Tuesday, July 18, 2017

Tuesday, July 18, Morning Global Market Roundup: Asian Shares, Dollar Slip As Passage Of U.S. Healthcare Bill Doubtful

By Lisa Twaronite
July 18, 2017

Asian shares stepped back from more than two-year highs on Tuesday and the dollar extended losses as passage of a U.S. healthcare bill grew doubtful, and as investors bet the Federal Reserve will be more cautious about raising interest rates.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 percent, a day after scaling its loftiest levels since April 2015.

Republican Senators Jerry Moran and Mike Lee announced their opposition on Monday to legislation to dismantle and replace the Affordable Care Act, commonly known as Obamacare, leaving it without enough votes to pass.

U.S. S&P stock futures edged down slightly after the news, but then steadied and were flat on the day.

Wall Street ended little changed on Monday in low-volume trading, as investors braced for a flood of second-quarter earnings reports later this week.

The dollar, already down in early trade, extended losses. It slipped 0.4 percent on the day to 112.21 yen, well below its nearly four-month high of 114.495 touched last week.

The euro jumped 0.5 percent to $1.1529, pushing to its highest since May 2016.

The dollar index, which tracks the greenback against a basket of six major rivals, wallowed at 94.773, plumbing its lowest levels since September 2016.

"It's hard to be bullish on the dollar, both from the monetary side and from the U.S. politics side," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

Fading support for U.S. President Donald Trump was weighing on the dollar, he said, as the U.S. administration struggled to gather enough backers in the Senate to pass the healthcare reform bill, raising doubts about how the rest of its ambitious agenda would fare.

"Trump's falling popularity, although it was not spectacular from the beginning, is another hurdle for pushing for the changes, and that will be negative for the U.S. economy and the dollar," said Yamamoto.

Japan's Nikkei stock index dropped 0.6 percent, as markets resumed trading after a public holiday on Monday and caught up to the resurgent yen.

Fading U.S. rate hike bets also weighed on the dollar. Fed funds futures continue to show less than a 50 percent chance of a rate hike in December after Fed Chair Janet Yellen sounded a cautious tone last week in congressional testimony, and following downbeat U.S. inflation and retail sales data on Friday.

"U.S. data is still not strong," said Harumi Taguchi, principal economist at IHS Markit in Tokyo. The combination of that data and the political situation has pressured U.S. Treasury yields, which undermines the dollar, she said.

The U.S. 10-year yield stood at 2.305 percent in Asian trading, down from its U.S. close on Monday of 2.309 percent.

"We still expect the Fed to hike in December, but unless the market expects the same, I don't think interest rate differentials are going to widen," Taguchi said.

Overall Asian sentiment remained underpinned by solid China data on Monday, which showed its economy expanded at a faster-than-expected 6.9 percent clip in the second quarter, setting the country on course to comfortably meet its 2017 growth target.

Crude oil futures edged higher, benefiting from the weaker dollar, with U.S. crude rising 0.3 percent to $46.15 per barrel and Brent crude adding 0.3 percent to $48.57.

On Monday, crude prices had skidded about 1 percent as investors held out for strong indications that an OPEC-led effort to drain a glut was proving effective.

The weaker dollar lifted spot gold which rose 0.3 percent to $1,237.76 per ounce.

Article Link To Reuters:

Oil Prices Stable As Strong Demand Meets Ongoing Supply Glut

By Henning Gloystein
July 18, 2017

Oil prices were stable on Tuesday, supported by strong consumption but weighed by ongoing high supplies from producer club OPEC and also the United States.

Brent crude futures, the international benchmark for oil prices, were at $48.55 per barrel, up 13 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $46.12 per barrel, up 10 cents, or 0.2 percent.

In a sign of strong demand, data on Monday showed refineries in China increased crude throughput in June to the second highest on record.

Despite this, oil markets have struggled with oversupply since 2014, resulting in a more than 50 percent fall in prices since then.

A deal by the Organization of the Petroleum Exporting Countries with Russia and other non-OPEC producers to cut supplies by around 1.8 million barrels per day (bpd) between January this year and March 2018 has so far not led to the tighter market and higher prices that producers have hoped for.

That's because supplies from within OPEC remain high largely due to rising output from Nigeria and Libya, two OPEC states exempt from the pact, and increasing U.S. production.

Ecuador, a small producer within OPEC, also said on Tuesday that it is not complying with its production cut of 26,000 bpd due to the country's fiscal deficit which is expected to hit 7.5 percent of GDP this year.

Oil Minister Carlos Perez said that Ecuador was only cutting some 60 percent of that figure, putting current output at 545,000 bpd.

"We are not meeting the quota imposed on us because of the obvious needs the country has," Perez said.

Article Link To Reuters:

What If Big Oil’s Bet On Gas Is Wrong?

Global gas-fired generation capacity to decline after 2031; Energy giants plan shift from producing oil toward natural gas.

By Jack Farchy and Kelly Gilblom
July 18, 2017

Talk to a Big Oil executive these days, and the chances are they’ll steer the conversation toward gas.

“In 20 years, we will not be known as oil and gas companies, but as gas and oil companies,” Patrick Pouyanne, chief executive officer of French giant Total SA, told a conference in St. Petersburg last month.

Pouyanne and his peers have pitched the fuel as a bridge between a fossil-fuel past and a carbon-free future. Gas emits less pollution than oil and can be burned to produce the power that grids will need for electric cars.

But with the cost of renewable technologies falling sharply, some are warning that the outlook may not be so rosy. Forecasters are beginning to talk about peak gas demand, spurred by the growth of alternative power supplies, in the same breath as peak oil consumption, caused by the gradual demise of the internal combustion engine.

In a long-term outlook published last month, Bloomberg New Energy Finance predicted that gas’s market share in global power generation will drop from 23 percent last year to 16 percent by 2040, and that gas-fired power generation capacity will start to decline after 2031. BP Plc has highlighted “risks to gas demand” as a key uncertainty, including the possibility that consumption plateaus by 2035, “squeezed out by non-fossil fuels.”

If those forecasts play out, it has huge implications for Total, BP and other oil majors already grappling with a possible surge in electric car use. Gas-exporting nations most notably Russia, Qatar and Australia will also be exposed. The global gas industry, based on multi-billion dollar pipelines and export plants, has decades long investment cycles and decisions being made today rely on rising demand until the middle of the century.

The energy transition is “fundamentally a force that cannot be stopped,” Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden said last month. “It is both policy and public sentiment, but also technology that is driving it.” Oil demand will probably peak in the 2030s or 2040s, he said, while “gas will not peak before the 40s if not in the 50s.”

Shell is still betting heavily on the future of gas after last year’s $50 billion purchase of BG Group Plc, but it’s also planning to spend $1 billion a year on new energy technologies such as renewables.

“There’s no question that gas usage declines over time,” Geisha Williams, CEO of PG&E Corp, the largest investor-owned utility in the U.S., said at a conference in San Francisco. “But I don’t think it’s overnight. I think it’s something that we have to manage.”

Until recently, the energy industry had been hoping that natural gas would play the role of a bridge fuel between polluting coal and emissions-free renewables. That’s because producing electricity from gas generates around half the carbon dioxide emissions that burning coal does. The International Energy Agency predicted a “golden age of gas.”

But rapid changes in the economics of renewables, combined with low coal prices, have put that outlook in doubt. The IEA last week predicted global gas demand for power generation would rise just 1 percent a year in the next six years, down from 4 percent a year in 2004-2010.

Driving the shift has been a sharp decline in the cost of building new renewable power –- which, unlike generating electricity from coal or gas, is almost free to run after the initial capital investment has been made.

“Wind and solar are just getting too cheap, too fast" for gas to play a transitional role, said Seb Henbest, lead author of the BNEF report.

The consultant estimates that onshore wind and solar power are already competitive with coal and gas in Germany, and that within five years they will be cheaper to build than new coal and gas plants in China, the U.S. and India. By the late 2020s, it will start to even be cheaper to build new onshore wind and solar power than run existing coal and gas plants.

The trends that are undercutting optimism about the global gas outlook are already playing out in Europe. Natural gas demand remains well below a 2010 peak, as greater energy efficiency, rapid adoption of renewables and resilient coal consumption cut into its market share.

The IEA does not see European gas demand returning to its 2010 high. In its base case scenario, European gas demand would be at the same level in 2040 as in 2020.

Still, most forecasts anticipate strong growth globally for natural gas demand for two decades or more. In the U.S., plentiful cheap supplies thanks to the shale boom helped gas displace coal as the primary fuel for power generation for the first time last year.

The IEA sees global natural gas demand growing almost 50 percent by 2040. Exxon Mobil Corp. sees a 44 percent increase. BP’s base case forecast is for a 38 percent increase in demand by 2035.

Several things could upend those predictions.

Much of the forecast growth in gas demand is dependent on China and India adopting policies that favor gas rather than coal in an attempt to improve air quality. The Chinese government, for example, has set a goal of getting as much as 10 percent of its energy from gas by 2020 and 15 percent by 2030, up from 6 percent in 2015. If that doesn’t happen, gas demand could peak sooner.

And the power sector, while the largest single source of natural gas demand, only accounts for 40 percent of the market. By contrast, nearly 60 percent of global oil use is as a transport fuel and vulnerable to the rise of electric vehicles.

“The future of oil is down to whether electric vehicles take off or not; the future of gas is quite nuanced,” said James Henderson, director of natural gas at the Oxford Institute for Energy Studies. “Gas producers are talking about how to adapt to a different type of gas market.”

While the outlook for wind and solar for power generation appears limitless, renewables will have a harder time replacing fossil fuels in other sectors. The IEA last week said industry will drive gas demand’s 1.6 percent a year growth through 2022 as it replaces crude oil as a raw material for petrochemical manufacturing, especially in the U.S.

“Gas will play a significant role in the decades to come,” Johannes Teyssen, chief executive officer of EON SE, told Bloomberg on May 24. “Coal will decline much, much faster, but gas probably needs also to accept that its own role will not grow to eternity."

Article Link To Bloomberg:

Germany Should Say Danke For U.S. Oil

Angela Merkel’s slaps at Trump don’t help her country’s cause. America’s frackers do.

By Isaac Orr
The Wall Street Journal
July 18, 2017

German Chancellor Angela Merkel used her closing speech at the recent Group of 20 summit to chide President Trump for withdrawing the U.S. from the Paris climate accord. Yet the German people will benefit far more from the American president’s focus on facilitating U.S. energy production and boosting exports than from Mrs. Merkel’s climate policies. They have increased residential electricity prices for German households and failed to achieve any meaningful reductions in fossil-fuel consumption or carbon-dioxide emissions.

Germany has developed a reputation as a green-energy superpower, but in many respects it isn’t. Of all the energy used in Germany in 2016, 34% came from oil, 23.6% from coal, 22.7% from natural gas, 7.3% from biomass, 6.9% from nuclear, 2.1% from wind power, and 1.2% from solar. Waste, geothermal and hydropower accounted for the remaining 2%.

All told, Germany derived more than 80% of its total energy consumption from fossil fuels. That’s bad news for a country that depends on imports. About 97% of the oil, 88% of the natural gas and 87% of the hard coal Germans consume are imported.

Though they may find it difficult to swallow, the German people will benefit from Mr. Trump’s efforts to make energy resources accessible and affordable. Germans spent $73.5 billion on imported oil in 2013, when the price of Brent crude averaged approximately $108 a barrel. Since then, the U.S. embrace of hydraulic fracturing—also known as “fracking”—has resulted in a surge of U.S. crude oil on the world market, causing global oil prices to fall to about $47 per barrel. Some back-of-the-envelope math suggests Germans may now pay $41.5 billion less per year for their oil imports, constituting an average savings of around $1,107 (at current exchange rates) for each of Germany’s 37.5 million households.

Ms. Merkel’s climate and energy policies have caused residential electricity prices in Germany to spike by approximately 47% since 2006, costing the average German household about $380 more a year. The higher prices are largely due to a 10-fold increase in renewable-energy surcharges that guarantee returns for the wind and solar-power industries. These surcharges now make up 23% of German residential electric bills.

The German people are paying far more for their household energy needs under Ms. Merkel, yet they have little to show for it. Since 2009, when Germany began to pursue renewables aggressively, annual CO 2 emissions are down a negligible 0.1%.

Meanwhile, the U.S. experienced year-over-year reductions in CO2 emissions in 2015 and 2016, and CO 2 emissions have fallen a dramatic 14% since 2005. This has mostly been made possible by fracking—a practice banned in Germany. Fracking has allowed the U.S. natural-gas industry to compete with coal in a way that wasn’t previously possible, lowering costs for everyone.

Slapping around Mr. Trump, who is deeply unpopular in Germany, might score Ms. Merkel some domestic political points. But if the German leader really wants to help the environment, she might consider scaling back the attacks. Without American energy production and exports, Germany—and the world—would be a dirtier, darker and less efficient place.

Article Link To The WSJ:

Trump Is Falling Into The Same Trap As Obama On Iran

By Jonathan S. Tobin
The New York Post
July 18, 2017

When President Trump met earlier this month with Russian President Vladimir Putin, their exchange about Moscow’s interference in the 2016 presidential election was all anyone seemed to care about. Trump’s efforts to present an agreement between the two countries on a cease-fire in Syria as a major achievement were largely ignored by a media determined to focus exclusively on allegations of collusion between the Republicans and Russia.

But it turns out his critics were wrong to dismiss the Syrian pact as a distraction. It’s now clear that in his eagerness for a deal, the president fell into virtually the same trap his predecessor did when he signed the Iran nuclear deal.

The real surprise here is that the biggest critic of the Syrian pact is one of the president’s staunchest friends: Israeli Prime Minister Benjamin Netanyahu. He spoke out once he discovered that Trump hadn’t taken into account Israel’s concerns about Iran being the real beneficiary of the agreement.

Like it or not, the Russian and Iranian forces fighting on behalf of the barbarous Bashar al-Assad regime appear to have prevailed. Yet Russia and Iran aren’t content with just keeping their client in power. They want Western recognition not just of Assad’s victory but also of their occupation of Syrian territory.

US acquiescence to the Russian presence in Syria is the first step toward the realization of Putin’s dream of reassembling the old Soviet empire. Once President Barack Obama punted enforcement of his “red line” about Assad’s use of chemical weapons to the Russians, there was probably no way to roll back Putin’s ambitions.

But what Trump has done now by trying to pull a foreign-policy victory out of his meeting with Putin is arguably almost as bad as Obama’s feckless Syrian retreat. The cease-fire terms would ensure that Iran and its Hezbollah auxiliaries get a free hand in southern Syria — and that the Iranian presence will become permanent.

Israel has kept a close watch on Hezbollah’s activities in Syria and launched strikes to prevent Iran from using the civil war as cover to transfer heavy arms to its Lebanese allies or allowing the group to establish bases close to its border. Yet if Trump’s cease-fire lets Iran put military facilities adjacent to Israel — something Jerusalem has said it can’t tolerate — that increases the chances of conflict with an Islamist regime that is dedicated to Israel’s destruction.

Just as troubling is that this will enable Tehran to achieve its dream of a land bridge from Iran to the Mediterranean. Just as Obama’s bugout from Iraq allowed Iran to become the dominant power in that nation, the Trump seal of approval on Assad’s victory could give it the same power in Syria and enable it to link up with a Lebanon dominated by its terrorist errand boys.

That’s the same nightmare of Iranian regional hegemony that scared Arab nations as much as it did the Israelis about the nuclear deal.

Unlike Obama, Trump isn’t laboring under the delusion that Iran’s leaders are moderates. He understands the Iranians are a threat to both the United States and its allies. The problem is that he still refuses to accept that he must choose between his good relations with Russia and getting tough with Iran.

Trump spent the 2016 campaign talking up cooperation with Russia against ISIS and denouncing Obama’s nuclear deal with Iran. But events in Syria have proved him wrong. Russia and Iran are interested in Syria for reasons that have nothing to do with fighting ISIS. Indeed, the survival of their man Assad ensures that the terrorist group will continue to retain Sunni support since it is seen as the only local force resisting the regime.

Rather than ignore Israel’s warnings, the president must wake up and realize that acting as if he can tilt toward Russia while also resisting Iran means that Trump is, in effect, making his own awful Iran deal with implications that could be almost as deadly in the long run as Obama’s folly.

Article Link To The NY Post;

China's Property Market Slows, Beijing Prices Down For First Time Since 2015

By Yawen Chen and Ryan Woo
July 18, 2017

Home property prices in Beijing fell for the first time in more than two years in June, while Shanghai further declined and Shenzhen stalled, pointing to significant cooling in China's biggest real estate markets, official data showed.

Nationwide, home price growth slowed slightly in June as government efforts to keep prices in check weighed on larger cities, though smaller cities maintained rapid growth.

People in the industry expect home price growth in China's largest cities to stay on a mild slowing trend for the next 12 months.

In June, average new home prices in China's 70 major cities rose 10.2 percent from a year earlier, decelerating from May's 10.4 percent gain, according to Reuters calculations based on an official survey out on Tuesday.

On a monthly basis, new home prices rose 0.7 percent in June, the same as the previous month's reading, Reuters calculations based on data issued by the National Bureau of Statistics (NBS) showed.

"China's 15 hottest property markets, mostly first- and second-tier cities, remained stable in June as a city-based property policy continued to take effect," the NBS said in a statement accompanying the data release.

More than 45 cities, most of them top-tier cities with a sizable population, have imposed varying levels of restrictions since last October to curb fast-rising prices, with most of the latest measures introduced in late March.

These measures have started taking some heat out of the market, with sales and investment in property cooling slightly in the second quarter.

The cooling effect is most visible in China's the biggest cities. Price growth in Shenzhen, Shanghai and Beijing slowed to 2.7 percent, 8.6 percent and 10.7 percent, respectively, from a year earlier.

From a month earlier, prices in Beijing fell 0.4 percent, marking the first fall since February 2015. Shanghai prices slipped by a further 0.2 percent, while Shenzhen prices remained unchanged.

Declining Sales

The value of new personal home mortgages in Beijing, Shanghai and Shenzhen in the first half of 2017 was equal to 30 percent of the total value of home loans in 2016, a Chinese state newspaper reported.

"Sales declines in the biggest cities were quite significant, so prices are certainly not going to rebound," said Rosealea Yao, a property economist with Gavekal Dragonomics.

"I think the mild declining trend will continue through at least the first half of 2018," Yao said.

Nonetheless, real estate investment and sales growth both sped up in June after slowing in May, most likely due to more robust demand in smaller centers that have been encouraged to reduce inventory and are not subject to the strict curbs at work in bigger cities.

Luoyang, a third-tier city in central Henan province, topped the list in June, with prices of new units up 2.3 percent on month, compared with a 1.3 percent gain in May, taking the annual growth to 10.2 percent.

That has also been reflected in stronger credit demand in the month from households.

Household loans - mostly mortgages - in June rose to 738.4 billion yuan from 610.6 billion yuan in May, according to Reuters calculations based on data released by China's central bank.

Keeping a lid on price fluctuations has become a priority for policymakers in a politically important year, with a major leadership reshuffle expected this autumn.

But to make sure the market is neither too hot nor too cold, authorities have increasingly resorted to administrative measures that many analysts warn are anti-market in nature.

For example, sales prices for new units in a few cities like Zhengzhou - capital of Henan - are not allowed to be higher than the price level seen last October for new units in the vicinity.

Fading Affordability

The upsurge in house prices since 2001 in most major Chinese cities has spurred growing concerns about affordability.

A typical two-bedroom new home in Beijing now costs around 6 million yuan ($870,000), about 69 times the average per capita disposable income in the city, much higher than the ratio of less than 25 times for New York City.

Economists worry that slowing growth in incomes, which had been rising at double-digit rates for decades, will no longer be able to cushion financial risks in an extremely inflated housing market.

On average, China's disposable income was up 8.1 percent on-year for city-dwellers in the first half of the year, official data showed, slower than the 10.2 percent annual property price growth in June.

Article Link To Reuters:

New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring

Santander-Chrysler venture opens window into race to bottom; Wall Street’s insatiable debt machine fuels lax underwriting.

By Gabrielle Coppola
July 18, 2017

It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud.

Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017.

A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide.

Subprime car loans have been around for ages, and no one is suggesting they’ll unleash the next crisis. But since the Great Recession, business has exploded. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.

Few things capture this phenomenon like the partnership between Fiat Chrysler Automobiles NV and Banco Santander SA. Since 2013, as U.S. car sales soared, the two have built one of the industry’s most powerful subprime machines.

Details of that relationship, pieced together from court documents, regulatory filings and interviews with industry insiders, lay bare some of the excesses of today’s subprime auto boom. Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories. For instance, Santander recently vetted incomes on fewer than one out of every 10 loans packaged into $1 billion of bonds, according to Moody’s Investors Service. The largest portion were for Chrysler vehicles.

Some of their dealers, meantime, gamed the loan application process so low-income borrowers could drive off in new cars, state prosecutors said in court documents.

Through it all, Wall Street’s appetite for high-yield investments has kept the loans -- and the bonds -- coming. Santander says it has cut ties with hundreds of dealerships that were pushing unsound loans, some of which defaulted as soon as the first payment. At the same time, Santander plans to increase control over its U.S. subprime auto unit, Santander Consumer USA Holdings Inc., people familiar with the matter said.

Lending Practices

Santander, subpoenaed or questioned by a group of about 30 states regarding its auto loan underwriting and securitization activities, declined to comment on “active legal matters.” In May, Santander agreed to pay $26 million to settle allegations brought by Delaware and Massachusetts as part of ongoing investigations into the auto industry’s lending practices. Santander, whose partnership with Chrysler goes by the Chrysler Capital brand name, neither admitted nor denied wrongdoing.

Reid Bigland, Chrysler’s U.S. sales chief, said Santander has been a “good partner.”

In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.

For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.

“Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management.

Worth It?

Asset-backed securities based on auto loans are engineered to keep paying even when some loans sour. Still, some cracks have emerged in the $1.2 trillion market for auto financing. Delinquencies have picked up, as have losses on subprime loans. Auto loan fraud, meantime, is approaching levels seen in mortgages during the bubble.

Auto finance “is not going to bring down the financial system like the mortgage crisis almost did, but it does signal more stress with the consumer,” said Stephen Caprio, a credit strategist at UBS Group AG.

Whatever the case, the Santander-Chrysler relationship has opened a rare window into an industry-wide race to the bottom that may have lasting consequences.

In the years after its 2009 bankruptcy, Chrysler looked for a dedicated lender to help customers finance their cars quickly. One reason it picked Santander was the Spanish lender’s expertise in “automated decisioning.” At the time, a Chrysler executive said the process helped Santander “take a little bit more risk and approve more deals because they mine the data” in subprime.

Becoming Chrysler’s preferred lender made sense for Santander. It was aggressively expanding in the U.S. subprime loan market, and Chrysler, the perennial third wheel among the “Big Three,” relied more on buyers with lower credit scores than General Motors Co. or Ford Motor Co.

Problems surfaced almost from the start. Many of them, detailed in the settlement between Santander and authorities in Delaware and Massachusetts, recall some of the excesses of the subprime housing era.

‘Fraud Dealers’

Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors.

State authorities also said an internal Santander review in 2013 found that 10 out of 11 loan applications from a Massachusetts dealer contained inflated or unverifiable incomes. (It’s not clear whether this particular case involved a Chrysler dealer.)

Santander kept originating the dealer’s loans anyway, even as they continued to default “at a high rate,” the authorities said.

Some dealerships even asked Santander to double-check customers’ incomes because they didn’t trust their own employees, the authorities said. They also said the lender didn’t always oblige because that would put it at a “competitive disadvantage.” At the time of the settlement, Santander said it was “totally committed to treating its customers fairly.”

In some ways, the laissez-faire mindset reflects how competition squeezed Santander as demand for new cars -- and loans to finance them -- soared.

Tough Time

Without a deposit base, Santander’s auto finance unit had a tough time competing with banks for the most creditworthy buyers. Private-equity firms also poured in, vying for many of the same subprime borrowers Santander targets, but often with more relaxed underwriting. And Santander doesn’t get the same preferences that automakers’ wholly owned finance units typically receive, Bigland said.

The irony is that what got Santander into hot water did little to help it reach the lofty goals set at the outset of the 10-year venture with Chrysler. As of April, Santander financed about 19 percent of the carmaker’s sales, short of the 64 percent they targeted by that time.

While Santander takes pains to avoid criticizing Chrysler, the lender launched a special loyalty and rewards program to vet the carmaker’s dealerships. Those that aren’t deemed fraudulent during the process are labeled “VIPs.” Santander also cut ties with over 800 dealers across its network since 2015 as it tries to boost business without exposing itself to more bad loans.

“Chrysler continues to represent an opportunity for growth for us,” Richard Morrin, chief operating officer of Santander’s auto finance arm, said during an investor presentation in February. Still, “it can’t be growth at any cost.”

Chrysler declined to comment on instances of fraud at its dealer network.

Varying Norms

Indeed, with U.S. auto sales falling after a record 2016, many lenders including Santander say they’re tightening standards. Santander’s underwriting practices, however, continue to raise eyebrows. In May, Moody’s drew attention to the fact that Santander verified incomes on only 8 percent of loans it bundled into bonds, based on data that auto-debt issuers have recently started to disclose.

Yet when it comes to due diligence, there’s no industry-wide standard. Unlike the mortgage market, stated-income loans -- also known as “liar loans” -- are perfectly legal in car buying. Last month, Jeff Brown, Ally Financial Inc.’s chief executive, said verifying income isn’t the norm. Ally, he said, checked incomes on 65 percent of its subprime car loans. GM Financial’s AmeriCredit unit checked roughly the same percentage.

The industry has little reason to change given the success of Wall Street’s securitization machine. Protections built into the bonds have largely insulated investors from losses even as delinquencies pile up. Most securities are upgraded over their lifetimes.

The losers, of course, are people who go into debt for cars they can’t afford.

Jerry Robinson, who worked in Santander’s debt collection unit, has seen the trouble firsthand. Robinson, who retired in August after six years with Santander, says one of his responsibilities was to get cars the lender repossessed back into their owners’ hands.

Business Decision

Often times, he found dealers listed non-existent features like sunroofs or alloy wheels to inflate a car’s value and win credit approval. Although Robinson’s job was to make sure dealers reimbursed Santander for any loan fraud, borrowers didn’t see their debts reduced, he said. Instead, their loans were usually extended, increasing the compound interest consumers would ultimately pay after their repoed cars were reinstated. More often than not, those payments wind up going to ABS investors.

Bonuses were tied to how many borrowers could be reinstated, said Robinson, now a Dallas-based member of the Committee for Better Banks, a worker and consumer advocacy coalition backed by a union seeking to organize bank employees. The same cars were often repoed multiple times.

Santander spokeswoman Laurie Kight disputed Robinson’s account and said it was part of a union campaign to discredit the lender. Santander is “unaware” of the type of conduct he described and money reimbursed by dealers for non-existent features is used to reduce borrowers’ loan balances, she said.

Robinson contends it was more profitable for Santander to keep cash-strapped borrowers in their cars rather than auction off the vehicles.

“The business makes money putting people in the car,” he said.

Article Link To Bloomberg:

New Life In U.S. Housing Market Not Evident In Big Bank Results

By Sweta Singh
July 18, 2017

The U.S. housing sector has seen prices, sales and financing applications soar lately as more buyers entered the market for the first time, but those trends were hard to see in big banks' mortgage businesses during the second quarter.

Four major U.S. lenders reported an average 33 percent drop in second-quarter mortgage banking revenue on Friday, compared with the same quarter of last year. An ongoing decline in refinancing activity, higher funding costs, tougher competition and a greater portion of business coming from third parties, who generally deliver lower margins, all contributed to the slide.

Even so, executives sounded optimistic about the core operation of lending to people who want to buy homes.

"I wouldn't throw in the towel on the mortgage business," Tim Sloan, chief executive officer of Wells Fargo & Co, the biggest U.S. home lender, said on Friday.

Wells's quarterly mortgage banking revenue of $1.4 billion was down 19 percent from the year-ago period.

A variety of factors hurt results, including the sale of a legacy portfolio of risky loans, but Wells saw improved credit quality among borrowers, and strong demand for mortgages to purchase new homes. The bank sees "huge opportunities" in growing first and second mortgages, Sloan said.

JPMorgan Chase & Co, PNC Financial Services Group Inc and Citigroup Inc also reported mortgage banking revenue declines of 33 to 41 percent last week. Bank of America Corp reports results on Tuesday.

Starting in 2009, banks began to benefit from a surge in mortgage refinancing, thanks to rock-bottom interest rates and federal programs to help struggling borrowers. That activity has been trailing off as rates have started to rise and many borrowers who sought lower rates have already gotten fresh loans.

It will be difficult to make up for lost refinancing volumes, even though the market for home purchases has been improving, analysts said.

New and existing home sales rose in May while prices reached all-time highs, according to federal housing data and the National Association of Realtors (NAR). Weekly mortgage applications shot to a seven-year high at one point during the quarter, according to data from the Mortgage Bankers Association. NAR predicts new single-family home sales will rise 8.4 percent this year.

Those improvements in the market may continue for some time, analysts said, since mortgage rates remain low by historical standards and young American millennials have only recently begun to enter the housing market. But banks' mortgage businesses will only show improvements as comparisons with a previous year become easier, they said.

"While we saw some pressure in the second quarter, we think that's a low point for the year," Marty Mosby, an analyst at Vining Sparks brokerage and asset manager, told Reuters. "We should start to see some pickup in home purchase activity."

Article Link To Reuters:

America’s Summer Labor Shortage

Trump’s 15,000 extra guest-worker visas aren’t nearly enough.

By The Editorial Board
The Wall Street Journal
July 18, 2017

Employers from Cape Cod bed-and-breakfasts to Alaskan fisheries have been begging the Trump Administration for more seasonal guest-worker visas. Summer is nearly half over, and on Monday the Department of Homeland Security finally agreed to issue 15,000 additional H-2B visas.

The H-2B visa program covers a myriad of industries that rely on seasonal labor including seafood, construction, skiing, tourism and landscaping. These jobs typically pay well, though they can be grueling and their temporary nature deters native-born Americans from applying. Some summer jobs in tourism used to be filled by teens who now spend their summers studying or volunteering.

Foreign workers have become even more crucial as labor markets have tightened amid near record low unemployment in many states. Unemployment is a mere 2.3% in Colorado, 2.7% in Hawaii and 3.2% in Maine. According to the Bureau of Labor Statistics, there were 755,000 job openings in food services and accommodations in May, up 12% from a year ago.

H-2B visas are capped annually at 66,000, and the labor shortage was exacerbated after Congress last year refused to extend a provision in the law that allowed foreigners who had previously worked on H-2Bs to count toward the limit. But the omnibus budget that Congress passed in May let Homeland Security Secretary John Kelly increase the number of visas in consultation with Labor Secretary Alexander Acosta.

While the 15,000 additional visas will no doubt be welcomed by employers, they won’t satisfy the growing demand for labor. More than 120,000 seasonal visas were requested this year, so tens of thousands of summer positions in hotels, fisheries and elsewhere will go unfilled. Businesses in disparate industries will be competing for too few foreign workers. And because the government usually requires between 30 to 60 days to process visas, workers may not arrive in time to benefit some employers. The result will be reduced economic output and perhaps shorter vacations for U.S. workers.

The decision to grant the new visas is a de facto admission that the U.S. has a labor shortage. Why hurt the economy by providing so few?

Article Link To The WSJ:

U.S. Allows More Seasonal Workers As Trump Pushes 'Hire American'

By Doina Chiacu and David Shepardson
July 18, 2017

The U.S. government cleared the way on Monday for thousands more foreign workers to enter the country under temporary seasonal visas, just as President Donald Trump declared this "Made In America" week and pledged to stand up for U.S. workers.

Advocates of stricter limits on immigration criticized the additional visas, saying American workers should get job openings.

Trump, a former New York real estate magnate who has relied on seasonal workers at his hotels and resorts, campaigned on promises to restore American jobs. On Monday, he showcased "Made in America" products at the White House and made an impassioned defense of America First policies.

"We're going to stand up for our companies and maybe most importantly for our workers," the Republican president said. "Clearly it's time for a new policy, one defined by two simple rules: We will buy American. And we will hire American."

Federal officials said there were not enough qualified and willing American workers available to perform certain types of temporary nonagricultural work.

As a result, the government will allow 15,000 additional visas for temporary seasonal workers, meant to help American businesses in danger of suffering irreparable harm because of a shortage of such labor, the Department of Homeland Security said in a statement.

"As a demonstration of the administration's commitment to supporting American businesses, DHS is providing this one-time increase to the congressionally set annual cap," Secretary of Homeland Security John Kelly said in a statement.

Many seasonal businesses such as resorts, landscaping companies and seafood harvesters and processors had sought permission to temporarily hire more immigrants.

Congress originally set the cap at 66,000 workers for the fiscal year ending Sept. 30. In May, lawmakers gave Kelly authority to approve up to an additional 70,000 temporary visas and pleaded with him to use his authority to issue as many of them as he thought appropriate.

Roy Beck, president of NumbersUSA, a group that supports immigration controls, said in a statement the decision "threatens to reverse the trend of reports emerging around the country of employers working harder and raising pay to successfully recruit more unemployed Americans for lower-skilled jobs."

Beck said it was "yet another example of the administration and Congress failing to keep the Trump campaign promise of putting American workers first."

'Minimal Relief Granted'

Trump campaigned on an "America First" platform of favoring Americans for hiring. Trump's golf resorts in Florida have used the visas, however, to hire temporary guest workers (reut.rs/1R4pKma).

The clothing line of the president's older daughter and adviser, Ivanka Trump, uses foreign factories employing low-wage workers in countries such as Bangladesh, Indonesia and China, a recent Washington Post report showed.

A group of U.S. companies that use the visas, called the "the H-2B Workforce Coalition," praised the "minimal relief granted."

It said: "From landscapers in Colorado to innkeepers in Maine to seafood processors along the Gulf Coast to carnivals nationwide, we hope the visa expansion will help some businesses avoid substantial financial loss, and in some cases, prevent early business closures during their peak season."

A report on Monday by the Economic Policy Institute, a liberal think tank, found, however, there was little evidence of worker shortages in H-2B jobs at the national level.

“Expanding the H-2B program without reforming it to improve protections and increase wages for migrant workers will essentially allow unscrupulous employers to carve out an even larger rights-free zone in the low-wage labor market,” said Daniel Costa, director of immigration law and policy research at the institute.

Kelly has acknowledged that many temporary workers "are victimized when they come up here, in terms of what they’re paid."

DHS said the government had created a tip line to report any abuse of the visas or employer violations.

Article Link To Reuters:

U.S. Companies Have A New 401(k) Fix: Spend More

Microsoft, Host Hotels, others raise contributions to retain employees, encourage older workers to retire.

By Sarah Krouse
The Wall Street Journal
July 18, 2017

Microsoft Corp. MSFT 0.78% and Host Hotels & Resorts Inc. are among a growing number of companies boosting contributions to 401(k) plans because some workers aren’t saving enough, a move many firms have long resisted because of the costs.

The average company contribution to 401(k) plans rose to an estimated 4.7% of employee salaries in 2016, up from 3.9% in 2015, according to data on 1,900 workplace retirement savings plans run by mutual-fund company Vanguard Group. It was the highest percentage and biggest year-to-year jump since at least 2007.

Some companies in certain industries say they need to spend more to retain the best employees and motivate staff. They also need to ensure that older, relatively expensive workers can afford to retire on time and make way for younger staff, retirement specialists said. Employees who don’t have adequate nest eggs will stay in their jobs longer and add to a company’s overall health-care costs.

The boost in contributions represents a policy shift for American companies that embraced tax-deferred 401(k) plans partly because the savings tool allowed them to shift the burden of paying for retirement to employees. Many shed more expensive defined-benefit pension plans that guaranteed employees a certain percentage of their salary in retirement.

Companies tried to encourage more 401(k) savings over the past decade by automatically enrolling workers in the plans and boosting the amount employees set aside each year unless they opted out.

But many U.S. workers still aren’t saving enough on their own. The average percentage they set aside among Vanguard-run retirement accounts has dropped since 2007 largely because more new 401(k) savers were enrolled at lower initial savings rates. The average total employee and company contributions to workplace savings plans among workers who participate, as a result, haven’t moved above 11% of salaries for at least a decade.

Many retirement plan advisers say employees need to save about 15% of their salaries each year. Workers can save that sum using their 401(k) and other tools like individual retirement accounts.

“If you want people to retire at a certain time they need to have acquired sufficient assets,” said Jean Young, a senior research analyst at the Vanguard Center for Investor Research. “There’s a growing interest among some employers in supporting that dynamic,” with more money.

The added contributions by some companies to their 401(k)s are a change from the depths of the financial crisis when many employers suspended or pared back contributions. The prolonged economic recovery in the years since has put many companies on more stable footing.

A 401(k) is an employer-sponsored plan that allows workers to contribute part of their pretax pay up to certain federal limits. That money typically isn’t taxed until it is withdrawn, and participants generally pick from a list of funds and investment options. Companies aren’t required to make their own contributions to employee accounts, but some companies agree to match a portion of what workers chip in. These accounts rise and fall with financial markets.

Some firms are using more generous 401(k) contributions to help attract and retain talent, said Aimee DeCamillo, head of retirement plan services at T. Rowe Price Group Inc.

Ultimate Software Group Inc. steadily increased the company match for its $281 million 401(k) plan in recent years as it met new revenue targets. In January 2016, the Weston, Fla.-based company pushed its match to 40% of any employee contribution up to federal limits for its roughly 3,700 workers, up from 35%.

Another company that recently contributed more money, Host Hotels, said it hadn’t done enough to get employees to the savings rate many advisers recommended.

“We weren’t getting people to the 15%” contribution level retirement advisers recommend, said Karen Montague, director of total rewards at Host Hotels, a real-estate investment trust that owns properties run by big hotel chains such as Hilton Worldwide and Marriott International Inc.

So in April Host increased its company match and now chips in 50 cents of every dollar its 220 employees invest in its 401(k) plan, up to 8% of their salary, an increase from the previous 6% limit.

Host also has a discretionary system that matches as much as an additional 4% of salary each year, up from 3% before the change.

The change to Host’s matches means the company is likely to contribute an additional $250,000 to the plan, based on 2016 contribution data. Increasing the discretionary component could result in another $300,000 a year, the plan’s administrator said.

In Seattle, Microsoft tried to change employee behavior before increasing its own contributions. Roughly three years ago it increased the salary amounts workers pick to contribute when they sign up for a 401(k). Workers now choose from the options of 8%, 10% or 12%, as compared with 6%, 8% or 10%.

Last year Microsoft offered more money to the more than 60,000 current employees in its 401(k) plan. Instead of chipping in half of up to 6% of each worker’s salary, the firm started matching half of all employee contributions up to federal limits. The government limits employee contributions and sets an overall limit on the amount channeled into an individual’s plan.

As a result of that change the company contributed roughly $150 million more to its $17 billion retirement savings plan last year.

“It’s a no-brainer to try and max that out as much as possible,” said Francois Burianek, a 43-year-old senior software engineer for Microsoft’s Xbox gaming unit, who raised his 401(k) contributions by more than 70%.

After one year of the increased match, 52% of Microsoft workers had maximized the amount of pretax money they contributed to the plan, up from 36% in 2015, the company said. That was half the time the company’s research suggested it could take to get 50% of its employees to maximize the amount they contributed.

“It’s blowing my budgets,” said Fred Thiele, general manager, global benefits at Microsoft.

But the move encouraged more workers to save additional money for retirement, particularly those with lower incomes, which was the company’s intent.

Article Link To The Wall Street Journal:

Netflix Triggers Shareholders’ Pavlovian Response

By Jennifer Saba
July 18, 2017

Netflix has proved again that it has a way of triggering a Pavlovian response from its shareholders. The video-streaming service on Monday unveiled second-quarter results that show it added more subscribers than expected. It also grew operating income faster than revenue. That sent shares soaring, even though expected profitability falls a long way short of being able to justify the stock’s fairy-tale multiple.

The company lead by Reed Hastings blew past subscriber forecasts, racking up more than 1 million net additions in the U.S. and some 4 million additions internationally. All told, Netflix has 103 million customers worldwide. Operating income is forecast to almost double to $204 million during the third quarter compared to the same period last year. That’s on top of growing, at 83 percent, almost three times as fast as the top line in the three months to June. In after-hours trading on Monday, after the results were released, shares shot up some 11 percent.

Yet Netflix burned through $608 million of cash during the second quarter, 44 percent higher than in the prior quarter. It’s expected to set ablaze up to $2.5 billion for the full year and expects free cash flow to be negative for “many years,” it told shareholders on Monday.

Netflix is using the greenbacks to fuel its own content creation - core to its strategy of luring more subscribers. That part, at least, is paying off. It is now picking up more Emmy nominations for its own programs, like “Stranger Things,” than any other media company save for “Game of Thrones” network HBO. Meanwhile, the second quarter may mark the first time that traditional pay-TV providers like Comcast and Charter have as a group lost more than 1 million video subscribers, UBS reckons.

Trouble is, Netflix’s subscriber and awards success is not enough to justify its stock-market valuation. The company currently trades at 36 times estimated consensus earnings for 2020, according to Thomson Reuters data. Yet its expected net margin of 11.5 percent will still run shy of traditional industry heavyweight Twenty-First Century Fox. That suggests investors believe Netflix is set for near-perpetual double-digit revenue growth. That faith, though, seems more a conditioned reaction than logical thinking.

Article Link To Reuters:

Taxing Hospitals Is A Lousy Way To Fix Health Care

Higher hospital profits were a feature of Obamacare, not a bug.

By Megan McArdle
The Bloomberg View
July 18, 2017

Before Obamacare passed, we were bombarded with statistics about the uncompensated care that hospitals provide. The numbers were large -- in the tens of billions -- and the implication was that this was something of a national emergency. Certainly it was one very good reason to pass the Affordable Care Act, so that hospital budgets wouldn’t groan under unpaid bills, and the people getting care could be sure that they wouldn't get turned away at the hospital door.

Seven years later, Obamacare is entrenched, and uncompensated care seems to have become a smaller problem. Which is -- bad?

In “How hospitals got richer off Obamacare,” Dan Diamond writes:

“The result, POLITICO’s investigation shows, is that the nation’s top seven hospitals as ranked by U.S. News & World Report collected more than $33.9 billion in total operating revenue in 2015, the last year for which data was available, up from $29.4 billion in 2013, before the ACA took full effect, according to their own financial statements and state reports. But their spending on direct charity care — the free treatment for low-income patients — dwindled from $414 million in 2013 to $272 million in 2015.”

This result is not surprising; indeed, it was intended. Obamacare was supposed to increase utilization of the health-care system -- which means utilization of hospitals, and therefore, their profitability. It was supposed to reduce the number of people who had medical bills they couldn’t pay. If you supported Obamacare, this is good news for your position: It shows the law working roughly as it was supposed to. So what’s the issue?

Well, many hospitals have non-profit status, which means they don’t pay taxes on their revenue. To keep that nonprofit status, they are supposed to provide community benefits. One of the major benefits they provided was health care for people without insurance. Now that fewer people are without insurance, there is a question about just what constitutes a community benefit that would justify leaving these hospitals untaxed. National Nurses United, a union that the article cites repeatedly, would like that community benefit to be defined as providing charity care. Hospitals would like it defined as “Anything we want to call community benefit.”

Anytime anyone in Washington opens their mouths in public, you can be pretty sure that they are doing what Wall Street types call “talking their book” -- in more common parlance, “trying to make themselves some money.” This is no exception. The labor union seems to be seeking to turn this provision of the tax code into a jobs program for nurses, by mandating that non-profit hospitals spend a certain amount of their revenue on charity care, an activity which will, of course, require the employment of many nurses. The hospitals, meanwhile, are trying to avoid paying a large tax bill, while avoiding any government interference in their operations. Both sides have wrapped themselves in the banner of the public good, as special interests are apt to do while they are sliding their hands into the taxpayer’s pocket.

Neither side is necessarily wrong: Sometimes lobbyists promote good ideas that just happen to make their clients some money. And I find it all too easy to believe that hospitals are benefitting from a nice tax subsidy while not really doing much worth subsidizing.

But if that’s the case, then the best solution is probably to stop subsidizing it, not to make the subsidy more complex. A lot of the current mess in the American health-care system can be traced back to the thicket of hidden subsidies and fiddling regulations we’ve enacted over the years, trying to fine-tune the system into some platonic ideal where nothing ever goes wrong and no one ever makes an unseemly amount of money. But fine tuning has not delivered us the platonic ideal of anything, except perhaps the word “dysfunction.” It might be time to step back and rethink our approach.

We might start by asking ourselves, “Why are hospitals tax exempt in the first place?” When the income tax was first levied, giving hospitals nonprofit status made sense, because these organizations did largely act as charities. Over the succeeding decades, however, the government decided that it didn’t want to rely on charities for charity care, and enacted a series of programs that financed such care with government dollars.

In an ideal world, perhaps hospitals would have gratefully accepted those dollars, and redirected the money they’d been spending on treating patients to cover gaps in the system, like dental care (woefully underprovided either by charity or government fiat). But we do not live in the ideal world. The difference between a charity hospital and its for-profit brethren has shrunk smaller and smaller, and by now, seems too small to justify treating them as charities.

Unfortunately, stripping hospitals of their tax-exempt status would entail a bruising lobbying battle. (Especially since teaching hospitals, major beneficiaries of the exemption, deliver a double punch, because they are part of both the hospital and the educational lobbies). The first best solution may not be possible, so as is often in politics, we may have to settle for second best.

But is second best really a massive public charity program, opaquely financed by taxpayer dollars, but invisible to the voting public? Special interest lobbies love such programs, because the general public will probably never know they exist, and is unlikely to sit still for an explanation of why this costs them billions of dollars every year. By redirecting the money this way, we also ensure that this dubious tax exemption becomes even more politically difficult to repeal; we will thus continue to spend this money, decade after decade, whether or not it is needed or wanted or less valuable than some other potential use for those government funds.

It’s galling, of course, to see hospitals getting away with something. But much of the new money we spent on Obamacare was always going to end up benefitting some third party, rather than the uninsured, because someone has to be paid to provide all the new services. And like all major new laws, it has delivered a windfall to some group that didn’t really do much to deserve it. When the dust clears, and we can see who’s holding the windfall, it’s tempting to say “That’s not what I wanted!” and frantically start trying to redistribute the windfall to some more deserving party by piling even more regulations atop the ones we already enacted.

But such instincts should be kept under strict control, because they lead to the piecemeal meddling that got us into this mess in the first place. The original sin of our health-care system, after all, is the tax deduction for employer-sponsored insurance, which began its life as an attempt to patch another major government program -- the World War II system of wage and price controls -- that turned out to have some unexpected side effects. Such little patches often turn into the exhibition tent for some amazing new boondoggle. And frankly, our health-care system can’t afford to add any new spectacles to its already remarkable collection.

Article Link To The Bloomberg View:

Why The Case For Recession Doesn’t Add Up

Capacity’s not that tight, assets not that pricey, bull not that old.

By Tim Mullaney
July 18, 2017

U.S. factories, mines and utilities are operating at about 76.6% of their full capacity, which suggests companies could easily increase production.

It’s easy to be nervous about the United States these days — its economy, or pretty much anything else about it. So maybe it’s no surprise that some pundits are speculating that we’re headed for a recession: The labor market’s a little too good, the stock market’s a little too high, everything is a little too stable, even if growth hasn’t been very exciting.

The U.S. economy’s collar, in other words, doesn’t match the cuffs of its political leadership, careening as it is between amusing, angry-making and just plain scary.

But none of the conditions for a recession are there in any convincing fashion — at least not to me. The only real way it happens is if the Federal Reserve messes up (possible) or if President Donald Trump discovers his inner Lyndon Baines Johnson and masters the Senate (uh, no) to pass some really bad, overexpansionary fiscal policy.

The arguments for an expansion rotting away into recession don’t hold up. Let’s take them one at a time.

We’re at or over capacity.

The recession case begins with the assumption that the economy’s near full strength, and that any further acceleration creates the overripe rot that provokes recessions. (In housing last time, technology stocks and corporate tech investment in 2000, and so on). That case begins with the 4.4% unemployment rate, arguing that it represents employment so full that labor markets can’t get any better without sparking inflation.

But is that really so?

The most-obvious rebuttal is the percentage of factory capacity being utilized, still at a historically measly 76.6%. (Every recession in the last 50 years has been preceded by this number topping 80). Add to that terrible recent productivity growth, because of weak investment in new plants and equipment (not a surprise, since existing stuff is underused). Business isn’t doing what business does when it’s under pressure — find ways to do the same job with fewer workers.

Then you get to the labor market, which isn’t all that tight. While an estimated 79% of the drop in work-force participation since 2006 is due to baby boomers retiring, the part that’s not represents 1.7 million potential workers, says Jason Furman, chairman of the Council of Economic Advisors under Barack Obama.

An slightly hotter economy would lure some back to work, boosting growth. If it didn’t, a sustained expansion might accelerate wage growth faster than the 2.5% of the last year — which, given the ample room for more productivity-boosting investment, needn’t boost inflation.

There’s plenty of capacity left, in other words.

Asset prices are too high and have to pop.

The case here isn’t very convincing either.

Let’s start with the easiest cases. Commodity prices aren’t overheating — indeed, the collapse in many commodities is one reason inflation is so low. Oil was $100 a barrel, now it’s $50. Gold is down by a third. Corn and copper are down double-digit percentages from cyclical peaks. It goes from there.

Housing prices have come back, but relative to incomes they are still firmly under control, said Moody’s Analytics chief economist Mark Zandi. The median U.S. household makes about $57,000, and the median existing house price of $252,000 requires about $46,000 in annual income with 10% down, per Bankrate.com. Commercial real estate is more expensive than any time since right before the last recession, according to Moody’s data, so the bears have a point there.

Even stock valuations look OK, once you get past energy shares. The price-to-earnings multiple of the S&P 500 is 19 times this year’s estimated profits —and that’s inflated by energy stocks temporarily elevated while the market bets on a recovery in industry profits. Absent energy, the market’s cheaper than in 2014, says Howard Silverblatt, a senior analyst for Dow Jones Indices. Nine of 11 industry sectors — all except energy and commercial real estate — are cheaper than in 2016.

Debt loads are so heavy folks have to cut back.

Not very convincing here either. Household debt loads — the percentage of income required to meet debt service — are virtually the lowest ever, and 30% less than in 2007. Unless interest rates double, that won’t change. Cheap housing loans and conservative credit-card usage has been a good combination, offset only partially by student-loan debt.

Corporate debt loads aren’t bad either. Outside of finance, debt loads as a percentage of companies’ equity have dropped by a quarter since 2009, even with the fuss over companies borrowing to buy back shares -- which most could reverse quickly by selling new stock if they have trouble making the payments.

My view may be a touch too calm, but fundamentals support it.

The core of any economy is consumer spending, and consumer fundamentals are solid — incomes are rising by about a percentage point more than core inflation each year, and consumers’ finances are solid. Unemployment is low but the long-predicted wage acceleration’s failure to appear suggests the labor market is not overheating. That the financial markets aren’t the center of the action right now — tech, business services and health care are — may disconcert Wall Street, but it reflects the basic health of Main Street.

If anything, persistently modest wage growth suggests the risk is the opposite of what some fear — rather than racing off a cliff into a recession, an expansion that has never been hot enough to satisfy anyone could be endangered by a Fed that moves too quickly, rather than too slowly, to cool off an expansion.

That could happen, but it hasn’t in a long time. On the date of the next recession, take the over.

Article Link To MarketWatch:

Major Takeaways From Trump’s Nafta Negotiation Objectives

Planned overhaul includes some items already negotiated under the Trans-Pacific Partnership.

By Bob Davis and Jacob M. Schlesinger
The Wall Street Journal
July 18, 2017

The Trump administration on Monday published its long-awaited negotiating objectives for a planned overhaul of the North American Free Trade Agreement, or Nafta. The objectives, required for a rewrite of the law, allow U.S. officials to begin formal talks with Canada and Mexico in as little as 30 days. The move also opens up what’s expected to be a spirited debate in Congress, where majority votes would be needed in the House and Senate to pass any new deal. Here are some major takeaways:

TPP By Another Name

The Nafta objectives include a number of items already negotiated under the Trans-Pacific Partnership, which President Trump killed on his first full workday in the Oval Office. They include rules covering state-owned enterprises, e-commerce and financial services. These should be easy parts to negotiate, since all three nations already agreed to such measures under TPP.

Environment And Labor

The administration says it wants to make environmental and labor disputes subject to Nafta arbitration panels—meaning that alleged violations can be punished by the imposition of tariffs. They would replace weak labor and environmental panels that were added to Nafta after the main accord was negotiated as a way to win congressional support for the trade pact. Businesses in all three countries are likely to object.


The administration wants to make Nafta the first U.S. trade pact to police “currency manipulation.” That would be a big deal—and one that may be easy to reach, because neither Canada nor Mexico face such accusations, which are usually leveled at Asian trading partners. The goal would be to establish this as precedent for future trade pacts.

Tougher Enforcement

One area where the plan does embrace the trade warrior agenda is a proposal to scrap a special Nafta provision that has made it easier for Canada and Mexico to avert U.S. trade sanctions, the so-called “Chapter 19 dispute settlement mechanism” that allows Nafta partners to challenge duties before a special Nafta tribunal available only to them. Canada in particular has made keeping Chapter 19 a priority. Chad Bown of the Peterson Institute for International Economics says the Trump administration’s general focus on tougher enforcement will likely push Canada to dig in on keeping Chapter 19, making this one likely flashpoint of the talks.

Investor Protection

There is no provision of Nafta—or other trade deals—that irks critics more than the ability of investors to sue governments in arbitration panels over policies they deem antibusiness. A loss of sovereignty, the critics say. A necessary alternative to corrupt legal systems, counters business. The U.S. seeks a middle-ground that may not exist: The U.S. wouldn’t eliminate the panels, but would constrain their power in the U.S.

Who’s Nafta For?

The document does acknowledge some winners from Nafta—notably “farmers and ranchers” who got “much needed market access” from the pact. That’s a nod to the (heavily Republican) farm-state lawmakers who have made clear to Mr. Trump he’d better not mess with their success. It largely portrays the pact as a raw deal for “American workers,” slammed by factories lost due to outsourcing. The broad goal is to help companies “grow their exports.” Left unmentioned: American consumers, who, economists say, have gained tremendously from the pact through cheaper prices and greater variety.

Which Trump Faction Won?

All Trump trade pronouncements are scrutinized for which faction of his advisers won: the economic nationalists who shaped his campaign platform, or the globalists who run his economic team. The quick Kremlinology says it’s the globalists, led by Gary Cohn, the former Goldman Sachs Group Inc. president running the White House National Economic Council. That said, the battle isn’t over. Many of the provisions remain vague. And Mr. Trump has reserved the right to pull out altogether—the goal of his nationalist advisers—if he’s not pleased with the final result.

Article Link To The WSJ:

U.S. Makes Lower Trade Deficit Top Priority In NAFTA Talks

By Lesley Wroughton and David Lawder
July 18, 2017

The United States on Monday launched the first salvo in the renegotiation of the 23-year-old North American Free Trade Agreement (NAFTA), saying its top priority for the talks was shrinking the U.S. trade deficit with Canada and Mexico.

In a much-anticipated document sent to lawmakers, U.S. Trade Representative Robert Lighthizer said he would seek to reduce the trade imbalance by improving access for U.S. goods exported to Canada and Mexico under the three-nation pact.

For the first time in a U.S. trade deal, the administration also said it wants an "appropriate" provision to deter currency manipulation by trading partners. The move appeared aimed at future trade deals rather than specifically at Canada and Mexico, which are not considered currency manipulators.

The 17-page document asserted that no country should manipulate its currency exchange rate to gain an unfair competitive advantage, an often-cited complaint about China in past years.

Shortly before the release of the document, President Donald Trump lashed out against trade deals and unfair trade practices, saying he would take more legal and regulatory steps during the next six months to protect American manufacturers.

Canadian Minister of Foreign Affairs Chrystia Freeland said the U.S. list was "part of its internal process" although a source familiar with the Canadian government's thinking said the document was "not earth shattering."

The source said officials from the United States, Mexico and Canada would meet in Washington on Tuesday to discuss logistics of the talks. No date has been announced for the NAFTA talks, but they are expected in mid-August.

Mexico's economy ministry said in a statement it would work "to achieve a constructive negotiation process that will allow trade and investment flows to increase and consolidates cooperation and economic integration to strengthen North American competitiveness."

Speaking on condition of anonymity, a senior Mexican government official said the list of priorities was "not as bad as I was expecting" and welcomed that the United States was not pushing to impose punitive tariffs, as Trump has threatened.

Trade experts have argued that shrinking the yawning U.S. trade deficit will not be achieved through trade deals but rather by boosting U.S. savings.

"The first bullet point shows their preoccupation with bilateral trade deficits and that's unfortunate," said Chad Bown, a senior fellow and trade expert at the Peterson Institute for International Economics. "There's not much that trade policy and trade agreements can do to change those. That's more of a macroeconomic issue."

Among the priorities, Lighthizer said the administration would seek to eliminate a trade dispute mechanism that has largely prohibited the United States from pursuing anti-dumping and anti-subsidy cases against Canadian and Mexican firms.

There was no mention of active disputes between the United States and Canada over softwood lumber and dairy products, but the document targeted a range of agricultural non-tariff barriers, including subsidies and unfair pricing structures, that are currently at the heart of those standoffs.

USTR said it would seek to strengthen NAFTA's rules of origin to ensure that the pact's benefits do not go to outside countries and to "incentivize" the sourcing of U.S. goods. It offered no details on such incentives and did not specify how much of a product's components must originate from NAFTA countries.

Automakers Support Stance

Matt Blunt, president of the American Automotive Policy Council, a group representing U.S. automakers, welcomed the decision to include objectives on the removal of regulatory barriers and the provision on currency manipulation.

A spokesman for Ford Motor Co said: "Foreign currency manipulation is the 21st century trade barrier, and we strongly support the inclusion of this top-tier issue in the U.S. negotiating objectives for NAFTA."

The document also outlined plans to upgrade standards for labor and the environment and govern digital trade. Canada and Mexico have already agreed to upgrade these areas as part of the defunct Trans-Pacific Partnership trade deal.

Earlier on Monday, AFL-CIO President Richard Trumka said NAFTA had been an "unequivocal failure" and should be completely renegotiated although he stopped short of calling on Trump to abandon the agreement if there was no agreement.

"We will do everything we can to make this a good agreement and to hold the president at his word and make sure we get a renegotiation," the head of the 12.5-million-strong union umbrella group told a conference call with reporters.

"If it comes out that it is not a good deal, no deal is better than a bad deal," Trumka said.

NAFTA has quadrupled trade among the three countries, surpassing $1 trillion in 2015, but the U.S. trade deficit with Mexico exceeded $63 billion last year.

Article Link To Reuters:

Why Do Cities Become Unaffordable?

By Robert Schiller
Project Syndicate
July 18, 2017

Inequality is usually measured by comparing incomes across households within a country. But there is also a different kind of inequality: in the affordability of homes across cities. The impact of this form of inequality is no less worrying.

In many of the world’s urban centers, homes are becoming prohibitively expensive for people with moderate incomes. As a city’s real-estate prices rise, some inhabitants may feel compelled to leave. Of course, if that inhabitant already owned a house there that they can sell, they may regard the price increase as a windfall that they can claim by departing. If not, however, they may be forced out with no compensation.

The consequences are not just economic. People may be forced out of cities where they have spent their entire lives. Leaving amounts to losing lifelong connections, and therefore can be traumatic. If too many lifelong inhabitants are driven out by rising housing prices, the city itself suffers from a loss of identity and even culture.

As such people depart, an expensive city gradually becomes an enclave of high-income households, and begins to take on their values. With people of various income levels increasingly divided by geography, income inequality can worsen and the risk of social polarization – and even serious conflict – can grow.

As this year’s Demographia International Housing Affordability Surveyshows, there are already massive disparities across major global cities (measured by the ratio of median home prices to median household income). A high ratio correlates with high pressure for people to leave.

This year’s survey, which covered 92 cities in nine countries, showed that, as of late 2016, Hong Kong had the least affordable housing, with a price-to-income ratio of 18.1. That means that paying off a 30-year mortgage on a median-price home would cost a median-income buyer more than half of their income – and that is without interest. Mortgage rates are low in Hong Kong, but not zero, suggesting it is just about impossible for a median-income household to purchase a home there without access to additional funds from, say, a parent, or, if the buyer is an immigrant, from abroad.

After Hong Kong, the list continues with Sydney (12.2), Vancouver (11.8), Auckland (10), San Jose/Silicon Valley (9.6), Melbourne (9.5), and Los Angeles (9.3). Next come London and Toronto – at 8.5 and 7.7, respectively – where housing is extremely expensive, but incomes are also high.

Meanwhile, some attractive world cities are quite affordable, relative to incomes. In New York City, the median home price stands at 5.7 times median household income. In Montreal and Singapore, that ratio is 4.8; in Tokyo and Yokohama, it is 4.7; and in Chicago, it is 3.8.

Maybe the figures for these outlier cities aren’t precise. They are hard to check, and there must be inconsistencies across cities, countries, and continents. For example, the geographical boundaries of the areas used to compute median price and median rent may vary. In some cities, higher-priced homes may tend to turn over more rapidly than in others. And some cities may be inhabited by larger families, implying bigger houses than in other cities.

But it seems unlikely that the errors could be so significant that they would change the basic conclusion: home affordability around the world is highly variable. The question, then, is why residents of some cities face extremely – even prohibitively – high prices.

In many cases, the answer appears to be related to barriers to housing construction. Using satellite data for major US cities, the economist Albert Saiz of MIT confirmed that tighter physical constraints – such as surrounding bodies of water or land gradients that make properties unsuitable for extensive building – tend to correlate with higher home prices.

But the barriers may also be political. A huge dose of moderate-income housing construction would have a major impact on affordability. But the existing owners of high-priced homes have little incentive to support such construction, which would diminish the value of their own investment. Indeed, their resistance may be as intractable as a lake’s edge. As a result, municipal governments may be unwilling to grant permits to expand supply.

Insufficient options for construction can be the driving force behind a rising price-to-income ratio, with home prices increasing over the long term even if the city has acquired no new industry, cachet, or talent. Once the city has run out of available building sites, its continued growth must be accommodated by the departure of lower-income people.

The rise in housing prices, relative to income, is unlikely to be sudden, not least because speculators, anticipating the change, may bid up prices in advance. They may even overshoot, temporarily pushing the ratios even higher than necessary, creating a bubble and causing unnecessary angst among residents.

But this tendency can be mitigated, if civil society recognizes the importance of preserving lower-income housing. Many of the calls to resist further construction, residents must understand, are being made by special interests; indeed, they amount to a kind of rent seeking by homeowners seeking to boost their own homes’ resale value. In his recent book The New Urban Crisis, the University of Toronto’s Richard Florida decries this phenomenon, comparing opponents of housing construction to the early-nineteenth-century Luddites, who smashed the mechanical looms that were taking their weaving jobs.

In some cases, a city may be on its way to becoming a “great city,” and market forces should be allowed to drive out lower-income people who can’t participate fully in this greatness to make way for those who can. But, more often, a city with a high housing-price-to-income ratio is less a “great city” than a supply-constrained one lacking in empathy, humanitarian impulse, and, increasingly, diversity. And that creates fertile ground for dangerous animosities.

Article Link To Project Syndicate:

Now That The GOP Can Replace ObamaCare, It’s Suddenly Got Cold Feet

By Rich Lowry
The New York Post
July 18, 2017

If the Republican attempt to repeal and replace ObamaCare ultimately fails, it will be a lesson in the wages of political bad faith.

The current path of the Senate bill has plenty of obstacles, including the sheer inertia of the ObamaCare status quo and the fact that no one has made the public case for the Republican legislation. But the effort also suffers from a mismatch between the longtime public posture of Republicans (ObamaCare must and will be fully repealed) and their private misgivings (do we really have to do this, even partially?).

It’s not just that Republicans have said for years that they would repeal ObamaCare — they actually voted to do it. In December 2015, a bill passed the Senate that was more stringent than the version now struggling to collect GOP support. The 2015 bill only tried to repeal ObamaCare (although it fell short of that goal), while the current bill attempts to repeal and replace, i.e., forge a Republican alternative.

Only two GOP senators voted against the 2015 repeal, Susan Collins of Maine, who is still a “no,” and Mark Kirk of Illinois, who is out of the Senate. Every other Republican was on board, and celebrated a righteous blow against ObamaCare.

Churchill said that nothing is so exhilarating as getting shot at without consequence. For Republicans, nothing was as exhilarating as repealing ObamaCare without consequence.

The repeal bill inevitably got vetoed by President Barack Obama. Republican congressional leaders thought they could pick up where they had left off. They failed to account for the changed — and more difficult — dynamic with a Republican in the White House ready and eager to sign whatever gets to his desk.

The prospects of the current bill are clouded by the hesitance of the Medicaid moderates, Republican senators from states that accepted the ObamaCare expansion of the program.

The legislation is hardly Dickensian on this front. It allows states to continue the expansion, but, over time, brings the level of federal funding for the new population down to the levels for the rest of Medicaid. (Years from now, it also establishes a new per-capita formula for all of Medicaid.)

The 2015 law was tougher on the expansion — it simply ended it after two years — and yet all of today’s hand-wringers voted for it.

Perhaps they are disturbed by the coverage numbers the Congressional Budget Office has produced about the current bill? According to the CBO, it would lead to 22 million fewer people having insurance. But the earlier repeal bill, per the CBO, would have led to . . . 32 million fewer people having insurance.

Perhaps they think the current bill should be more generous? The fact is the Senate bill unveiled a few weeks ago spends roughly $600 billion on replacing ObamaCare, or $600 billion more than the December 2015 bill. It has since been revised to spend even more, and scale back the tax cuts.

As the publication Health Affairs starkly noted of the 2015 legislation at the time, “it would end the premium tax credits, the cost-sharing reduction payments, the Medicaid expansion, and the small business tax credits — that is, all of the assistance that the ACA gives to low and moderate-income Americans.”

(Rand Paul, whose shtick is libertarian purity, is guilty of his own hypocrisy. He portrays the 2015 bill as preferable to the current version, which he opposes for not fully repealing ObamaCare regulations. But the 2015 bill didn’t touch any of the major ObamaCare regulations.)

All of this is why the Plan B endorsed by President Trump — to revert to a repeal-only bill if the current bill fails — is a non-starter. If there aren’t 50 Republican votes for today’s relatively generous bill, there won’t be 50 votes for anything like what passed a year-and-half ago.

Unless, perhaps, Trump promises to veto it, and Senate Republicans can consider it once again a blissfully consequence-free vote.

Article Link To The New York Post: