Wednesday, May 24, 2017

Wednesday, May 24, Morning Global Market Roundup: Moody's China Downgrade Rattles Asian Stocks, Aussie Dollar

Reuters
May 24, 2017

Chinese stocks fell and the Australian dollar skidded on Wednesday after Moody's downgraded its sovereign credit rating on China, adding to worries about the global impact of slowing growth and rising debt in Asia's economic powerhouse.

Shares elsewhere in Asia also slipped, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.3 percent, despite modest gains on Wall Street overnight.

Financial spreadbetter CMC Markets expected Britain's FTSE 100 to open slightly higher, Germany's DAX to start the day little changed, and France's CAC 40 to edge lower.

Japan's Nikkei stock index managed to end 0.7 percent higher.

"At the end of the day, overseas investors had been taking a cautious stance toward China, even before this, so it was not entirely surprising to the street," said Kyoya Okazawa, head of global markets, Japan at BNP Paribas Securities in Tokyo.

The move would likely have only a short-term market impact, he said.

The Australian dollar, regarded as a proxy for China due to the country's status as a major trading partner, was down 0.4 percent at $0.7450 after falling as low as $0.7439 after the Moody's announcement.

The offshore yuan slipped, but later recouped its losses. The Shanghai stock index also was off earlier lows but was still down 0.6 percent, while the blue-chip CSI300 index shed 0.4 percent.

Moody's cut China's rating by one notch to A1 from Aa3 in its first downgrade of the country in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

China's massive debt has been at the center of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.

Moody's has no specific timetable for re-visiting China's rating but will monitor conditions on a regular basis, Marie Diron, associate managing director of Moody's Sovereign Risk Group, told Reuters. She said the risks to China's financial system were "broadly balanced."

China's finance ministry said the downgrade by Moody's was based on inappropriate methodology, saying it was exaggerating difficulties facing the economy and underestimating reform efforts.

The downgrade would probably not have a much broader spillover impact on global financial markets, said Suan Teck Kin, economist for United Overseas Bank in Singapore, noting that Moody's forecasts for China's economic growth seemed "too pessimistic".

Chinese authorities have stepped up regulatory curbs in recent months to defuse financial risks and have cracked down on risky lending practices, with the central bank moving toward tighter policy. But the steps have been largely cautious to avoid braking economic growth too sharply.

The U.S. dollar pulled away from recent 6-1/2 month lows as investors pored over President Donald Trump's first full budget plan.

Containing no major surprises, the plan called for an increase in military and infrastructure spending but also cuts to social spending in areas such as healthcare and food assistance.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August.

"Of course we're not really sure of the details of the budget plan, and what form it will finally take, but it has given the market the perception that everything is moving forward again, after recent distractions such as 'Russia-gate'," said Mitsuo Imaizumi, Tokyo-based chief foreign-exchange strategist for Daiwa Securities.

Political turmoil following Trump's recent firing of FBI Director James Comey, who was overseeing an investigation into possible links between the president's election campaign team and Russia, had raised fears that his administration's promised tax reform and fiscal stimulus would be derailed.

Investors also were awaiting the minutes of the U.S. Federal Reserve's latest policy meeting, scheduled to be released at 1800 GMT on Wednesday.

"Expectations that the Fed will hike next month are also supporting the dollar. Though a hike is not a done deal, it is still widely expected," Imaizumi said.

Fed funds futures suggested traders saw a nearly 80 percent chance that the U.S. central bank would raise rates at its June meeting, according to CME Group's FedWatch program.

The dollar index, which tracks the greenback against a basket of six major rivals, edged up 0.1 percent on the day to 97.456, pulling away from its lowest levels since November plumbed earlier this week.

The dollar added 0.1 percent against the yen to 111.90, while the euro was down 0.1 percent on the day at $1.1173.

Oil prices modestly extended gains after rising in the previous session on expectations of an extension to OPEC-led supply cuts.

U.S. crude was up 0.2 percent on the day at $51.55 per barrel, while Brent crude futures were also up 0.2 percent at $54.27.

Spot gold slipped 0.2 percent to $1,248.65 an ounce.


Article Link To Reuters:

Oil Prices Rise As Market Expects Extended Production Cut

By Henning Gloystein 
Reuters
May 24, 2017

Oil prices rose on Wednesday, supported by confidence that an OPEC-led output cut aimed at tightening supply would be extended to all of 2017 and the first quarter of next year.

Brent futures rose to $54.28 per barrel, up 13 cents from their last close.

U.S. West Texas Intermediate (WTI) futures were at $51.57 a barrel, up 10 cents.

Both benchmarks have gained more than 10 percent from their May lows below $50 a barrel, rebounding on a consensus that the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, would extend their pledge to cut supplies by 1.8 million barrels per day (bpd) to March 2018, instead of just covering the first half of 2017.

"OPEC is meeting on 25 May with an extension of supply cuts at the top of its agenda. With oil stocks nowhere near OPEC's ... objective of the recent five-year average level, an extension of cuts seems all but a foregone conclusion," French bank BNP Paribas said.

BMI Research said that the OPEC-led cuts would only result in a balanced market this year, and that from 2018 onward markets would return to oversupply, albeit at a lower level than 2013-2016.

"Over a 5+ year horizon, oil price growth is in a structural slowdown, pressured by persistent supply gains," BMI said.

How Much Does Backwardation Help?


A key reason why markets have not tightened more has been U.S. oil production, which has soared by 10 percent since mid-2016 to 9.3 million bpd.

Benefiting from a market known as contango, in which future oil prices are higher than those for immediate delivery, U.S. drillers have sold future production in order to finance expanding output.

To stop this, analysts at Goldman Sachs and elsewhere suggest the price curve should be pushed into backwardation, where future oil prices are below current ones.

While backwardation would reduce inventories, it is less clear whether it can stop rising production.

"When you have backwardation, it tells you to drain your tanks and produce more in order to monetize your production and reserves. As long as you make money from oil production, you'll produce and sell as much oil as you can," said John Driscoll, director of JTD Energy Services.

Past forward curves <0> show that U.S. oil production rose at its fastest pace during times when prices were in backwardation (2011 to 2014).

Though prices were then higher, Driscoll said U.S. producers are now so efficient that they can live with a lower market.

"Break-evens for some of the U.S. producers are estimated at close to $35-40 per barrel," he said.

Instead of selling future production in order to finance prompt output when the oil price curve is in contango, Driscoll said shale drillers can now use backwardation to sell prompt production while buying into the cheaper back-end of the curve as a hedge.


Article Link To Reuters:

U.S. Financial Council Reimagined As Boon, Not Bane, For Wall Street

By Pete Schroeder and Lisa Lambert 
Reuters
May 24, 2017

The Financial Stability Oversight Council (FSOC), which brings together all U.S. financial watchdogs, used to be the scourge of Wall Street but under Treasury Secretary Steven Mnuchin it can serve to ease its regulatory burdens.

President Donald Trump has pledged to roll back legislation he believes stymies economic growth, but opposition in the U.S. Senate makes it hard for Mnuchin to tear up existing rules.

However, he can make it easier for banks to trade, invest and return capital to shareholders by changing how the laws are interpreted and enforced. Created by the 2010 Dodd-Frank reform to better identify emerging threats to the financial system, the council offers Mnuchin as its chairman a forum to hammer out a consensus about how rules are applied.

"FSOC's ability to prod regulators to do something they aren't otherwise doing can be incredibly powerful," said Dennis Kelleher, president and CEO of the Wall Street reform group Better Markets.

Using FSOC as a vehicle to promote deregulation is a volte-face for the council, which under President Barack Obama was a byword for tough financial oversight.

Mnuchin has already used a recent gathering of the council to kickstart an examination of the Volcker rule, which prevents banks from making speculative bets with their own capital.

"He has that forum, and it's clear that he's starting to use it," said Ian Katz, financial policy analyst at research firm Capital Alpha.

Mnuchin has said he supports the Volcker rule in principle, but would seek its clarification.

That in itself can serve to lighten the regulatory burden by reworking the definition of "proprietary trading," or holding banks to a less rigorous standard in terms of proving compliance with it. The five agencies in charge of implementing the rule are all represented on FSOC, providing Mnuchin with a forum to hammer out a common interpretation.

Wall Street has criticized the rule as unworkable, arguing it was impossible for banks to determine when a trade is purely for profit as opposed to creating market liquidity.

A spokeswoman for Treasury declined to comment but pointed to Mnuchin's interview with the Financial Times last month in which he said: “I intend to use FSOC as a very important tool as part of the administration’s policies.”

Common Interpretations


Mnuchin can also have the Council take another look at rules requiring banks to retain some risk when they securitize loans or get bank regulators to revisit existing capital rules that the industry has long insisted are too restrictive, banking lobbyists say.

The significance of FSOC’s focus will grow once Trump has appointed new heads of the individual agencies. His picks are already in place at the helm of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission, and he is expected to name new bosses for other key bank regulators later this year.

Mnuchin cannot force regulators to change or rewrite rules, but will have ways of cajoling potential dissenters.

For example, all FSOC members are required to sign off on an annual report identifying potential problems facing the financial system. Those who refuse to do it are required to publicly explain their position and so far no one has dissented.

Another, more acute power available to Mnuchin is frequently called "naming and shaming." The Dodd-Frank law gives the FSOC the power to identify a specific threat to the financial system, and direct the primary regulator on that issue to address it.

That regulator then must either enact the FSOC-recommended course of action within 90 days, or explain in writing why it did not. The mechanism, designed to eliminate any blind spots in financial oversight, has only been used once before, to spur the SEC to complete its long-stalled work on money market fund rules in 2013.

In the context of easing rather than tightening regulation, such a strategy could be applied, for example, to rules that can affect market liquidity, which in turn could be deemed a risk.

Past FSOC participants warn that such heavy-handed tactics would only be used sparingly.

"It’s going to be used judiciously. No one really wants to call out another agency," said Nellie Liang, who headed the Federal Reserve's Division of Financial Stability until her retirement in 2016.


Article Link To Reuters:

Renewable Energy Powers Jobs For Almost 10 Million People

Solar industry has 3.09 million people vs 1.2 million in wind; China employment at 3.6 million vs 777,000 in U.S.: Irena.


By Mahmoud Habboush
Bloomberg
May 24, 2017
Renewable energy employed 9.8 million people last year, up 1.1 percent from 2015, led by solar photovoltaic at 3.09 million jobs, according to the International Renewable Energy Agency’s annual report on the industry.

Growth has slowed in the past two years while solar photovoltaic and wind categories more than doubled their number of jobs since 2012, the first year assessed, Irena said in the report.

Here are some of the highlights from the report:

Global renewables employment has climbed every year since 2012, with solar photovoltaic becoming the largest segment by total jobs in 2016.



Solar photovoltaic employed 3.09 million people, followed by liquid biofuels at 1.7 million. The wind industry had 1.2 million employees, a 7 percent increase from 2015.


Employment in renewables, excluding large hydro power, increased 2.8 percent last year to 8.3 million people, with China, Brazil, the U.S., India, Japan and Germany the leading job markets. Asian countries accounted for 62 percent of total jobs in 2016 compared with 50 percent in 2013.



Renewables jobs could total 24 million in 2030, as more countries take steps to combat climate change, Irena said.


Article Link To Bloomberg:

Google Vs. Uber: How One Engineer Sparked A War

Anthony Levandowski started outside tech companies while working for Google, which alleges he took driverless-car secrets to a competitor.


By Jack Nicas and Tim Higgins
The Wall Street Journal
May 24, 2017

Anthony Levandowski, the former Google engineer at the center of a battle between the tech giant and Uber Technologies Inc., was never a typical employee. And for years, Google was fine with that.

Weeks after Google hired him in 2007 to work on a global photo database called Street View, Mr. Levandowski, then 27 years old, registered a startup to sell a sensor system to Google for the same project, according to public records and former employees of both companies.

For the next four years, Mr. Levandowski split his time between his day job at Google and the startup, 510 Systems LLC, an hour away in Berkeley, Calif., where he directed employees to develop technology related to his Google projects, including self-driving cars, according to former 510 Systems employees.

After Google discovered the side business, instead of reprimanding Mr. Levandowski for a potential conflict of interest, it ultimately bought 510 Systems for about $20 million.

Now Google parent Alphabet Inc. and Uber are embroiled in a legal fight over driverless-car technology, with Mr. Levandowski playing a starring role. The two firms, along with several other companies, are locked in a race to automate cars, a contest that could affect the future of transportation.

A look back at Mr. Levandowski’s nine years at Google shows an employee who sometimes operated at the edge of what a typical company would accept—even one like Google that encourages entrepreneurialism among its workers. While Google’s approach helps it create new businesses, it also can spark disagreements between the company and its employees over who owns certain technology.

Alphabet accuses Mr. Levandowski of stealing its driverless-car technology and bringing it to Uber, which he joined as its head of its driverless-car project last year after earning more than $120 million at Google. Alphabet has filed two arbitration claims against Mr. Levandowski and is suing Uber for allegedly conspiring with him.

Last week, the judge handling the civil lawsuit asked federal prosecutors to investigate Alphabet’s allegations that Mr. Levandowski stole the trade secrets.

Uber, a ride-hailing company, denies wrongdoing and is contesting the accusations in court. It isn’t clear how Mr. Levandowski has responded to the arbitration claims, which are private. Uber declined to make him available for an interview and he didn’t respond to requests for comment.

This account of Mr. Levandowski’s tenure at Google and simultaneous work for his own companies is based on interviews with a dozen former 510 Systems and Google employees, and on court filings and other public records.

Google encourages employees to spend 20% of their work time on side projects of their choosing that benefit the company, and it has created a so-called incubator for employees to found startups inside the company. Some eventually leave to start their own ventures, such as social-media firms Instagram and Pinterest Inc. Even Google’s co-founders, Larry Page and Sergey Brin, have launched their own outside companies in recent years, including firms developing flying cars and an airship.

Mr. Levandowski’s outside companies benefited Google for years. Technology developed by 510 Systems helped Google create its own maps and avoid paying for third-party data. When Google launched its self-driving car program in 2009, one of its first vehicles was a Toyota Prius that Mr. Levandowski and 510 Systems engineers had rigged up for a TV show.

The employment agreements signed by many Google employees bar them from starting outside companies that conflict with Google’s interests, such as online advertising. It isn’t known when Google learned about Mr. Levandowski’s initial side project, 510 Systems, or whether his employment agreement permitted his activities there.

Mr. Levandowki started other businesses later in his Google tenure, public records indicate, including an online game for betting on stock-market trends and a California factory building prefabricated housing. Two of the other later startups led to Alphabet’s claims against Mr. Levandowski and Uber.

Mr. Levandowski, who stands 6 feet 6 inches tall, was born in Brussels and came to the U.S. in the early 1990s, at age 14. As a teenager in Marin County, north of San Francisco, he created a digital map of his school and started a company to provide technical support for local businesses’ websites.

He caught the bug for robots as an industrial-engineering student at the University of California, Berkeley, where he made one with Lego pieces that could sort Monopoly money. He also began experimenting with driverless vehicles, organizing classmates to enter a 2004 Defense Department competition to race autonomous cars across the Mojave Desert. To save money, the team built a driverless motorcycle, dubbed Ghostrider. It crashed within seconds but is now displayed at the Smithsonian Institution.

Around 2006, before he joined Google, Mr. Levandowski was part of a digital-mapping project called VuTool, which used sensor technology developed for the Defense Department race.

Google’s Mr. Page was looking for a similar tool for its burgeoning maps service. He believed Google’s mission to “organize the world’s information” needed a lot more data from streets, according to employees who worked on the project, which became Street View.

Google’s team was struggling with an expensive high-resolution camera. Sunlight streaked through images. VuTool was moving faster by using off-the-shelf parts and a system built by Mr. Levandowski and a few classmates that combined information from multiple sensors.

Google hired Mr. Levandowski and the VuTool team in the spring of 2007. A few weeks later, Mr. Levandowski registered 510 Systems, named after Berkeley’s area code. He soon began selling his sensor-fusion system to Google via a middleman.

The black-and-yellow box became the brains of the Street View system. It synchronized information from multiple sensors, including cameras, satellite data and the cars’ wheels, so images gathered as the vehicles drove through neighborhoods would precisely match where they were taken.

During 510 Systems’ first several months, Google was its only customer. Former 510 Systems employees say the transactions occurred through a middleman that branded the devices, sold them to Google and eventually manufactured them directly. Google bought more than 100 over the first year. Former 510 Systems employees said they kept quiet about their high-profile customer, giving Google the code name Aspen.

Mr. Levandowski told few employees at 510 Systems about his Google job, although some figured it out because he often wore Google apparel, the former employees say. Fellow engineers on Google’s Street View team knew of Mr. Levandowski’s connection to 510 Systems, a former Google employee says.

Alphabet lawyers have suggested Google executives initially didn’t know they were buying technology from one of their own employees.

“You did not disclose to Google your involvement with 510 Systems…before Google discovered your involvement with them, correct?” an Alphabet lawyer asked Mr. Levandowski in a deposition last month, according to a transcript. Mr. Levandowski declined to answer, invoking his Fifth Amendment rights.

At 510 Systems, Mr. Levandowski appeared sporadically, often scheduling meetings with managers late at night, former employees say. He brought on his stepmother, Suzanna Musick, as chief executive to help manage the dozen or so employees. Former employees described Ms. Musick, a former consultant, as a competent manager but unschooled in the technology. Ms. Musick didn’t respond to requests for comment.

By 2008, 510 Systems’ devices were helping Google offer street-level images for dozens of U.S. cities. Then Google halted its purchases. It had reverse-engineered the system and built its own, according to employees of both companies.

By that time, 510 Systems was selling its sensor systems to surveying firms and later to Microsoft Corp. Through the middleman, 510 Systems sold Google camera rigs similar to the Street View ones for about 20 small planes Google used to take aerial images for its maps.

Mr. Levandowski’s passion for robots hadn’t faded. In 2008, he was asked to make a driverless vehicle to deliver a pizza for a Discovery Channel show. He formed another startup, Anthony’s Robots LLC, and assembled a few 510 Systems engineers to modify a Toyota Prius to make it drive on its own. Weeks later, the car—emblazoned with 510 Systems and Anthony’s Robots decals—drove over San Francisco’s Bay Bridge with a police escort and pizza inside.

Months later, in 2009, that car became a seed vehicle for Google’s driverless-car project, a bold new venture for a company based on internet search and advertising.

Over the next year, Mr. Levandowski quietly shifted 510 Systems’ focus toward driverless cars, pulling 510 Systems engineers onto driverless-car projects. 510 Systems quietly began supplying Google with self-driving technology, including a modified sensor-fusion box and a system that connected computers to a car’s steering wheel, gas and brakes.

Photographs viewed by The Wall Street Journal show three of Google’s self-driving vehicles at 510 Systems’ headquarters in late 2010.

The companies’ unusual relationship hardly registered with 510 Systems employees. “Amongst ourselves we said, ‘That’s a little strange, isn’t it?’” said former 510 Systems software engineer Ben Discoe. “But that was extent of it. We liked our jobs.”

At last month’s deposition, an Alphabet lawyer asked Mr. Levandowski: “You used confidential information from Google to help develop technology at 510 Systems, correct?” Then, “You brought Google Street View source code to 510 Systems…correct?” Mr. Levandowski invoked the Fifth Amendment.

Two former 510 Systems employees said in interviews Mr. Levandowski often would return from a day at Google and suddenly have answers to engineering questions the 510 Systems team had been struggling with.

One day in early 2011, 510 Systems employees awoke to an email from Mr. Levandowski calling a companywide meeting. At the headquarters, they lined up to sign a nondisclosure agreement at a desk manned by Mr. Levandowski. Then he announced Google was buying 510 Systems and Anthony’s Robots for its driverless-car program.

The 510 Systems team gathered at Google headquarters that afternoon for barbecue, beers and rides in self-driving cars. The mood soured when the deal’s details came out. Mr. Levandowski had sold the company for about $20 million, just below the threshold at which employees would have shared in the proceeds. Google eventually hired about half of the company’s 50 or so employees.

Mr. Levandowski signed a noncompete agreement that for two years barred any outside involvement in a variety of areas, including sensors, robotics and driverless cars.

The relationship between Google and 510 Systems “was completely tangled,” says Mr. Discoe, the former 510 Systems software engineer. “I guess the decision to be bought or not be bought was basically: Are we going to untangle this or are we just going to give up and merge it?”

More than five years later, the most valuable piece of the acquisition is 510 Systems’ lidar system, a laser sensor crucial to driverless cars because it allows them to effectively see their surroundings. The system was the predecessor to the lidar that Waymo, Alphabet’s recently renamed autonomous-vehicle unit, now uses on its most advanced driverless cars.

That lidar, one of Waymo’s most valuable technologies, also is at the center of the claims Alphabet has filed against Mr. Levandowski and Uber.

Alphabet has alleged that Mr. Levandowski continued his side dealings in violation of his noncompete agreement. In August 2012, a year after the 510 Systems acquisition, a new business making lidar was founded at 510 Systems’ former headquarters, a building owned by Mr. Levandowski, Alphabet alleges. Public records show the new company, Odin Wave LLC, was originally registered by Mr. Levandowski’s personal lawyer. That lawyer didn’t respond to requests for comment. At the time, Mr. Levandowski ran the lidar team at Google.

Mr. Levandowski quit Google in January 2016, days after launching his own driverless-car venture, Ottomotto LLC. Alphabet alleges that when he left, he took 14,000 confidential files about Google’s lidar system, and some top engineers. Mr. Levandowski then merged Ottomotto with the lidar business housed at the former 510 Systems headquarters, Alphabet alleges.

In August, Uber bought the new company for $680 million in stock. Court documents show Mr. Levandowski received more than $250 million.


Article Link To The Wall Street Journal:

Shale Is Just A Scapegoat For Weaker Oil Prices

OPEC's attempts to limit output are offset by a cooling of Chinese manufacturing.


By Jason Schenker
The Bloomberg View
May 24, 2017

When the Organization of the Petroleum Exporting Countries gathers in Vienna this week, members and non-OPEC oil producers are likely to extend the production cuts put in place in November as a way to shore up prices, which have been choppy this month. Whatever the final details look like, a mix of oil-bullish policy and jawboning are likely to be on the menu.

Oil prices have risen on trend since April 2016, but came under pressure in early May, and analysts once again pointed to U.S. shale oil production as the culprit. And while shale is a big deal, there wasn’t a major change in output that triggered the significant oil market selloff starting May 2. After all, the shale story has been playing out for some time, and oil rig counts are up around 125 percent since May 2016.

The focus on the supply side of the market to explain this recent selloff was misguided because this time, it was demand that engendered concerns: The April Chinese Manufacturing Caixin PMI, which was released late on May 1, fell to the slowest pace in seven months.

China is the critical marginal swing player for oil demand growth and consumption, and the weak Chinese manufacturing PMI -- and its implications for oil demand growth -- initiated the selloff in WTI crude oil prices that started with a close below a critical trendline that had been in place since April 2016 (diagonal line in blue). Although oil prices have risen since the early May selloff, they remain under pressure -- and traders will be taking their cues from the action in Vienna this week.



The stakes are high and traders will not want to be steamrolled by an OPEC decision designed to support oil prices. This sets up oil prices up for moves higher, especially since the OPEC gang and non-OPEC oil producers have all gotten on the same page. Their decision this week will be important because these 25 countries account for more than 55 percent of global oil production. But there is a debate over extending their oil production cuts.

The Saudis have borne the brunt so far, and some question how long they would be willing to make such a sacrifice. First, even if they lose out on near-term oil revenue from selling fewer barrels, they are not losing the oil, which they could still sell in the future -- and likely at a higher price once global oil market supply, demand and inventory dynamics have rebalanced.

Plus, those who think the kingdom won’t hold the line are overlooking one critical fact: Saudi Aramco is gearing up for an initial public offering. By reducing production to support oil prices, the Saudis are making a calculated bet that logically prioritizes balance sheet over income statement. Sacrificing some current revenue to support oil prices ahead of its IPO could boost the valuation of the entire company -- and of the shares for sale. Any corporate executive in the commodity world would willingly sacrifice short-term income losses as a way to significantly improve a company’s balance sheet ahead of an IPO. And Saudi Aramco’s worth comes from oil, which will likely be priced noticeably higher at the time of the IPO than it is now.

This week’s meeting of OPEC and non-OPEC oil producers will draw attention to a likely price-bullish supply story for oil. But next week, traders will again turn their attention to global oil demand fundamentals. At the top of the list will be the May Chinese Caixin manufacturing PMI, which will be released on the evening of May 31 in the U.S. Chinese manufacturing is a strong proxy for the pace of China’s economic expansion, Chinese oil demand growth, and global growth. As such, a decline of the Caixin PMI below 50 would represent a contraction in monthly Chinese manufacturing activity -- and it could imply slower global economic and oil demand growth. That would be bearish for crude oil prices in the near term, regardless of the OPEC policy decision this week.

Even if the May Chinese PMI falls below 50, expect a trend of monthly Chinese manufacturing expansions to accompany a likely modest acceleration of global growth over the next two years. This should support oil demand growth -- and prices -- on trend, especially if OPEC and non-OPEC oil producers rein in production at the meeting on May 25 to allow the global oil market more time to rebalance global oil supply and demand.



Article Link To The Bloomberg View:

Goldman Sachs: Trump's Proposed U.S. Oil Reserve Sale Not An Issue For OPEC

By Nithin Prasad
Reuters
May 24, 2017

President Donald Trump's proposal to sell half of the U.S. Strategic Petroleum Reserves (SPR) will likely have little impact on OPEC's efforts to reduce a global oil glut, Goldman Sachs said on Tuesday.

The White House budget, delivered to Congress on Tuesday, aims to start selling SPR oil in fiscal 2018, which begins on Oct. 1. Under the proposal, the sales would generate $500 million in the first year and gradually rise over the following years.

Goldman Sachs said such sales would only average around 110,000 barrels per day annually through 2027, 66,000 bpd between 2018-2020 and just 25,000 bpd this year.

"This is negligible relative to both the size of the OPEC cuts of 1.7 million bpd and the global oil market of 98 million bpd," the bank said in a note.

The Organization of the Petroleum Exporting Countries (OPEC) meets in Vienna on Thursday to consider whether to prolong cuts to reduce a global glut of crude. OPEC and other producing countries including Russia have cut output about 1.8 million bpd in the first half of 2017.

Goldman Sachs said the proposed SPR sales would increase the logistical strains on the U.S. Gulf Coast, which is already struggling with higher shale production.

The U.S. SPR, the world's largest, holds about 688 million barrels of crude oil in heavily guarded underground caverns in Louisiana and Texas. Congress created it in 1975 after the Arab oil embargo caused fears of long-term motor fuel price spikes that would harm the U.S. economy.


Article Link To Reuters:

Ford’s Turmoil Is Not About Tesla

GM doesn’t kid itself that ‘mobility’ will be the salvation of car building.


By Holman W. Jenkins, Jr.
The Wall Street Journal
May 24, 2017

Now let’s consider the defenestration at Ford Motor Company of Mark Fields. Ford’s stock price under his three-year leadership has been down 37%. Tesla’s is up nearly 50%. This has been all the explanation the media needs.

A New York Times report lays the meme on thick, blaming the car efforts of “Google, Apple, Uber and not least Tesla, the electric-car maker now valued more highly than any of the Detroit giants. The upheaval at Ford, the nation’s No. 2 auto maker by sales, after G.M., reflects the challenges that lie ahead for companies that cannot adapt to that new landscape fast enough.”

Really? Is that really what’s happening? Then why is Fiat Chrysler, a notable laggard compared with GM and Ford in all the gee-whiz categories, enjoying the best share performance of all—up 60% in the past year?

The theory falls even flatter with a simple thought experiment. Suppose GM or Ford burned cash the way Tesla does, putting off for the long-term any hope of profits. Would the market applaud and give either a Tesla-like multiple? Not in a million years. The people like Mr. Fields and GM’s Mary Barra who run car companies aren’t dumb. If they could mint stock-market wealth by investing heavily and not worrying about profits, they wouldn’t need to be asked twice.

To continue with the now-standard narrative, GM’s stock price has held fairly steady while Ford’s has dropped so this must mean GM is doing a better job of not falling behind Tesla, Google, etc.

Here’s the truth about GM. It’s valued on the profits it generates from cars and trucks—mostly trucks. Its diversion of a few billion in capital toward autonomy, ride-sharing, electrification, etc., is looked on indulgently by investors because they see what’s going on. Such investments are partly a brand-burnishing accompaniment to hardheaded business decisions to withdraw from unprofitable markets like India, Russia and Europe, and to minimize the burden of manufacturing profitless small cars for the domestic market under U.S. fuel-economy regulations.

It’s the sense that GM’s Ms. Barra is shedding unprofitable cost structures. It’s the sense that she is focusing GM on those geographical and product markets (trucks, SUVs) that can provide acceptable returns. This is why GM is perceived as playing the underlying game better—the underlying game being all about capital efficiency and rationally maximizing shareholder value.

At Ford, Mr. Fields also tried to minimize small-car burdens, by shifting small-car production to Mexico. Alas, his plan ran into Donald Trump. And, like GM, he understood that Ford’s profits and persistent competitive advantage come from SUVs and pickups, especially the F-150. Alas, its billion-dollar bet on aluminum for its best-selling pickup looked to many like a move to placate fuel-economy regulators, not to create commensurate value for Ford pickup buyers in a time of cheap gas. Such choices on so crucial a product naturally give rise to doubts.

The real problem became glaring every time Mr. Fields and company chairman Bill Ford opened their mouths in the past year. They kept saying, in answer to investor worries about lagging profits and the company’s long-term viability, just wait for the fat margins that our post-car businesses like “mobility” will generate.

When they heard this, shareholders were rightly terrified that Ford had lost the plot that GM leadership has been so undeludedly attuned to.

The new guy, former furniture executive Jim Hackett, gives mixed signals. His talk of faster decisions, attention to efficiency, and rethinking the small-car burden all sound good. But though he has been a director since 2013, his executive career at Ford only started a year ago as overseer of its mobility division—i.e., ride-sharing and all that.

It isn’t that autonomous driving, battery technology and car-sharing won’t affect the industry’s future. But these new technologies will be available to everyone playing in the market. They won’t be anybody’s unique competitive advantage. Ford’s meal ticket will remain its enduring strength in designing and assembling complex, consumer-ready machines. And its bread-and-butter trucks and SUVs will be the least affected. Yes, technology will transform even these vehicles. What boat owner won’t want computerized help in keeping the trailer straight when backing up? But these will remain vehicles that suburban and exurban Americans will want to own and drive themselves (and cherish) for a long time to come.

GM’s leaders don’t kid themselves or their shareholders that profits from new “mobility” businesses will be the salvation of the old, metal-bashing business. Making vehicles needs to be profitable in its own right. Ford shareholders want to know that Ford’s leadership understands this too.


Article Link To The Wall Street Journal:

$25 Oil Is Coming, And Along With It, A New World Order

By Oriel Morrison
CNBC
May 24, 2017

The world as we know it, will be no longer. The balance of power on a global scale will shift. All in the next decade.

Sounds dramatic right? But independent think tank RethinkX believes it to be true, because of rapid advances in technology, and specifically the advent of self-drive or autonomous cars.

First and foremost, RethinkX co-founder and Stanford University economist and professor Tony Seba told CNBC's Street Signs that the rise of self-drive cars will see oil demand plummet, the price of oil drop to $25 a barrel, and oil producers left without the political or financial capital they have today.

"Oil demand will peak 2021-2020 and will go down 100 million barrels, to 70 million barrels within 10 years. And what that means, the new equilibrium price is going to be $25, and if you produce oil and you can't compete at $25, essentially you are holding stranded assets," Seba said.

"At $25 a barrel, that means deep-water, sands, shell oil, fields, most are going to be stranded, and also all the refineries and pipelines associated with these expensive oils are also going to be stranded. And that is going to reshape worldwide oil, geopolitics and so on."

It's a big call, right? But if you look at what's behind Seba's premise, surprise, surprise, it comes down to money.

He says we are not going to stop driving altogether, just switch to self-drive electric vehicles, which will become a much larger part of the sharing economy. And these electric vehicles are going to cost less to both buy and run.

"The day that autonomous vehicles are approved, the combination of ride hailing, electric and autonomous means that it's going to be ten times cheaper, up to ten times cheaper, to use a robot taxi, transport as a service car, than it is to own a car. Ten times."

Investment Case


Interestingly enough, if you believe this thesis, you may want to look at selling out of any exposure you have to car parks. "In fact what is going to happen, in 80 per cent or maybe more, parking spaces are going to be vacant. Because we are going to have, fewer cars on the road" Seba says.

And given that $25 forecast for oil, you certainly want to look at selling oil, and expensive oil producers. Oh, and sell the car makers that are slow to adapt too, given there will be no more petrol or diesel cars, buses and trucks sold anywhere in the world within 8 years. Which also means no more car dealers by 2024.

And wait, you can sell insurers too, as the cost of car insurance will drop dramatically when you take human error out of the equation, and a much lower direct ownership of vehicles in general.

But, according to Seba, it is time to look at buying into anything that will help to produce and manufacture the next generation of cars, which are "computers on wheels."

He says to look at companies that make the operating system, the computer platform, the batteries, mapping software, and those that adapt to the new environment.

"Imagine a Starbucks on wheels. Essentially transportation is going to be so cheap, it's going to be essentially cheaper for Starbucks to run around and take me to work, which is, you know, 60 kilometers away, and give that transportation for free, in exchange for going to buy coffee in that hour of commute."

There is some good news for economic growth too. The savings households make on cars, will drive higher consumer spending in the U.S., which in turn will drive business and job growth. Seba forecasts that productivity gains will boost GDP by an additional $1 trillion.

But on the other hand, outstanding auto loan debt in the U.S. stands at more than $1 trillion. And there are those who see the U.S. subprime-auto market as a big problem already.

Josh Jalinski, president of Jalinski Advisory Group told CNBC's Street Signs that it's a huge risk. "We have a potential auto subprime crisis looming in America, the likes we haven't seen since 2008. … I see the car subprime loan debacle as something that could be the catalyst of upending the Trump train."

Oil And Cars

Seba is not alone in his predictions, although others believe the shift will take longer, and will not be so dramatic.

China and India are accelerating the adoption of electric vehicles. China wants to get electric, plug-in hybrids and fuel cell cars to account for 20 per cent of all auto sales by 2025, while India aims to electrify all vehicles in the country by 2032.

But as always with any thesis, there are those who argue for the other side. Oil majors are the obvious ones, with recent reports from both ExxonMobil and BP's suggesting electric cars will comprise less than 10 per cent of the global car fleet by 2035.

As for the auto industry itself, in the latest moves, Ford announced a new CEO, James Hackett, the head of its self-driving subsidiary Ford Smart Mobility LLC. That moves speaks for itself.

Also Monday, Toyota Research Institute ramped up their investment, teaming up with MIT Media lab and five other companies to explore blockchain technology for the development of driverless cars.

And of course, there is the market interest in Tesla. The Elon Musk-backed electric automaker now has a bigger market cap than both Ford and GM.

Trip Chowdhry, managing director and senior analyst at Global Equities Research, points out that while some people think Tesla is an Auto company, it is not.

"It is a cloud computing company, it's a machine and an artificial intelligence company, it is an app company, it is an energy company, and just an automobile is nothing more than a laptop on four wheels."

One point that is agreed, is that the auto industry will look vastly different in the future. The question is, just how long will that change take, and who is going to successfully adapt.


Article Link To CNBC:

Trump’s ‘Draconian’ Budget Barely Dents Spending Increases

By Chris Edwards
The New York Post
May 24, 2017

President Trump issued his first federal budget Tuesday, and critics have been quick to call the proposals cruel and heartless. It would cut federal spending by $3.6 trillion over the next 10 years, which does sound massive. But consider that total spending over that period is expected to be an unfathomable $53.5 trillion, and so Trump’s reforms would be a reasonable 6.7 percent reduction.

Critics like to call the cuts “draconian” — one non-profit even said it was “taking us back to the Stone Age” — without acknowledging that they are a drop in a bucket compared to the overall growth in spending in the past decade.

The 2007 federal budget was $2.8 trillion. In 2016, it was $3.85 trillion — an increase of 37.5 percent.

Overspending by the last occupant of the White House caused federal debt to roughly double from $10 trillion to $20 trillion. That was a cruel and heartless policy because it imposed huge costs on young Americans. Their prosperity is undermined by ongoing borrow-and-spend policies. We don’t know whether Trump will end up being more fiscally responsible than President Obama. But he does get credit for challenging the status quo in his budget and pursuing belt-tightening across a range of federal programs.

The plan would cut Medicaid, the huge health program for low-income families. Medicaid spending exploded from $118 billion in 2000 to $389 billion today because there are few incentives for cost control in the program. State governments are rewarded for expanding the program with more federal aid, which makes no sense. The Trump budget proposes ways to cap each state’s federal aid payment.

The food stamp program is also on the chopping block. The program’s cost has soared from $18 billion in 2000 to $71 billion today. Yet demand for the program should have plunged in recent years, as the U.S. unemployment rate has fallen to 4.4 percent. The Trump budget would tighten work requirements and share program costs with the states.

The budget would reform Social Security Disability Insurance. This program has also grown excessively — from $56 billion in 2000 to $144 this year. A key problem is that SSDI discourages disabled Americans who can work, and often want to work, from entering the labor force. The Trump budget would change program rules to encourage work, while also cutting the program’s large fraud problem.

Trump targets the excessive benefits paid to federal workers. The Congressional Budget Office found that federal workers receive benefits 47 percent higher, on average, than comparable private-sector workers. Unlike the vast majority of private workers, federal workers receive both a defined-contribution and a defined-benefit pension. Trump’s budget would cut the latter.

The earned income tax credit is a spending program that has soared in cost from $32 billion in 2000 to about $70 billion today. The program is plagued by an error and fraud rate of more than 20 percent, and the budget would generate savings by tackling that waste.

President Trump campaigned against crony capitalism, and he is following through with cuts to farm subsidies. Farm aid skews toward wealthy households. In 2015 the average income of farm households was $119,880, which was 51 percent higher than the $79,263 average of all U.S. households. The budget would tighter the income limits and the per-farmer payments on the subsidies.

Finally, the Trump budget would cut a wide range of so-called discretionary programs. Many of these programs — such as education and housing subsidies — are properly state and local responsibilities. If the states believe that programs are crucial, they can pony up the funding themselves. There is no magic money tree in Washington, as the $20 trillion federal debt makes clear.

Trump’s budget would increase spending on defense, infrastructure, paid leave, and a few other items. But it would cut overall projected spending substantially. The plan would eliminate the budget deficit within a decade and would spur economic growth by encouraging more people to join the labor force.

Many members of Congress are denouncing and dismissing the proposed cuts, but they are in denial of the large reforms needed to ward off a Greek-style financial crisis in this country. We are headed in that direction with business-as-usual budgeting in Washington. The Trump budget is a challenge to Congress to start paring back our dangerously bloated welfare state.


Article Link To The New York Post:

Trump Is Right: Fight Against Terrorism Is Battle Of ‘Good Vs. Evil’

By Michael Goodwin
The New York Post
May 24, 2017

In his speech in Saudi Arabia, President Trump called on his Muslim audience to unite “in pursuing the one goal that transcends every other consideration. That goal is to meet history’s great test — to conquer extremism and vanquish the forces of terrorism.”

That challenge could have been drama enough for the occasion, but Trump didn’t stop there. He went on to frame the great test as a “battle between good and evil.”

As if to concede the point, evil responded quickly with the savage attack in Manchester, England, targeting innocent children and teenagers, most of them girls, with a nail bomb. Evil is as evil does.

The sickening, celebratory claims of responsibility by Islamic State underscore the stakes. While it is important to investigators whether the suicide bomber, Salman Abedi, acted alone or had help or even direction from Islamic State, those are not the most important distinctions in the larger picture.

Whatever the details, it is vital to see the battle exactly as Trump described it. Good versus evil. There is no other way to fight and defeat this enemy.

And since we’re being honest, let’s admit that evil won the day in Manchester.

Using evil as an explanation for malevolent human behavior has gone out of fashion in much of the West, with the religious underpinnings making secularists uncomfortable. Yet Trump was correct, and has been consistent, in describing the battle against contemporary terrorism in fundamental terms.

Anything else is misleading mush or a version of the sophistry favored by President Barack Obama. His determination to divorce Islam from terrorism wasn’t limited to splitting semantic hairs. His denial took political correctness to a new level, misshaping American policy and public debate, and the result is a disaster of wasted time and lives.

For eight years, Obama insisted that any acknowledgment that terrorists were acting in the name of Islam was to condemn all Muslims. It didn’t matter to him that many Muslims, including Islamic scholars and leaders from around the world, said he was wrong and that the obvious link had to be confronted to be defeated.

The president who always knew best wouldn’t budge, and after every domestic attack, law enforcement was sent on obligatory searches for other motives, leading to such ridiculous claims that the Fort Hood massacre was a case of “workplace violence.”

Even before the toll was known in San Bernardino and before the husband-and-wife terrorists were killed by police, Obama spoke from the Oval Office about the need for stricter gun control, urging Congress to pass “common sense gun safety laws.”

Later, it was revealed the murderous couple, Syed Rizwan Farook and Tashfeen Malik, carried out the attack, killing 14 of his colleagues and wounding 22, in the name of Islamic State.

Similarly, following the attack in a gay club in Orlando, Fla., where Omar Mateen killed 49 people in the largest mass shooting by an individual in American history, Attorney General Loretta Lynch said Mateen’s true motive “may never be known.”

In the real world, Mateen’s motive was crystal clear. He may also have hated gays, but he stopped his rampage long enough to call 911 and declare his allegiance to Islamic State and its leader, Abu Bakr al-Baghdadi.

Yet Lynch was so stubborn in her denial that she had the Justice Department redact al-Baghdadi’s name and the mention of Islamic State from a transcript of Mateen’s three calls that night. After an uproar, Justice released the full transcript, saying it had acted to avoid giving the terror group additional publicity.

In fact, it acted to avoid revealing inconvenient truths.

Trump, of course, is nothing if not the anti-Obama, and he is reversing his predecessor’s policies in word and deed. Instead of the pinprick airstrikes which Obama used to contain Islamic State, Trump is unleashing the military to destroy it, with one report saying the number of attacks is up 50 percent.

The president also used the word “evil” five times in his Saudi speech, including calling jihadists “the foot soldiers of evil.”

Nor did he shy away from religious references, saying terror’s victims were Christians, Jews and Muslims, and that “Terrorists do not worship God, they worship death.”

Later, he said, “If we do not stand in uniform condemnation of this killing — then not only will we be judged by our people, not only will we be judged by history, but we will be judged by God.”

The horrible attack in Manchester illustrates why Trump’s effort to more honestly define the enemy and crush it is a necessary break from Obama’s halfhearted evasion. Trump is acknowledging the religious context and offering a potential solution by helping to create a Muslim version of NATO.

In theory at least, it is a global response to a global problem and challenges Muslims to take the lead in defending their own societies and religion. Bluntly telling his audience of representatives from 50 Muslim countries that they must decide which kind of future they want, he said, “it is a choice America CANNOT make for you.”

As it stands now, the terrorists are shaping the battlefield by launching spin-off groups in a number of countries. They pick when and where to attack, putting isolated governments in the position of always playing defense.

One result is that weak Mideast and African governments are in danger of being overthrown, or watching helplessly as terrorists carve out vast territories of control. From Islamic State to Boko Haram, the consequence is a sea of suffering and death.

Another result of the franchising of terror is that law enforcement and intelligence agencies in North America and Europe cannot keep pace with the mounting number of threats and plots. There are simply too many jihadists in the pipeline.

Abedi, the Manchester bomber who was born in the UK to Libyan refugee parents, fits the pattern. Neighbors told reporters he had grown a beard and taken to reciting Islamic prayers loudly in the street in the weeks leading up to the attack.

Unfortunately, he fits another pattern as well. Reports say he was known to law enforcement, which is consistent with virtually every major attack carried out in Europe and the United States.

It is long past time for authorities to accept the fact that jihadists such as Mateen and Abedi and the Boston Marathon bombers cannot be stopped by the same police tactics that work with burglars and car thieves. “The foot soldiers of evil” must be dealt with accordingly.

The sooner we acknowledge that reality, the sooner the forces of good can prevail. And only then can parents send their children off to concerts without fear of unspeakable horror.


Article Link To The New York Post:

After The Manchester Terror Attack: What Comes Next?

This has brought security back to the forefront of Britons’ minds.


The National Interest
May 24, 2017

President Donald Trump has emerged as an unlikely source of comfort for many Brits today. America’s commander in chief is widely regarded here, as everywhere else, as a dangerous fool—yet his response to last night’s terrorist attack at a pop concert in Manchester, in the north of England, has been well received by shocked and saddened Britons. “We stand in absolute solidarity with the people of the United Kingdom,” he said. “So many young beautiful, innocent people living and enjoying their lives murdered by evil losers in life. I won’t call them monsters because they would like that term. They would think that’s a great name. I will call them, from now on, losers, because that’s what they are. They are losers. And we will have more of them. But they are losers, just remember that.”

The strange vapidity of that response struck a chord with the English because we have almost nothing left to say about terrorism: impotently calling terrorists “losers” or “cowards” is just about the only thing that gives us satisfaction. The other we do is channel our inner Churchills and vow “they will never win.” Theresa May did that, rather well, outside 10 Downing Street earlier this morning:

"At terrible moments like these it is customary for leaders, politicians and others to condemn the perpetrators and declare that the terrorists will not win. But the fact that we have been here before, and the fact that we need to say this again, does not make it any less true. . . . Today, let us remember those who died and let us celebrate those who helped, safe in the knowledge that the terrorists will never win—and our values, our country and our way of life will always prevail."

May is an old hand at terror response, having been home secretary for six years before she became prime minister. She knows that people want reassuring platitudes when they are scared. She has suspended her general-election campaign—which is right and proper, although nobody in Westminster will fail to notice that the timing is politically useful for her. May is widely expected to win a landslide when Britain goes to the ballot on June 8, but her campaign has stuttered badly in recent days. Her party manifesto has been much derided, and only yesterday she performed a humiliating volte-face over her controversial social-care proposals (a.k.a. the “dementia tax”). Now, hostilities will be reignited against her Labour opponent Jeremy Corbyn, who is about as “soft on terror” as any major political figure in Western politics today. Corbyn makes Bernie Sanders look like John Bolton when it comes to handling security issues.

Once the initial flushes of shock, indignation and defiance have passed, and people have stopped sharing Donald Trump’s speech on social media, we Britons will have to face up to the concern that our terrorist problem may be a lot worse than we like to think. In recent years, the British have looked at the many terror incidents that have taken place in France, Belgium and Germany and thanked our lucky stars that our brilliant security services know how to keep us safe. Our attitude has bordered on hubris. Unlike the other Europeans, Brits are more than willing to have our privacy invaded if it means M15 (our domestic security agency) protects us. We still said so a few weeks ago in March, when a maniac in a car ran over and killed people on Westminster Bridge, then charged at Parliament before being shot. This sort of attack proved that the security services were winning, said the pundits. We can’t do much about lone-wolf attackers, but the more concerted, bomb or heavy-armored attacks require meticulous planning, and we haven’t had one of those atrocities since the suicide bombings on London transport in 2005.

It’s still possible that last night’s attack was the work of a lone individual with no links to known terror groups—nobody is crying Islamism quite yet—but all the experts suggest that an individual would have struggled to make the explosive and carry out the bombing without training or support. This raises the question of whether the British security state really is viable.


Article Link To The National Interest:

China Isn't Rising -- It's Merely Outlasting Other Nations

China has been a hegemon and source of civilization for at least twenty centuries; its rise is not new.


The National Interest
May 24, 2017

Does China’s imperial past predict its future? Does Europe’s past predict Asia’s future? These are the wrong questions to be asking. Asia is much more than simply China, and Asia itself is much more than simply a reflection of Europe. The question is not whether there are any lessons to be drawn from Europe’s bloody past; nor is the question whether there is anything essentially Chinese that we can trace back through the mists of time which will allow us to unlock the Oriental mind. Rather, the most relevant questions are whether East Asia as a region experienced any enduring patterns or dynamics, and if so, then what are the implications for regional security in the twenty-first century?

The answers to these questions is clearly, “Yes.” East Asia has usually been unipolar, and often hegemonic. Today the region has returned to unipolarity so quickly that almost nobody has noticed. Whether China can again become a hegemon, however, is far less certain.

After a tumultuous twentieth century, an East Asian regional power transition has already occurred, and occurred peacefully. Despite endless pessimistic predictions of the return of the balance of power politics to Asia, China’s rise in the region is already over. China’s share of regional GDP grew from 8 percent in 1990 to 51 percent in 2014, while Japan’s share fell from 72 percent in 1990 to 22 percent. The past quarter-century has seen a head-spinningly fast regional power transition. Countries are rapidly increasing their economic ties to China and each other. East Asian countries have steadily reduced their defense spending because they see little need to arm. China passed Japan in overall size without a blink from anyone in the region. The only remaining question is how big the gap between China and its neighbors will become. In fact, the difference in size between China and its neighbors is already so stark as to be almost impossible to put on the same chart.

This leads to an uncomfortable conundrum for all the pessimists out there who bleat endlessly about the return of power politics in Asia, or who wishfully hope for Abe to lead a powerful Japan to compete with China:

Considering the ample evidence of China’s rising power, states in the region could easily have already begun a vigorous counterbalancing strategy against China if that were their intention. It seems reasonable to argue that if states were going to balance against China, then they would have begun by now. Those who predict that a containment coalition will rise against China in the future need to explain why this has not already occurred, despite three decades of transparent and rapid Chinese economic, diplomatic and military growth. Idle speculation about what could happen decades from now provides little insight into the decisions states are making today. If China’s neighbors believed China would be more dangerous in the future, they would have begun preparing for that possibility already.

Problems With Using European History To Understand Asia’s Present

The tendency to use European comparisons to understand Asia is unsurprising. Our theories of multipolarity, alliances and balance-of-power politics were largely inductively derived from the European historical experience, but have been presented as universal phenomena. Yet the Western international system grew and spread out of something that preceded it that was quite different. Because of the triumph of the nation-state system, it is forgotten that other international orders have existed, and might exist again. The current international system is actually a recent phenomenon in the scope of world history, but to date it has generally been studied from within: scholars studied European history to explain how this European model for international relations developed over time.

Arguments about Asia’s future thus become arguments about European history, instead. And, using Europe as a lens through which to view Asia also implies that learning about Asia must not be that important. After all, if European history is all we need to understand Asia’s future, then why put in the enormous effort to master an Asian language? Why put in the years of time and effort to become comfortable with the history, culture and society of an Asian country?

As for using China’s imperial past to predict its future, there are two main problems with that approach. First, looking at China itself ignores the fact that Asia is comprised of much more than simply China, and that it is the interaction among these countries that is key to stability; not simply what China wants itself. The region has a set of enduring patterns, and it is only by looking at how the countries as a region interact with each other that we can explain the tensions, and explore their resolution. Second, looking at China, while potentially insightful, tends to end up focusing on Chinese identity and whether there is any cultural or social links that exist throughout time. That’s fine, of course, but that becomes much more an exploration of any potential Chinese civilization than it does a guide to how regional-security dynamics might play out. It takes two to tango, and exploring the regional dynamics is more insightful than simply looking at China in isolation.

What Is Different About Asia?


It is no surprise that the models derived to explain the European experience emphasize the balance of power. Shifting alliances, a war of “all against all,” and the game of “Risk” are particularly suited to explaining European wars over the last thousand years. The past millennium of Europe has been characterized by a number of similarly sized units competing viciously for the slightest advantage. Upon those occasions when one European power would temporarily gain an economic, political, or institutional advantage, it would use that advantage to its maximum advantage, because soon all others would catch up. This led to the nasty, brutish, and short nature of international relations in Europe.

For example, in 1000 AD, the region that would later become France had a population of 6.5 million and an estimated GDP of $2.7 billion. At that time, Spain had a population of 4 million and a GDP of $1.8 billion, while Italy had a population of five million and a GDP of $2.2 billion. By 1700, France had a population of twenty-one million and Italy a population of thirteen million, with a GDP of $19 billion and $14 billion. Meanwhile, Spain had a population of 8.7 million and a GDP of $7.8 billion.

However, had our theories been derived from with the Asian experience, it is almost impossible to imagine that our models of how the world “naturally works” would have ended up with a balance-of-power perspective. Indeed, as far back as the rise of unified Han dynasty in 221 BCE, Asia’s predominant pattern has been a massive Chinese presence. By the year 1000 AD, China had a population of fifty-nine million and a GDP of $27 billion, while Japan had a population of three million and a GDP of $3 billion. In 1700, China had a population of 138 million and Japan twenty-seven million, and China had a GDP of $82.8 billion and Japan had $15 billion, respectively.

In short, Japan never had a population larger than one of China’s provinces, and no country in the region was ever anywhere close to China’s size and heft. This has consequences not only for how business worked, how trade developed and how militaries functioned, but also for culture and the flow of learning and ideas. China was more powerful than anyone in Europe could imagine.

Although Chinese power has waxed and waned over the centuries, what is perhaps most enduring about East Asia has been the centrality of China. Remarkable is that after these times China fell apart, it tended to come back together. “China among equals” was always a temporary phenomenon, especially when viewed from cities such as Hue in Vietnam, Kaesong in North Korea, or Kyoto in Japan. Even during those times that China was conquered, the center of gravity remained China. As Brantly Womack has written, “the Mongols and the Manchus conquered China, but Mongolia and Manchuria did not become the new centers of Asia, nor did they obliterate the old one.”

What Is The Link Between Past And Present In Asia?


Taking the patterns of East Asian history seriously provides new insights into explaining how countries view each other, themselves and the rise of China.

Most importantly, China’s rise is not new. Neither Germany, the United States, France, nor the Soviet Union existed three centuries ago in anything recognizable to their current form. But China has been hegemon and source of civilization for at least twenty centuries.

All countries in the region have to coexist with each other—none is picking up and moving somewhere else—and countries are thus dealing with that reality and seeking diplomatic, nonmilitary solutions with each other. This does not mean that countries will kowtow to China, nor that the old pre-modern tributary system and its particular mode of hierarchic international relations will magically reestablish themselves. Too much has changed. The world is different today. These countries have centuries of learning to deal with and push back against the massive presence of China, even as they forge stable relations with it.

At stake is nothing less than the way in which we conceive of international relations. The East Asian region was as vast and long lasting as was the European region. Yet in many ways the patterns of conflict, the patterns of interaction, and the norms, institutions and ideas that developed in East Asia were quite different from those in Europe. As scholars explore this rich history through the lens of international-relations theory, the unquestioned universality of actors, interests and conditions is seen to be far more contingent or conditional than is currently accepted in conventional international-relations scholarship.

For nearly three centuries, the baseline for thinking about international relations has been provided by balance-of-power theory. But this practice is no longer tenable. Concentrated power is not “unnatural.” The hegemonic, unipolar structure of the current international system is not historically unusual, and its effects should therefore not be theoretically surprising. Paying careful attention to the normative order and institutions of an international system is as important for understanding how unipolar systems work as is the concentration of power.

Given the changes in the international system and the central place of the United States, there is almost no chance that China will return as the unquestioned hegemon in East Asia. Too much has changed for that to happen, and the United States—even as it adjusts to changing circumstances—is not going to disappear from the region. The United States remains too central, too powerful—and American (and Western) ideals have become too deeply accepted around the globe—for it not to be important. The United States and China need to figure out how to live together in the Pacific. Both navies are strong and growing, and the United States is not used to having a naval peer to deal with. That is a big issue, and both Washington, DC and Beijing need to work carefully over the coming decades to figure out how to get along.


Article Link To The National Interest:

The Fed Is About To Reveal How It Could Wind Down Its Biggest Policy Experiment Ever

-- Fed releases minutes of its last meeting Wednesday afternoon
-- The minutes are expected to show some detail of Fed discussions on how it plans to reduce its $4.5 trillion balance sheet
-- The Fed's comments on the economy, particularly inflation, will also be important because traders doubt the Fed's forecast for two more rate hikes this year


By Patti Domm 
CNBC
May 24, 2017

The Fed is about to tell the markets how it plans to remove itself bit by bit from the experimental program that made it a major player in the financial markets.

In Wednesday's release of minutes from the Federal Reserve's last meeting, economists expect to see some rough details of how the central bank could start the unwind of its massive $4.5 trillion balance sheet, a process it should take slowly since it could impact interest rates.

The Fed built up its balance sheet during and after the financial crisis, buying Treasury and mortgage securities to add liquidity to markets. After it ended its quantitative easing programs, the Fed continued buying securities as those holdings matured, in an effort to keep markets steady and interest rates low.

"It's an experiment the Fed is hoping they can extricate themselves from to some extent. ... They're going to try to do it in a way that's not destabilizing. That's the hope. Given the fact we've been talking about it for a while, my guess is the Fed will be successful because it's been so well advertised," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

The unwind should drive interest rates higher, but LaVorgna said no one knows how much for sure. The Fed will also pace its program, based on the economy and the reaction to it.

"It will very much depend on financial conditions and the evolution of the forecast of how the economy is expected to evolve. What the Fed would like to do is avoid anything similar to 2013 when the taper tantrum caused significant market disruption," he said.

The Fed's QE purchases targeted longer-dated securities, and yields in 10-year and 30-year Treasurys have also been kept low by the fact that the European Central Bank and Bank of Japan went to negative yields and have their own asset-buying programs. By comparison, low U.S. yields look attractive.

The Fed's quantitative easing also led to tighter spreads and lower volatility, and helped reflate stocks and other risk markets.

"We think a shrinking Fed balance sheet, especially if not countered by sufficiently expanding central bank balance sheets elsewhere could have the opposite impact," wrote Morgan Stanley fixed income strategists in a recent note. They warned it could be unpredictable. The strategists said interest rates should rise, but when conditions are tightening, "shocks" are not as easy to absorb and high leverage becomes harder to manage.

"There are few precedents for actively tightening policy via central bank balance sheets alongside rate hikes. Hence we would caution against expecting an uneventful voyage," the Morgan Stanley strategists wrote.

Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch, said he expects the Fed to ultimately reduce its balance sheet by about $1 trillion. He said the reduction of $2 trillion is estimated to have the equivalent impact of a 0.75 increase in the yield of the 10-year Treasury note, all else being equal.

Cabana expects the Fed to be flexible with the unwind, and slow or even reverse it if the economy needed help or interest rates were rising too quickly.

The Fed has been signaling it will start the exit process at the end of the year, possibly as it pauses after two more rate hikes. So, the central bank's economic comments in Wednesday's minutes will also be important, since traders have been doubting the Fed can raise as much as it would like this year. That's because economic data have been softer than expected, particularly inflation, and the political turmoil in Washington has created some uncertainty, so comments on the economy could show how confident the Fed is in its forecast.

"If we see a majority of participants signaling the data does not signal a weakening trend, that would be instructive that the Fed is looking through its recent softening and is not deterred by it," said Cabana. If the Fed is concerned, it would raise doubts about the rate hikes and the December action on the balance sheet.

Many economists expect the Fed to hike interest rates in June and again in September, before focusing on the balance sheet at its December meeting. The market is now pricing an interest rise for June but about a 30 percent chance of a September increase.

LaVorgna said he expects the Fed to hike both in June and September, and then announce a "tapering" of its balance sheet, starting next January. In December, he expects to see the Fed give clear detailed guidance on the process.

LaVorgna said the tapering of its reinvestments could look very similar to its tapering of purchases in 2014. The Fed could reduce reinvestments by 80 percent beginning in January. Then go to 60 percent in the second quarter, 50 percent in the third quarter and 20 percent in the fourth quarter. The Fed could then allow all maturing securities to roll off its balance sheet starting in 2019.

Next year, $425 billion of the Fed's Treasurys mature, more than double this year's level. In 2019, the amount falls to $350 billion, and then drops to about $200 billion in following years.

LaVorgna said for instance, the Fed could return $21.5 billion to the market of Treasurys in the first quarter of 2018 and $8.9 billion of mortgage securities, then increase it to $46.2 billion of Treasurys in the second quarter, along with $17.8 billion of mortgage securities.

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China Handed First Moody's Downgrade Since 1989 On Debt Risk

Ratings company says outlook now stable as risks are balanced; Analysts focus on low external holding of sovereign debt.


By Bloomberg News
May 24, 2017

Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth.

Stocks in Shanghai headed for the lowest level in almost eight months, the yuan and Australian dollar retreated, and default risks increased after Moody’s reduced the rating to A1 from Aa3 on Wednesday. It cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative.

China’s sovereign debt is mostly held by domestic investors, shielding the nation somewhat from the impact of ratings changes. Still, the move underscored doubts President Xi Jinping’s government can simultaneously cut excessive leverage in the financial system while keeping economic growth above the target of at least 6.5 percent.

“It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures in China,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. That said, “it doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”

Debt Holdings


Total outstanding credit climbed to about 260 percent of GDP by the end of 2016, up from 160 percent in 2008, according to Bloomberg Intelligence. At the same time, China’s external debt is low by international standards, at around 12 percent of gross domestic product, according to the International Monetary Fund, meaning that a downgrade isn’t likely to be as disruptive as in nations more reliant on international funding.



Overseas institutions’ holdings of onshore bonds dropped to 830 billion yuan ($121 billion) as of the end of March, from 853 billion yuan three months earlier, People’s Bank of China data show. That’s less than 1.5 percent of 63.7 trillion yuan of outstanding notes, according to Bloomberg calculations based on the central bank data.

Moody’s last cut China’s sovereign rating in 1989, when it downgraded the sovereign to Baa2 from Baa1, according to spokesperson, Manvela Yeung.

Rating Warnings


Moody’s lowered China’s credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and uncertainty over authorities’ ability to carry out reforms. About a month later, S&P Global Ratings also warned that rising local debt was pressuring the nation’s rating.

S&P currently rates China’s foreign and local-currency long-term debt at AA- with a negative outlook, and Fitch places an A+ rating on both foreign and local currency long-term debt with a stable outlook. Moody’s move puts China parallel in their rankings with countries including Japan, Saudi Arabia and Estonia.

The warnings last year were followed by the IMF, which in October 2016 said China urgently needs a plan to address a build up of corporate debt that is manageable and that the window to address it "closing quickly."

Stable Outlook


Still, Moody’s isn’t hitting the panic button.

"The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced," Moody’s said in the statement Wednesday. "The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account."

Not Grounded

Moody’s decision irked some commentators.

"This cut is not solidly grounded," said Wen Bin, chief analyst at Minsheng Securities in Beijing. " China’s economy is in a much better shape than last March when their previous cut happened. Also the policy makers have been well aware of the debt and leverage issues, and actions have been taken. It is a smart move if no one sees the problem and you are the first to flag it. But less so if it has already been noticed and addressed."

The move may still discomfort China investors in that it highlights the risks to the economy rather than the ability of the government to control them.

“The downgrade comes at a bad time,” said Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, adding that it will make it more expensive to open the country’s bond market. “China’s leaders from President Xi Jinping down have said that structural reform and financial stability are priorities. Still, progress remains faltering and in some respects movement is in the wrong direction.”


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