the major consequences from a potential war on the Korean Peninsula, according to a new report from economic research consultancy Capital Economics.

The prospect of American and South Korean armed forces entering full-blown conflict against North Korea is a last resort for Washington and Seoul — the principal targets of Pyongyang's nuclear aggression — in their quest to halt the rogue nation's nuclear development but many believe the risk of military action has grown.

President Donald Trump has previously stated "a major, major conflict" with North Korea was possible and that all options were on the table. Meanwhile, Japanese Prime Minister Shinzo Abe recently told CNBC that the international community must "firmly and solidly stand upon the principle of action for action" as the isolated state continues to fire ballistic missiles that are growing technologically advanced.

If military action does break out on the Korean Peninsula, global industries will certainly be impacted given the likely possibility of U.S. involvement and the size of South Korea's economic footprint.

Smartphone Prices Will Rise

South Korea is the world's fourth-biggest producer of electronics goods on a value-added basis, accounting for just over 6 percent of global production, according to Capital Economics. "Even a relatively short conflict would deal catastrophic damage to South Korea's economy," the report stated, and the manufacturing sector isn't likely to be spared.

If electronics production was damaged during a war with North Korea, companies would be scrambling to find alternative suppliers but the global economy lacks enough spare capacity to compensate for South Korea's lost output, the report explained.

That means several companies worldwide would be forced to halt production, which would translate into a sharp rise of various electronic products globally, Capital Economics said.

But the disruption doesn't stop there — pricier products could impact developed economies.

"U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation," the report warned.

As other industrialized nations encounter similar impacts, the real purchasing power of consumers would fall and the lower spending could prompt central banks to respond by hiking interest rates, the report continued.

Global Trade Will Be Disrupted

"The biggest impact (of war) on the global economy would likely be felt through the disruption to global trade flows" due to South Korea's deep integration into regional and global manufacturing supply-chains, Capital Economics stated.

Nine of the world's ten busiest container ports are located in Asia, including the South Korean port city of Busan, so even countries that aren't involved in the conflict could be affected if it becomes too dangerous to transport goods around the region, Capital Economics continued.

If South Korean GDP fell 50 percent as a result of war, that would directly knock one percentage point from global GDP, the consultancy noted.

US Debt Could Increase

"A prolonged war in Korea could significantly push up federal debt in the U.S., which at 75 percent of GDP, is already uncomfortably high," the report stated.

But given Washington's military superiority over Pyongyang, Capital Economics believes that any conflict would be of a relatively short duration, "months rather than years."

Should the U.S. involve itself in South Korea's post-war reconstruction, that could further increase Washington's financial burden. "If the US were to spend proportionally the same amount on reconstruction in South Korea as it did in Iraq and Afghanistan, it would add another 30 percent of GDP to its national debt," the report warned.

Article Link To CNBC:

Brokers Giving Away Best Trade Ideas Leads To Unexpected Paydays

Funds seek payment methods for easy-to-measure trade ideas; ‘Alpha capture’ platforms are a source of revenue for brokers.

By Julie Edde
May 18, 2017

Ian Conway doesn’t just give away his best trading ideas. He pays to post them online.

That’s how Conway, his colleagues at London-based Avalon Capital Markets and, increasingly, thousands of market professionals promote their wares. In return, investors pay whatever they think the idea is worth.

In a world turned upside down by new rules on how research is paid for, this is one model -- known as “alpha capture” -- that is gaining traction. It’s a tool for investors to help establish the value of ideas now that banks are about to be barred from bundling research costs into trading commissions.

"We’ve seen quite a big change in demand from more fundamental firms for trade ideas,” said Colin Berthoud, whose TIM Group provides one of the biggest alpha capture platforms. “We’re also seeing big new firms who haven’t had a trade idea programs in the past. There is a need for a quantitative assessment in a way that there hasn’t been historically."

The demand stems from European regulators’ rewrite of their financial rulebook known as MiFID II, which comes into force in January. What was once a buffet of services attached to trading will soon transform into a system where research, corporate access and trade-execution services must be bought and sold a la carte.

Alpha capture platforms have been tracking and ranking trading ideas from brokers for more than a decade -- they’ve been a staple at some hedge funds for years. But they’re growing. Research firm Tabb Group says 2017 spending on alpha capture will represent about 5.8 percent of total global paid commissions, from about 4.8 percent last year. It’s a market that Berthoud estimates could be valued at as much as $1 billion.

Brokers pay about 5,000 pounds ($6,481) a year to post on alpha capture platforms. Fund managers who like what they see then send the trader a check. Some high-performing brokers who use the TIM platform say they have received payments from clients they had never previously met or spoken with.

One winner from this system: Smaller brokerages that lack the established relationships of investment firm Goliaths can now win clients by showing that their advice is superior. That worked for Conway, a quantitative analyst who says he has received payments for his trading ideas posted on TIM Group.

"Nobody had considered the performance angle before, it used to be only about price” of trading execution, said Conway. “Now, there’s an audited record of ideas. It’s a very clinical system, but it’s proven to work."

The MiFID II regulations, which seek to separate research payment from trading commissions, will spur more than $300 million in research budget cuts in the U.S. and Europe, according to consulting firm Greenwich Associates.

Other startups offering a la carte services such as corporate access or analyst research are seeing upticks in client interest ahead of the law’s January deadline. Data-backed systems like alpha capture are likely to similarly benefit, Tabb Group says, giving brokers an additional channel for payment as well as bragging rights for generating the top-ranked ideas.

One problem, though, is that payment isn’t guaranteed as it’s an honor system, says Geoffrey Mills at Oppenheimer Europe, a TIM client.

“If the buy-side wants to engage the sell-side on alpha capture, they have to properly incentivize the top performers,’’ said Mills, a sales director at Oppenheimer in London. “At the moment, whether they are doing that, or just making use of the data points and signals is an open question.”

Still, TIM Group says that it has almost every large broker in the world as a client -- more than 4,000 contributors. On the buy side, it has lured 250 firms ranging from hedge funds to long-only funds.

Hedge funds including Marshall Wace LLP and Two Sigma Investments LP were among pioneers in using in-house alpha-capture platforms. Third-party rivals are likely to benefit as more funds review fee policies ahead of MiFID II, Tabb Group says. For now, TIM Group has few major outside rivals. (One of them is Bloomberg LP, parent of Bloomberg News.)

"It’s evolved from nothing to being a globally accepted practice,” said Niki Beattie, a Merrill Lynch alumna who now heads adviser Market Structure Partners. “With MIFID II, clients will have to be more discerning about the information they take, how they use it and how they pay for it.”

Article Link To Bloomberg:

EU Looks To Build Alternative To London For Capital Market

By Huw Jones 
May 18, 2017

Brexit has forced the European Union to rethink its flagship capital markets union (CMU) project and urgently look for ways to create an alternative financial market to London, according to a draft EU document seen by Reuters on Wednesday.

London is the bloc's biggest financial market by far, but will be outside the EU from 2019, posing a challenge to the CMU project that had already begun to flag before last year's referendum in Britain.

"The CMU reform programme must be updated so that it can meet the challenge of creating a more autonomous capital market for the EU-27 economy," the document written by the European Commission says, referring to the remaining EU member states.

Britain's Prime Minister Theresa May has said she wants a free trade agreement with the EU that would include financial services, but the document suggests the bloc wants instead to replicate London's financial industry as much as it can.

The draft document, due to be discussed by the executive Commission on June 7 ahead of potential publication, said Brexit made it necessary to ensure that businesses remaining in the EU would have access to strong capital markets.

"This calls for stronger actions, more effective supervision and making sure that the benefits of the CMU are felt across the entire EU," it said.

"The City of London has traditionally pooled liquidity and provided risk management services for the rest of the EU. The departure of the UK from the single market reinforces the need and urgency of further developing and integrating EU capital markets."

A "deep re-engineering" of the financial system is necessary and this "implies finding ways to integrate sustainability into the EU's regulatory and financial policy framework", and to broaden the "geographical reach of capital markets".

Separately, the EU executive has already announced it will publish a draft law next month to tighten its grip on the clearing of euro-denominated securities, an activity which London currently dominates.


The draft document sets out a string of proposals to boost the bloc's capital market, especially in areas which London has dominated such as institutional investment, pensions, and stock market listings.

The Commission will propose in the third quarter to strengthen the powers of the EU's European Securities and Markets Authority - a step Britain had long opposed - in order to make the CMU more effective, the document added.

There may be an "EU Small Listed Companies Act" in the second quarter of next year to make the bloc a more attractive location for companies to go public, it said.

The Commission will propose a draft law to ease capital requirements on investment firms in the fourth quarter of 2017, and assess the case for granting licences and "passporting" rights to financial technology firms to operate across the EU, the document said.

The EU executive will also present measures to "support secondary markets" for non-performing or soured loans on the books of banks, blamed for holding them back from lending more to companies.

There may be a draft law too on making it easier to sell mutual and hedge funds products across borders.

The draft document follows a "mid-term" review of the CMU, a project that aims to encourage companies to raise more funds on markets and reduce the continent's heavy reliance on bank loans.

The document, which could be amended before publication, says a draft law to propose a pan-European personal pension product will be published by the end of June.

There will also be a draft law proposing an EU framework for covered bonds in the first quarter of next year.

Article Link To Reuters:

'Trump Trade' Turns To Trepidation As Investors Unwind

By Megan Davies and Jennifer Ablan
May 18, 2017

Investors were shelving rosy hopes for U.S. tax reform and rethinking strategies premised on Donald Trump's economic growth promises on Wednesday, as the President faced his loudest criticism yet over possible collusion between his election campaign and Russia.

From stocks to bonds to the U.S. dollar, a bevy of trades that have been fashionable since Trump's election last November, were getting dialed back or in some cases shredded as his reform agenda looked increasingly vulnerable amid the fallout from his firing last week of James Comey, the director of the Federal Bureau of Investigation.

The uncertainty about Trump's future increased in the last 24 hours over allegations Trump had sought to end Comey's investigation into ties between the president's first national security adviser, Michael Flynn, and Russia, and even some Republicans were now calling for a deeper probe into possible obstruction of justice.

The result was the harshest sell off yet in U.S. stocks since Trump was elected and a jettisoning of positions that were tied to the notion that his policies would stoke economic growth and inflation.

"The Trump Trade is over as of today," Ross Gerber, co-founder and CEO of Gerber Kawasaki Wealth and Investment Management, who said they have been selling for the past 45 days and continued to be bearish on risky assets today. "We've seen cracks all year, but today, this is the first institutional selling we are seeing."

Indeed, some "Trump trades" have been unwinding for weeks, especially in the bond and currency markets where bets on inflation risks and economic growth prospects are most prevalent.

"This has created opportunities for investors," said Richard Benson, managing director, co-head of portfolio investments, Millennium Global Investments, London, who said they had been short U.S. dollars against European currencies. "And right now, we're looking at these opportunities."

On Wednesday, one key indicator of the level of inflation five years from now fell to its lowest since late November. Meanwhile, the U.S. dollar, which had surged more than 5.0 percent after Trump's election, was effectively back to its Election Day level.

The real pain trade on Wednesday, though, was in stocks. Through the end of last week the S&P 500 stock index had gained more than 12 percent since Trump won the White House, and while the index has seen one other day since last November's election in which it fell by more than 1.0 percent, Wednesday's drop of 1.7 percent was its largest one-day fall in eight months.

"It doesn't mean that institutions are saying: 'its time to leave the U.S.', but for various reasons it's time to go to the sidelines," said Michael Purves, chief global strategist at Weeden & Co.

Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities, said clients were "certainly concerned because it increases the uncertainty".

With Washington policymakers distracted by Trump's political problems, investors were betting on a longer timeline to get to tax reform.

"Immediately after the election, we asked our analysts to use lower forward-looking tax rates in their models, and now in the last couple of days I'm starting to think whether we should reverse that to assume the status quo for tax rates," said Edward Perkin, Chief Equity Investment Officer at Eaton Vance.

U.S. House Speaker Paul Ryan said on Wednesday that Republicans were determined to keep pursuing tax reform, although such efforts could be seriously hampered. Democratic Representative Jim Himes, a member of the House Intelligence Committee, told MSNBC that the "legislative agenda...(was) lying in ruins."

Investors have become increasingly bearish on US equities versus international assets in recent weeks, pulling a total of $11.2 billion from U.S.-based domestic stock funds, according to Thomson Reuters Lipper data, and instead stampeding into U.S.-based stock funds that invest in Europe.

“We have been contemplating an increase in international stocks to kind of hedge our U.S. equity bet," said Phil Blancato, CEO of Ladenberg Thalmann Asset Management in New York. "So we are very much remodeling our portfolios."

A longshot worry is the uncertainty that could be presented if Trump is actually impeached by the U.S. Congress. A small but growing number of Trump's fellow Republicans called for an independent probe of possible collusion between his 2016 campaign and Russia, and one mentioned impeachment.

Investors said that was not necessarily a market negative, if Vice President Mike Pence were to take over.

"Policy wise it might not make such a difference," said Frances Hudson, Global Thematic Strategist at Standard Life Investments in Edinburgh.

Article Link To Reuters:

World's 500 Richest People Lose $35 Billion From Trump Turmoil

Bezos falls to No. 3 position, $4.9 billion behind Gates; Facebook’s Zuckerberg is hardest hit with $2 billion drop.

By Brendan Coffey and Jack Witzig
May 18, 2017

The world’s richest people lost $35 billion Wednesday when global equity markets were rocked by political turmoil in the U.S., according to the Bloomberg Billionaires Index.

Bill Gates, the world’s richest person with $86.8 billion, lost $1 billion as shares of Microsoft Corp., his largest holding, tumbled 2.8 percent, the most in almost a year. Inc. co-founder Jeff Bezos, who came within $4 billion of taking the top spot from Gates earlier this week, dropped to No. 3 after losing $1.7 billion as shares of the online retailer slid 2.2 percent. Spanish retailing tycoon Amancio Ortega lost $355 million to end the day in the second position with $83.2 billion.

Global stock indexes tumbled as political turmoil enveloped the White House, with President Donald Trump’s ties to Russia and his firing of FBI Director James Comey under scrutiny. U.S. stocks posted their steepest declines since September, led by the Nasdaq Composite’s 2.6 percent slide. The MSCI All-Country World Index fell 1.2 percent, and bank stocks were the worst performers.

Facebook Inc. founder Mark Zuckerberg was hardest hit in the tumult, dropping $2 billion when the social media giant dropped 3.3 percent. Zuckerberg is the fifth-richest person on the planet with $62.3 billion, according to the index. Trump, the first billionaire to serve as U.S. president, has a net worth of $3 billion and doesn’t have a spot on the Bloomberg index, a daily ranking of the world’s 500 richest people. They have a combined net worth of $4.9 trillion, up $455 billion in 2017.

Article Link To Bloomberg:

Google Shifts Mobile Focus To Apps And Digital Assistant

By Julia Love
May 18, 2017

Mobile phone apps took center stage at Google’s annual developer conference on Wednesday as the search giant announced new features for its digital assistant and its popular photo app while devoting little time to the Android mobile operating system.

Addressing an audience of thousands of developers in Mountain View, California, Google executives delivered a broad-based update to their product portfolio which also included a slate of new features for the Google Home speaker, a job search tool and even a set of new virtual reality headsets.

In a sign of the ongoing strategic importance of Google Assistant, the company's artificial intelligence-driven, voice-controlled digital assistant, Google announced it would make the product available on Apple Inc’s (AAPL.O) iPhone, making a play for the higher end of the smartphone market and challenging Apple's Siri feature on its own devices.

What’s more, the assistant will soon be able to complete transactions and supply information about objects captured by the smartphone’s camera, executives said.

But several analysts noted that the emphasis on the assistant and other apps like photos and maps, which run on many types of devices, resulted in the company’s Android operating system -- long the cornerstone of Google's mobile strategy -- getting relatively little attention during the presentation.

That reflects a recognition by the search giant that the assistant and other apps will be increasingly important to its future, said analyst Jan Dawson of Jackdaw Research. The strategy helps the company sidestep some of the complications of developing new features for the vast Android ecosystem, where only a fraction of devices are running on the latest version of the operating system, he noted.

“This is partly a concession to the fact that whatever they put into Android, most users don’t see it for a couple years ... and a lot of their best, most attractive, most valuable users are going to be on other platforms,” Dawson said. “They need to put that functionality where users are.”

The Google Assistant debuted last year on the company's own hardware, and Google has gradually extended the tool to devices from other manufacturers running on its Android operating system.

Google, Microsoft, Apple and Inc (AMZN.O) are competing to establish the dominant voice-powered digital assistant, which many in the industry believe will supplant keyboards and touch screens as a primary way that users interact with technology.

"Humans are interacting with computing in more natural and immersive ways," Google CEO Sundar Pichai told the audience. "We’ve been using voice as an input across many of our products. We’ve had significant breakthroughs."

The company is also gaining traction with its photo app, which now reaches 500 million users regularly, Pichai said. To drive greater usage of the app, Google will now make suggestions to prod users to share images and allow them to order physical photo albums.

Pichai also announced the company will expand its search engine with a new jobs tab that will allow candidates to filter postings by criteria such as wages and commute time.

Google, which gets most of its revenue from its dominant search engine, also released a host of new features for Google Home, a speaker released last year. Users will soon be able to make phone calls using the device, and the HBO Now streaming service, owned by Time Warner Inc (TWX.N), will be integrated as well.

While Amazon’s Echo speaker has emerged as the most popular device in the category, Google repeatedly touted its ability to use artificial intelligence to identify multiple users, an edge it has over Amazon.

“Google was putting forward a message about artificial intelligence and how they are including the technology in virtually every aspect of their products and services,” said analyst Brian Blau of Gartner. “They really pushed that message hard.”

Article Link To Reuters:

The Key To North Korea Is Russia

Unfortunately, the idea of a grand bargain with Russia is less popular in Washington than ever before.

By Leonid Bershidsky
The Bloomberg View
May 18, 2017

The idea of a grand bargain between the U.S. and Russia is less popular in Washington than ever before. And yet one of the biggest foreign policy problems for the U.S. -- that of North Korea -- cannot be resolved without Russia's participation. In recent years, Russian President Vladimir Putin has made sure to rebuild a close relationship with North Korean dictator Kim Jong-un, and it's no longer enough to talk to China to mitigate the Stalinist state's aggressiveness.

Last Sunday, North Korea tested a ballistic missile that might be capable of reaching the U.S. military base on Guam. It fell in the Sea of Japan -- according to U.S. reports, just 60 miles south of the Russian port of Vladivostok. The White House said in a statement, "With the missile impacting so close to Russian soil -- in fact, closer to Russia than to Japan -- the President cannot imagine that Russia is pleased."

Putin's response was quick and unfriendly. While restating that Russia was against the proliferation of nuclear weapons, including to North Korea, he said on Monday:

We need to go back to dialogue with the Korean People's Democratic Republic, stop intimidating it and find peaceful ways of resolving these issues.

"Stop intimidating North Korea" is tougher rhetoric than that used by Chinese Foreign Minister Wang Yi in April, when he urged "all parties to refrain from inflammatory statements and deeds." Unlike Beijing's ostensibly conciliatory stand, the Kremlin blames the U.S. for the escalation. With that kind of full-throated support, it's no wonder Russia was first to receive Kim's lunar New Year's greetings this year, before China.

Given that North Korea doesn't have meaningful economic ties with any country but China makes honoring Russia even more surprising. Trade with Russia hasn't amounted to more than $100 million a year for more than a decade, though in the 1970's and 1980's, the Soviet Union was North Korea's biggest trading partner with up to 53 percent of its total trade turnover ($2.2 billion in 1990). The two countries have set a goal to increase trade to $1 billion a year by 2020, but the growth hasn't quite materialized yet.

Trade, however, isn't the best way to win trust in the land of the Kims, whose governing ideology, juche, is one of self-sufficiency. Russia has lately come through for the isolated country when it needed help.

In May, 2014, less than two months after the Crimea annexation and with Western nations seeking to punish Russia, Putin signed away 90 percent of North Korea's $11 billion debt to Russia, an amount comparable with the debtor state's GDP. The other 10 percent, according to the deal Putin signed, could be used for joint Russian-North Korean projects. That same year, Russia delivered 50,000 tons of wheat as humanitarian aid to North Korea.

The North Koreans are also helping with one of Putin's pet plans, reviving the Far East. About 50,000 North Korean citizens -- up from about 21,000 in 2010 -- work at construction sites and lumber yards in Russia that are under the open surveillance of the North Korean intelligence services. The North Korean state takes most of the pay they earn, but the remaining share is still so big by North Korean standards that competing for this work -- described by the United Nations and human rights activists as slave labor -- requires a bribe. If any of the workers get ideas and try to defect, Russian authorities hand them over. Russia's previous, pro-Western president, Boris Yeltsin, allowed some of the defectors to hide out in his country -- but those days are gone.

Russia is pushing to reduce North Korea's international isolation. In 2013, it finished renovating the railroad link between the two countries, and this month, ferry traffic opened between Vladivostok and the North Korean port of Rason.

Putin's Russia never does anything for free, and it can't hope to get any economic benefits from North Korea on a scale that might interest its oligarchy or its mammoth state companies. Like China, it's making political investments is a country seen as a buffer state separating it from the U.S. military bases in South Korea. No matter what Putin says about nuclear proliferation, he wants North Korea to be militarily strong. So to the Russian military, the North Korean ballistic missile didn't fall as close to Vladivostok as the White House said: It reported that the missile's flight terminated 310 miles from Russian territory.

Kim Jong-un knows his regime's continued existence depends on its credibility as a buffer. That makes any spontaneous act of aggression on North Korea's part highly unlikely: it would bring war right to the borders of Russia and China, rendering Kim useless to the two powers. He needs to rattle his weapons just loud enough to deter the U.S. from acting and remain useful to North Korea's bigger neighbors.

If that rattling is getting too loud for Washington, China isn't the only partner with whom to discuss it. Its economic leverage isn't so big in absolute terms that Russia couldn't take over some or even most of the financial burden China carries today. Moscow has positioned itself as the next in line for a deal with Kim.

But then, talking to the Russians is almost more toxic for the current U.S. administration than talking to Kim himself. That makes it all but impossible to stop North Korea from running its increasingly ambitious tests and stepping up its threats to the U.S. Nor is military intervention a good option without both China's and Russia's consent: For both, a U.S. strike would be too close to home.

Threatening anyone who helps North Korea with sanctions, as Nikki Haley, the U.S. ambassador to the U.N, did this week, isn't particularly effective: Western sanctions against Russia only made it more paranoid about the possibility of a Western attack and pushed it, among other things, to work closer with Kim.

Since 2014, Putin has tried to build a stock of things to sell to the U.S. in exchange for a free hand in the former Soviet Union, including Ukraine. He has leverage on the Syrian regime and the North Korean one, leverage in Iran and Libya. So far, he has found no takers. But avoiding a deal with him means trouble with his clients; unless the U.S. wants to risk using force in North Korea, it needs Putin's cooperation in resolving the crisis.

Article Link To The Bloomberg View:

Trump's Opponents Are His Only Hope

The president has made a watertight case for his unfitness for office. But he has friends in the media.

By Clive Crook
The Bloomberg View
May 18, 2017

Even before the latest startling development, I'd bet my West Virginia neighbors that President Donald Trump's support will soon collapse and, regardless of whether he manages to stay in office, the Republican Party will take a beating in next year's midterm elections. This amuses them very much, and they ask to be introduced to more people from Washington who think they know what they're talking about. You'll see, they say, Trump will be fine and the Republicans will increase their majorities next year.

I'd be spending my expected winnings right now, except for one thing: My neighbors have been right every time about Donald Trump's electoral prospects, and I've been repeatedly wrong. (It started with my confident prediction that Trump's disrespect for John McCain's military service -- "I like people who weren't captured" -- would stop the insurgent during the primaries.) By the time of the election, I'd half-way learned my lesson, and wasn't as surprised by the result as many, but my record isn't good.

Never mind. Things are now clearer. Since Trump took office, voters have surely learned enough to think the country has made a terrible mistake. Their opinion is crucial for the president's prospects of survival. His approval numbers are already poor, and at this rate will surely get worse. Once that happens, Republicans in Congress will start to desert.

And the bad stuff just keeps coming. Indeed, the egregious blunders of the past week -- the firing of FBI Director James Comey, sharing of classified intelligence with the Russians, and now the Comey memo -- disprove a view I'd taken seriously until recently: that Trump would be contained by the job and all that goes with it. Sit him in the White House and surround him with smart people, and let the dignity of the office civilize him. He'll learn to behave.

Well, he hasn't learned. He's the same incompetent braggart as before, only more so. Even if the president's powers are constrained -- as the courts and Congress have shown -- his personality and temperament can't be.

So I'm certain to win my bet. Right?

The thing that gives me pause isn't Trump, but his opponents. They've been the secret of his success throughout -- his great enablers. I maintain they're the reason he won the election. And sure enough, in their own misguided way, they're still pulling for the president.

From the beginning of Trump's time in office, Democrats and their allies in the mainstream press have been celebrating every misstep, putting the worst possible construction on every dumb comment, howling at every pratfall, one day hyperventilating and the next yucking it up -- all as if to tell Trump's supporters, "There you are, morons, you see we were right."

However justified, that chorus of contempt for Trump's supporters isn't going to encourage them to defect. It will allow them to believe -- also with justification -- that the press isn't dedicated to telling it straight on the firing of Comey or the sharing of intelligence with Russia or anything else Trump does. The refusal from the start to give him a chance (sorry for bringing that up again) continues to undermine his critics' credibility even though, by now, he's had his chance and blown it.

I still expect to win my bet. His opponents are a tremendous asset, never to be underestimated -- but Trump is still Trump. He looks beyond saving. My neighbors, in case you're wondering, will pay up with a smile. They're good people.

Article Link To The Bloomberg View:

'Bobby Three Sticks' Mueller To Probe Russia-Trump Imbroglio

By Mark Hosenball and Lawrence Hurley
May 18, 2017

Former FBI director and prosecutor Robert Mueller, known for his independence in high-profile government investigations, is taking on a new challenge in the midst of a crisis that threatens the presidency of the United States.

Mueller, 72, was named on Wednesday by the Justice Department to probe alleged Russian efforts to sway November's presidential election in favor of Donald Trump and to investigate whether there was any collusion between Trump's campaign team and Moscow.

President Trump said in a statement there was no collusion between his campaign and "any foreign entity."

Mueller is known by some as "Bobby Three Sticks" because of his full name - Robert Mueller III - a moniker that belies the formal bearing and no-nonsense style of the former Marine Corps officer who was decorated during the Vietnam War.

Democrats and Republicans alike praised his appointment and hailed his integrity and reputation.

Mueller was named to the post by Deputy Attorney General Rod Rosenstein. His investigation will run in parallel to those being carried out by the FBI and the U.S. Congress.

It would be difficult to fire Mueller, and past special counsel appointments have shown that the job comes with independence and autonomy.

Chicago federal prosecutor Patrick Fitzgerald was appointed during the George W. Bush administration in 2003 to a similar role to investigate the leak of the identity of Valerie Plame, an undercover CIA officer whose husband had criticized Bush administration policies.

Fitzgerald indicted I. Lewis "Scooter" Libby, a top aide to Vice President Dick Cheney. Bush granted Libby clemency from a prison sentence before he left office.

Robert Luskin, a Washington lawyer who defended Bush political adviser Karl Rove during Fitzgerald’s investigation, praised the choice of Mueller.

"I think it's good across the board," Luskin told Reuters. He described Mueller as "credible" and "independent" and said his appointment would be "good for the Department of Justice."

Mueller, known for avoiding political controversy, took a stand in 2004 when he and then-deputy attorney general James Comey threatened to resign when the Bush White House sought to reauthorize a domestic wiretapping program that the Justice Department had deemed unconstitutional.

In his new role as special counsel, Mueller will have wide latitude to take the investigation wherever he thinks it should go and can use the full range of Justice Department investigative tools, said Jack Sharman, an attorney who served as special counsel during a probe into the Whitewater real-estate investments of President Bill Clinton in 1995.

9/11 Attacks

Mueller was appointed director of the Federal Bureau of Investigation by George W. Bush a week before the Sept. 11, 2001, attacks on New York and Washington, D.C.

He was credited with transforming the FBI after Congress and an independent government commission established that the agency and the CIA had failed to share information before the attacks that could have helped thwart them.

At the FBI, Mueller put more resources into counterterrorism investigations and improving its cooperation with other federal agencies.

Mueller was chief of the Justice Department's criminal division before becoming FBI director. Among his most famous cases was the fraud and racketeering indictment of individuals associated with a politically connected Luxembourg bank run out of London and led by bankers from Pakistan and Abu Dhabi.

He also oversaw the investigation into the Pan Am airline bombing over Scotland and the drug case against former Panamanian dictator Manuel Noriega.

Mueller served 10 years as FBI chief under Bush and his Democratic successor Barack Obama, who then signed legislation to extend Mueller's FBI term for another two years.

He was succeeded as FBI director by Comey, who was fired by Trump last week.

In the wake of his firing, there have been media reports that Trump had asked Comey in February to end an FBI investigation into the president's former national security adviser, Michael Flynn. The reports cited a memo said to have been written by Comey documenting Trump's request.

There have been calls for months for a special counsel to oversee the investigation into any ties between Trump's campaign team and Moscow.

Ethics Requirement

Most recently, Mueller had worked at a major Washington law firm, Wilmer Hale, which presents a possible wrinkle for his new assignment.

The firm represents Trump's daughter Ivanka and son-in-law Jared Kushner, who have taken on White House jobs. It also represents Paul Manafort, a former campaign chairman who had ties to Russia.

Mueller left Wilmer Hale this week but faces a Justice Department ethics requirement that could bar him for a year from investigating anyone represented by his former firm.

Mueller may be able to obtain a waiver from the Justice Department's ethics officers or recuse himself from investigating certain individuals, leaving those inquiries to a deputy.

Richard Painter, an ethics lawyer in the George W. Bush administration who has been a vocal critic of Trump, said Mueller has good grounds to receive such a waiver.

Article Link To Reuters:

Conservatives Begin To Whisper: President Pence

With Trump swamped by self-inflicted scandals, Republicans find solace in the man waiting in the wings.

By Matthew Nussbaum and Theodoric Meyer
May 18, 2017

Not since the release of the Access Hollywood tape, in which Donald Trump bragged about groping women by the genitals, have some conservatives thought so seriously, if a bit wistfully, about two words: President Pence.

The scandals clouding Trump’s presidency — including, most recently, his firing of FBI Director James Comey, his alleged leak of classified information to Russian officials, and reports that he urged Comey to drop an investigation into a top aide — have raised once more the possibility that Trump could be pushed aside and replaced by Vice President Mike Pence.

“If what the [New York Times] reported is true, Pence is probably rehearsing,” one House Republican who asked not to be named quipped Wednesday. “It’s just like Nixon. From the standpoint that it’s never the underlying issue, it is always the cover-up.”

The still far-fetched proposition of removing Trump from office has increasing appeal to Republicans who are growing weary of defending Trump and are alarmed by his conduct in office. But such whispers are cringe-worthy for Pence and his aides, who have made an art of not upstaging the mercurial president. Pence’s press secretary declined to comment for this article.

On the campaign trail, Pence would shut down any conversations about the possibility of his own future bid should Trump lose, telling donors who raised the prospect that he was entirely focused on the race at hand. Aides said that sentiment was sincere — even if they engaged in some thinking about what Pence’s future could entail after a likely loss.

Still, some conservatives are hinting that Pence looks like a particularly good alternative right now, especially as the Justice Department moves ahead with a special prosecutor for the FBI’s Russia probe.

Erick Erickson, a conservative pundit who was a strong Never Trumper but then pledged to give the president a chance, wrote on Wednesday that Republicans should abandon the president because they “have no need for him with Mike Pence in the wings.”

And conservative New York Times op-ed writer Ross Douthat, argued that abandoning Trump now should be easier because someone competent is waiting in the wings. “Hillary Clinton will not be retroactively elected if Trump is removed, nor will Neil Gorsuch be unseated,” Douthat wrote in Wednesday’s Times.

The pining for Pence is nothing new, however. From Capitol Hill to K Street, the notion that many Republicans prefer Pence to Trump in the Oval Office is perhaps the worst-kept secret in Washington.

Just ask Republican lobbyists who have watched the Trump administration struggle to move tax reform, health care and other top priorities.

“I find it unlikely that Trump is going anywhere,” one GOP lobbyist, who spoke on condition of anonymity, wrote in an email. “That being said, Pence is well-liked on the Hill, fairly predictable, and doesn't stir up much unnecessary drama.”

A number of Republican lobbyists already view Pence as a source of stability in an otherwise tumultuous White House. Many of Pence’s top staffers — including his chief of staff, Josh Pitcock — worked for Pence during his years in the House and are deeply familiar with the legislative process. Other former Pence staffers from his House days are working elsewhere in the administration, including Marc Short, the legislative affairs director, and Russ Vought, deputy director of the Office of Management and Budget.

While Pence may not be as commanding a figure in Trump’s White House as Dick Cheney was in George W. Bush’s, Trump has leaned on him heavily. Lobbyists who set up meetings between Pence and their clients must warn them that the vice president may be an hour and a half late or have to leave after 10 minutes because Trump is constantly calling him into the Oval Office to confer with him, according to one Republican lobbyist.

But that doesn’t mean a Pence transition would be smooth. In the unlikely event that Trump is removed from office, Pence would assume the presidency amid a constitutional crisis. He could also be considered tainted by his past devotion to Trump.

Only once in American history has a president been forced from office by scandal, when Richard Nixon resigned amid Watergate. Ford assumed the presidency and sparked controversy by pardoning Nixon, a move that may have cost him the 1976 election but one that historians have since praised.

Ford, like Pence, had enjoyed a career in the House of Representatives and rose to a leadership position. There are other echoes, too.

“It’s almost an eerie comparison that a more mild-mannered, religious conservative Republican Gerald Ford came in,” said Douglas Brinkley, a presidential historian at Rice University. “He’s much like Pence in temperament and personality. He doesn’t have that acerbic side that Nixon and Trump had.”

And, like Ford, Pence “has made so few enemies,” Brinkley said.

“Having Pence in reserve is one of the few things, I think, that is calming Republican nerves,” he added. “It would just be a more mild-mannered Pence who never says anything offensive, who doesn’t take to Twitter, who goes to Church every Sunday.”

But unlike Pence, Ford was appointed to the job after the resignation of Vice President Spiro Agnew. Ford did not have the baggage of having campaigned for and championed Nixon.

Almost like a reminder of Pence’s political ambitions, news broke on Wednesday that Pence had formed a new leadership political action committee called the Great America Committee. It is unusual for a vice president to form his own PAC, as the vice president would traditionally merge his political operation with the Republican National Committee.

A spokesman confirmed the existence of the new committee and said it is being overseen by Marty Obst and Nick Ayers, two former Pence campaign aides and close confidants of the vice president.

Article Link To Politico:

Wall Street Gives Up On A 2017 Tax Overhaul

After building up expectations for sweeping action on tax policy, executives and analysts are now deferring their hopes to next year — or beyond.

By Ben White
May 18, 2017

Wall Street and corporate America view President Donald Trump’s bold agenda for a sweeping tax overhaul as largely dead for the year.

Executives, lobbyists and Wall Street analysts increasingly believe the administration — distracted by repeated crises while facing a short and crowded legislative calendar — will be unable to deliver on Trump’s promise to slash corporate and individual tax rates this year and ignite significantly faster economic growth.

The main hope now in corporate America and on Wall Street is that the White House and Congress manage to bypass a scary fight over raising the nation’s debt limit this summer, keep the government open and avoid any major foreign policy crisis.

“It is just completely unrealistic to think they can get a big tax reform bill done this year,” said Greg Valliere, chief global strategist at Horizon Investments. “They haven’t even agreed whether they are doing tax cuts or tax reform. They haven’t decided if it needs to be paid for or not and I don’t think they appreciate just how big a fight the debt limit is going to be.”

Stocks sold off Wednesday morning following the latest Trump blow-up over alleged remarks from the president to then-FBI director James Comey with the Dow off over 200 points in early trading.

The Wall Street outlook for overhauling the tax code this year took a hit when the House revived the effort to repeal Obamacare, sending the issue to the Senate where it will now consume precious legislative time and political capital.

And while Hill Republicans argue that Trump’s decision to fire the FBI director and other Russia-related scandals will have no impact on tax reform, the political firestorm has already slowed down movement on Capitol Hill and emboldened Democrats to try to block Republicans’ every move. And Wall Street analysts believe it will help push tax reform into 2018 and perhaps even beyond next year’s midterm elections.

“It’s very unlikely they can get tax reform done this year because the cleavages within the party on health care are very similar to those on taxes,” said Megan Greene, chief economist at Manulife. “And they say they want to do both corporate and individual rates and there’s no way they can do that by the end of the year. They will need a new budget to do tax reform through reconciliation and it’s not clear at all that they can pass that. And it’s going to be hard to get tax reform done next year because of the midterm elections so it may have to wait until 2019.”

In a recent note to clients, Goldman Sachs analyst Alec Phillips also suggested tax reform could get pushed into 2019. Further delays “could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years,” he wrote.

All the doom and gloom from Wall Street contradicts what Republicans are saying both publicly and privately.

They argue that while the Senate deals with health care, the House will push forward on tax reform beginning with a House Ways and Means Committee hearing on the issue on Thursday. While there are big arguments on details like a border tax and the need to be revenue neutral, there is large agreement on cutting rates.

“Yeah, it's going to get done,” House Speaker Paul Ryan said of tax reform on Fox News last week. “We totally agree on this.”

Tony Sayegh, a spokesman for Treasury Secretary Steven Mnuchin, who along with National Economic Council Director Gary Cohn is taking the lead for the administration on tax reform, said corporate America has it wrong and tax changes will happen this year. “We are very aware of what is in process right now. We are working with our partners on the Hill to get this done. We feel like we can certainly accomplish that.”

Lobbyists and Wall Street executives disagree and point mainly to the calendar. Only around 40 working days are left for the House before the monthlong August recess.

When Congress returns in September, it will face a pile of pressing deadlines including the need to raise the debt limit and pass a new government funding bill. Both are likely to need at least eight Democratic votes in the Senate.

Democrats are likely to use every opportunity to slow Republicans down and demand that any must-pass bill include a special prosecutor to look into allegations of collusion between Russians and the Trump campaign in 2016.

Republicans will also need to pass a new budget in order to provide a vehicle to do tax reform through a reconciliation process that would not require Democratic votes to pass. Both administration officials and senior Republicans aides on the Hill say this will be the path for tax reform and they do not expect to do much work with Democrats on the issue.

One senior Republican Senate aide said that while the party seems far away from being able to pass a 2018 budget, the measure could get wrapped into the debt limit hike, opening that path to tax reform. But that would likely require Democratic cooperation.

For lobbyists closely following the tax reform prospects on Capitol Hill, all this means any sweeping rewrite that could have a significant economic impact is highly unlikely this year.

“I still see a slight possibility that some slimmed-down version of a tax cut could get done late this year, but it’s probably an early 2018 event,” said a financial services industry lobbyist who declined to be identified by name contradicting the White House timeline. “What’s being talked about in meetings I’m having is just some targeted rate reductions and that’s pretty much it. Maybe they could do that but even then it’s probably next year.”

So far, the grim prospects for getting tax reform done this year has had little impact on a stock market that has shown remarkable resilience to every piece of Trump related chaos coming out of Washington.

The reason for this, analysts say, is that with the economy near full-employment and growth expected to rebound the rest of the year, there is no obvious and immediate need for a big tax cut package.

And economists largely agree that any set of rate cuts that eventually make it off of Capitol Hill would probably have only a minor impact on growth that would not be felt until 2019 at the earliest. If tax reform looked permanently dead, it could force a reckoning on Wall Street. But until then, investors seem patient.

“If markets suddenly thought this was totally dead, that’s a very bad story,” said Valliere. “As long as the process moves forward, however slowly, I think markets can handle that.”

The bigger risk in the short-term is that talks toward passing a funding bill and raising the debt limit late this summer bog down or the White House winds up in a diplomatic crisis with North Korea or another nation.

“I think there is room for a market correction because all of the upside seen after the election is already priced in,” said Greene. “It's just really hard to guess what the specific trigger will be.”

Article Link To Politico:

Bernanke: Always ‘Puzzled’ By Way Markets Ignore Political Risk Until ‘Last Moment’

Bernanke says Trump should renominate Janet Yellen to serve a second term as Fed chief.

By William Watts
May 18, 2017

The ability of financial markets to ignore deepening political turmoil in Washington and elsewhere has long puzzled former Federal Reserve Chairman Ben Bernanke.

The Dow Jones Industrial Average DJIA, -1.78% and the S&P 500 index SPX, -1.82%sank and the dollar DXY, +0.22% fell Wednesday as concerns about the fallout from Trump’s firing of Federal Bureau of Investigation Director James Comey and allegations the president leaked classified information to Russian officials finally began to take a toll. But stocks remain not far off all-time highs and had shown an ability to ignore a series of negative headlines over the past few weeks.

That’s not a new phenomenon.

“It always puzzled me a little bit,” Bernanke said In an onstage interview at the three-day, hedge-fund focused SkyBridge Alternatives Conference, or SALT, in Las Vegas. Financial markets have long shown a tendency to be “blasé” about political risks until the “last moment.”

Bernanke said he had previously doubted Trump’s ability to quickly move his policy priorities through Congress, arguing that the Republican sweep of the White House and Congress in the November elections belied divisions within the party.

Those divisions between populist Republicans and more mainstream party members were on display when the first version of a health-care bill collapsed and that those same dynamics will be in play on tax-overhaul efforts and infrastructure spending.

Bernanke recalled that financial markets had also largely ignored the fraught fiscal-cliff battle in the U.S. a few years ago as a looming default deadline approached. Markets also ignored uncertainty tied to Britain’s vote last June to exit from the European Union until it actually occurred.

The market view may reflect a global perspective that recognizes the president is only one part of the U.S. government and has only a moderate impact on growth while the global economy overall is doing better, Bernanke said.

Asked about persistently low market volatility, Bernanke said the phenomenon was “a little puzzling” given that there are “plenty of risks in the world.”

Bernanke said past work by economists Robert Shiller and John Campbell that argued the stock market tended to overreact to the news, showing more volatility than was justified by returns. “One possibility is that markets have wised up to that,” Bernanke said, but added that technical factors, including investor hedging strategies, may also be playing a role.

Bernanke, however, stuck to a relatively upbeat view on the economy, predicting at least a 50/50 chance the current recovery will last long enough to become the longest on record.

He also played down worries the Fed’s plans to begin shrinking its roughly $4.5 trillion balance sheet would inspire a repeat of the “taper tantrum” that sparked a spike in yields and a stock-market pullback in 2013.

Bernanke laid out what he said were key differences between the taper tantrum, which occurred in reaction to his signal that the Fed was preparing to halt asset purchases in the wake of the 2008-’09 financial crisis. The prospect of the Fed ceasing its purchases of Treasurys and mortgage-backed securities at the time also heightened expectations for interest-rate increases by the Fed and monetary tightening by other central banks, he said.

In contrast, the Fed has indicated that it might even temporarily slow the pace of rate increases when it begins to allow the balance sheet to slowly contract, Bernanke said. The Fed has worked to “divorce” the balance sheet issue from rate expectations, which should reassure market participants, he said.

Article Link To MarketWatch:

Trump’s Turmoil Won’t Kill The Market’s Rally

Strategists say political climate matters, but fundamentals matter more.

By Bob Sellers
May 18, 2017

Uncertainty is never good for the stock market — just ask anybody who lived through the Nixon presidency. So with the Trump administration in the deepening throes of political (and possibly legal) turmoil, is it starting to show up on Wall Street?

“The unemployment rate declining towards full employment levels is a great backstop for the economy and the markets,” says Peter Mallouk, CEO and chief investment officer of Creative Planning. “It allows for Trump to make some missteps along the way that won’t be immediately punished by the markets.”

Compare that with the 1970s, during the Watergate era, when the stock market fell 45% from its peak, a bear market that didn’t end until December 1974. It was Richard Nixon’s worst-case scenario, as “a third-rate burglary” led to congressional hearings, a special prosecutor, accusations of high crimes and misdemeanors and the eventual resignation of an American president.

But that political battle may have been secondary to concurrent economic problems, with growing unemployment, rising inflation, wage and price controls, the beginning of the oil crisis, and “probably more new regulations than in any other presidency since the New Deal” (according to Herb Stein, the chairman of Nixon’s Council of Economic Advisers).

This time, the economic scenario is completely different. The new president took office with low inflation, low unemployment, and a post-election stock market fueled by optimism that Trump’s pro-business agenda with tax reform and cuts in regulation would finally add strength to a feeble gross domestic product (1.6% in 2016).

“Net-net we believe Trump is still bullish for stocks,” says David Kudla, founder, CEO, and chief investment strategist of Mainstay Capital Management. “But his policies may be moderated somewhat and longer-in-coming than many might have thought in January.”

And that is part of the risk in the stock market. Most money managers believe the market has already priced in tax reform of some kind and cuts in regulation, but believe that Trump’s problems won’t permanently change the direction the financial markets are moving — at least not yet.

“He still has a net positive impact on the U.S. economy, and correspondingly, on the stock market,” says Kudla. “Businesses will certainly have less regulation over the next four years than during the past eight. The pendulum has now swung that way. Tax reform of some kind will get passed. Infrastructure spending will be hard to get through, but would also provide at least some stimulus.”

But while the stock market has priced in a pro-growth agenda, there are some poised to react if problems continue to mount for Trump himself.

Gerry Goldberg, CEO of GYL Financial Synergies, says, “The ability of the current administration to achieve any of its goals domestically or internationally is helped or hindered by its credibility. If we reach a tipping point where the capital markets conclude that forward progress is much less likely on tax reform and deregulation, we could see at least a partial reversal of the rally that was predicated upon those changes.”

And that may explain the recent pause in the markets, and today’s weakness, as some of the drama inside the Beltway unfolds.

“Political climate matters, but only some,” is the way Cal Brown, financial adviser at Savant Capital, looks at it. Brown, the author of “When Life Strikes: Weathering Financial Storms,” says “Basically, stocks are companies, and they all have their own individual stories.” He looks at Trump’s agenda the same way. “Tax cuts are good for stocks, but they’re not dependent upon tax cuts.”

Peter Mallouk is looking overseas if troubles continue domestically. “We see stocks as fully valued, pricing in low unemployment, higher earnings and substantial tax cuts. But we see limited downside if the full tax plan doesn’t pass. Overseas, we see substantial opportunity as higher yields, lower valuations and some strength point towards more upside. The geopolitical uncertainty is not significant enough to merit a pullback to our overseas allocation.”

Stephan Cassaday, president and CEO of Cassaday and Co., likes oversees investments as well. “We’re overweight in non-U.S. markets and believe that’s where the opportunity is.” But Cassaday also believes there’s a “megatrend” going on right now that will change our lives — and he’s investing in it: biotech.

“Biotech companies are working on cures for the things that killed our parents.” Cassaday envisions headlines of the future could include, “Cancer Cured!” And he doesn’t see anything on the political landscape changing that.

“No parent is going to say, ‘I don’t like this politician so I’m not going to buy this wonder drug for my son or daughter.’”

It’s the kind of insight that comes from someone who was around during Watergate. “We’re not changing anything we do,” he says. “There are always companies that are undervalued.”

Article Link To MarketWatch: