Thursday, August 3, 2017

Thursday, August 3, Morning Global Market Roundup: Asian Shares Slide As Tech Shares Crumble After Dow Hits 22,000

By Hideyuki Sano
August 3, 2017

Asian shares slid on Thursday, led by falls in South Korean tech shares, as investors locked in recent gains after Wall Street's Dow Jones Industrial Average broke the 22,000 barrier for the first time in its 121-year history.

Spreadbetters expected European stocks to follow suit, predicting Britain's FTSE and Germany's DAX to both open about 0.1 percent lower while forecasting a flat open for France's CAC.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.6 percent, with South Korea's tech-heavy Kospi index on course to drop 1.6 percent.

"We haven't seen a major correction in tech shares so far this year so they may be hitting a speed bump," said Nobuhiko Kuramochi, chief strategist at Mizuho Securities.

Samsung Electronics, which last Friday posted its biggest daily fall since October, slid 2.3 percent, giving up the gains made so far this week. SK Hynix dropped 2.9 percent.

"Those shares that were bought heavily on Tuesday are being sold aggressively. I would suspect investors want to take profits quickly after they saw a sharp correction last week," said Yukino Yamada, senior strategist at Daiwa Securities.

Some Seoul shares took an additional hit from President Moon Jae-in's new tax plan.

Japan's Nikkei dropped 0.3 percent.

In New York overnight, the Dow Jones Industrial Average topped the 22,000 mark for the first time on the strength in Apple shares following its earnings.

The S&P 500 gained 0.05 percent, hovering just below its record high touched last week, supported by upbeat earnings and rising expectations that the Federal Reserve's policy tightening will move ahead only slowly.

"The stock markets are supported by steady growth in earnings," said Mutsumi Kagawa, chief global strategist at Rakuten Securities, noting steady growth in forward earnings in the United States, Japan and elsewhere.

"In addition, even as the economy grows, both policy interest rates and long-term interest rates remain low because inflation remains tame due to various structural reasons," he added.

U.S. inflation has been contained even as the country's labor market appears to be in its best shape in many years, with the jobless rate staying near a 17-year low.

A report by private payrolls processor ADP showed on Wednesday that private U.S. employers added 178,000 jobs in July, slightly below economists' expectations, although payroll gains in June were revised up to 191,000 from an originally reported 158,000.

Market participants expect the more closely watched government employment report due on Friday to show a solid expansion in U.S. job creation.

In the currency market, the dollar has been losing its luster as the euro zone and a few other countries have been slowly winding back stimulus.

The European Central Bank, which is buying 60 billion euro ($71 billion) bonds per month to shore up euro zone economies, is expected to unveil a plan to wind down the asset purchase program in coming months.

The euro traded at $1.1845, after having risen to as high as $1.19105 on Wednesday, its highest level since January 2015.

The common currency has strengthened sharply against the safe-haven Swiss franc, having gained more than four percent in less than two weeks to 1.1488 francs.

The British pound held near its highest in almost 11 months against a broadly weaker dollar ahead of the Bank of England's "Super Thursday", which could shed light on how soon interest rates could be lifted.

Sterling has been supported in recent weeks by expectations the bank might finally be getting ready for a hike after a series of hawkish comments from policymakers, though Governor Mark Carney could be more cautious.

The pound last traded at $1.3221 , near Wednesday's 11-month high of $1.3250.

The yen stepped back from Tuesday's 1 1/2-month high of 109.92 yen per dollar to trade at 110.69 yen .

Oil prices dipped as a rally that pushed up prices by almost 10 percent since early last week lost its momentum, despite renewed signs of a gradually tightening U.S. market.

While strong demand in the United States supported prices, ongoing strong supplies from OPEC producers restricted further gains.

Brent crude futures slipped 0.4 percent to $52.17 per barrel, still not far from Wednesday's high of $52.93, its highest level in 10 weeks.

Article Link To Reuters:

Oil Dips On High OPEC Supplies, Defying Falling U.S. Crude Stocks

By Henning Gloystein
August 3, 2017

Oil dipped on Thursday as a rally that has pushed up prices by almost 10 percent since early last week lost momentum despite renewed signs of a gradually tightening U.S. market.

Brent crude futures, the international benchmark for oil prices, were trading down 20 cents, or 0.4 percent, at $52.16 per barrel.

U.S. West Texas Intermediate (WTI) crude futures were at $49.40 per barrel, down 19 cents, or 0.4 percent.

Strong demand in the United States was supporting prices, while high supplies from OPEC producers were restricting further gains, traders said, pointing to a range-bound market.

"Both contracts appear to be moving into a range consolidation mode," said Jeffrey Halley of futures brokerage OANDA.

U.S. crude prices held below $50 per barrel despite record gasoline demand of 9.84 million barrels per day (bpd) last week and a fall in commercial crude inventories in the week to July 28 of 1.5 million barrels to 481.9 million barrels, according to the U.S. Energy Information Administration (EIA).

That's below levels seen this time last year, an indication of a tightening U.S. market.

Traders said ongoing high supplies by the Organization of the Petroleum Exporting Countries (OPEC) were capping prices.

The high OPEC supplies come despite a pledge by the group, supported by other producers including Russia, to restrict output by 1.8 million bpd between January this year and March 2018 in order to tighten the market.

Trading data in Thomson Reuters Eikon shows that crude oil shipments by OPEC and Russia, which excludes pipeline supplies, hit a 2017 high of around 32 million bpd in July, up from around 30.5 million bpd in January.

BMI Research said that the industry had adapted to the low oil prices.

"Of the major projects sanctioned by the big five oil companies (ExxonMobil, Royal Dutch Shell, Chevron, BP and Total) over H1 2017, there has been a clear breakeven target price of $40 per barrel or lower at offshore oil projects," BMI said.

This followed U.S. investment bank Goldman Sachs saying earlier this week that the oil industry had successfully adapted to oil prices around $50 per barrel.

Article Link To Reuters:

Oil's Going, Going, Gone: Auctions Reveal Clues On Crude's Worth

Producers seen auctioning crude on DME to gauge buyer interest; Process helps set official selling price for long-term cargoes.

By Serene Cheong
August 2, 2017

Oil producers who for years tracked top OPEC member Saudi Arabia to help set the price of their crude could now be looking to go solo.

With $100 oil a distant memory and U.S. crude eating into their share of prized markets, they are seeking new ways to assess if their supply may be worth more -- a prospect that’ll help prop up their battered economies. Iraq’s state oil marketing company and Malaysia’s government-run producer are auctioning off cargoes on the Dubai Mercantile Exchange this year for the first time as sellers look to gauge demand by analyzing bids and buyer interest.

By sending crude under the hammer, sellers are hoping potential buyers will outbid each other and boost the value of their oil. In more common methods such as tenders or private negotiations, prospective customers can’t top an opposing offer even if they are willing to because they may not be aware of it. Information gleaned from auctions is seen helping producers set monthly official prices for shipments under long-term contracts, which is how most of their crude is supplied.

“The purpose is not only to secure the best price, but the seller gets access to all this market intelligence that nobody sees,” said John Driscoll, chief strategist at JTD Energy Services Pte. “They see how many buyers are participating, how aggressive they are and whether they are willing to improve their price. Sellers are getting a much more indicative and reliable gauge of the market for the crude through this process.”

Two-Minute Auction

Iraq’s state oil marketing company, known as SOMO, conducted its first-ever auction in April, when it sold two million barrels of Basrah Light grade for June loading. The company has sold another four million barrels each of Basrah Light and Basrah Heavy since, with its most-recent sale attracting 17 bidders and 25 bids in a two-minute window. The September-loading heavy cargo was sold at $1.37 a barrel more than its official price, a bigger premium than for an August shipment.

The relatively higher price signaled healthy demand for the variety as Saudi Arabia, the world’s biggest oil exporter, focuses on curbing medium-heavy crudes as part of a pact with other producers to rein in the global glut. It also contributed to a rise in Iraqi official prices against competing Saudi Arabian grades, according to a Bloomberg survey of five traders who participate in the Middle East oil market.

“Middle Eastern producers have traditionally referenced Saudi Arabia’s official prices when setting their monthly offer prices,” said Driscoll, who has spent more than 30 years in the petroleum trading industry in Singapore. “As Saudi Arabia now tries to rein in a global oil glut with its own independent strategy, other producers may be more inclined to find alternative ways to value their barrels.”

Through its sale on the DME, SOMO received an independent assessment of the value of its crude, which it can use to set its official selling price, he said.

Last month, SOMO reduced its official selling price for Basrah Light by a smaller margin than Saudi Arabia cut its similar-quality Arab Medium. Iraq also increased the cost of Basrah Heavy by more than Arab Heavy was raised. The spread between Basrah Light and Arab Medium has widened to its highest level since September 2012, while the discount of Basrah Heavy to Arab Heavy has narrowed to the smallest in six months.

Shipping Restrictions

Still, it’s not always viable for producers to sell their supplies via auctions. Some cargoes from Kuwait, for example, are restricted in terms of where they can be shipped. That means buyers would be limited in their ability to transport the crude. Some suppliers could also have requirements related to credit and legal terms that participants cannot meet. Additionally, sellers may not have the option to auction because they have already committed all their volumes under long-term contracts.

Under the DME’s guidelines, sellers provide details on the type of crude, quantity, delivery and other specifications such as the floor price, date and duration of the auction. Buyers who’ve registered with the exchange can participate. While the process -- conducted via an electronic platform -- doesn’t reveal the identity of those participating, their real-time price offers are available for everyone to see and outbid.

“The auction will accomplish in a few minutes what could take hours or even days during a traditional tender process, and potentially reach a much wider base of counterparties and a fair access to spot cargoes to all term lifters and customers,” said Mayssam Hamadeh, head of marketing at DME. “Additionally, the audit trail provided by an electronic auction process is increasingly important to many companies.”

Better Value

Auction sales also help producers unload cargoes relatively quickly if they become available because of unexpected incidents such as refinery outages. Offering crude via auctions is also part of their effort to enhance their trading expertise and become more nimble as competition increases in an oversupplied market. National oil companies such as SOMO and Kuwait Petroleum Corp. are entering into partnerships with international trading houses.

“Traditional marketing approaches from the Middle East is going to start to evolve into a more trading practice,” said Richard Gorry, managing director at industry consultant JBC Energy GmbH. “With producers now looking to auction off more cargoes into a trader market, they feel that they may better understand the value of their crude oil.”

Article Link To Bloomberg:

OPEC's Game-Theory Dilemma

Cartel members are being pushed to seek ever-broader coalitions to secure an orderly influence on oil prices.

By Mohamed A. El-Erian
The Bloomberg View
August 3, 2017

Over the last few years, producers belonging to the Organization of Petroleum Exporting Countries have had mixed success at winning the price-setting "game" for oil. To stand a better chance of regaining durable control, they must do a much better job of working together, and, importantly, they need to do so in a much broader and more institutionalized manner. Otherwise, they risk finding that the calming influence of a good July for the oil market, including a 9 percent price gain, could give way to continuing pressure from nontraditional suppliers, particularly in shale, that are benefiting from cost-cutting innovations.

To win the price-setting game, oil producers need to address two related issues: They must maintain prices at a relatively high level without losing more market share to nontraditional producers, and they need to retain unity amid geopolitical tensions and disparities in domestic economic and financial situations.

The easiest way to achieve this -- absent a major exogenous shock to oil production -- is through a large increase in energy demand. This is unlikely to happen anytime soon. The alternative is better supply management. Here, OPEC members have essentially three types of approaches available, and each comes with implementation challenges.

The first is to try to establish and lead a broad coalition that includes non-OPEC producers and involves some type of understanding with nontraditional suppliers. This is OPEC's best chance of reversing the multi-decade process of transition from a cartel of the many when it comes to share of energy production to the cartel of the fewer.

But this first best approach for OPEC is not just the least likely; it may also be a non-starter, given that nontraditional producers have such a fundamentally different setup. They are much more dispersed and highly decentralized, and they have little experience in self-organizing. Also, many reside in the U.S., a legal jurisdiction that is highly averse to pursuing a government-led approach to oil production.

The second approach is for OPEC to try to strengthen its recent alignment with producers outside the cartel by seeking tighter production curbs and stronger verification and enforcement mechanisms, and adding the incentive of a stabilization fund that would help the more pressured producers through multiple cash crunches. Such a unified approach would provide oil producers with greater short-term influence over oil prices.

Again, implementation is far from straightforward, as it would require a greater level of cooperation among a group that includes increasingly bitter geopolitical rivals. Moreover, a heavy funding burden would need to be carried by the low-cost producers led by Saudi Arabia, and would involve a set of cross-subsidies that are likely to be a lot more permanent than they may wish to -- and should -- commit to.

The third approach would be for OPEC to go all out to meaningfully disrupt the current production of nontraditional suppliers and, simultaneously, cripple the flow of funds for their investment needs. By allowing oil prices to plummet and stay low for a considerable time, this approach would eat into both operating earnings and investable funds in a manner that would render a recovery tricky and a lot more uncertain for these suppliers. It would be a repeat of what was attempted starting in November 2014, but with more duration and structural underpinnings.

In this scenario, and without a meaningful pickup in demand, OPEC members would need to be willing and able to live with a lot lower oil prices. They would have to convince their citizens that the potential longer-term gains are worth what would likely be considerable short-term pain. And to maintain the type of unity that would be required to carry out potential mid-course corrections, they would need to introduce an even larger stabilization fund than required for second option.

Again, this is not an approach that OPEC would readily adopt. But members could risk slipping into a disorderly version of it if the current arrangement with non-OPEC producers does not hold.

This brief survey of the most likely types of supply approaches available to OPEC speaks to a larger notion of game theory. Having experienced a gradual and persistent erosion in its dominance of the oil market, OPEC members are being pushed to play a larger cooperative game that involves ever broader coalitions to secure an orderly influence on oil prices. This explains the step-up in contacts with non-OPEC producers. And it explains why the initial agreement reached already needs some tweaking.

The survey also suggests that, at least for now, the most likely outcome is one in which OPEC seeks to influence a series of range-bound trading bands around what is likely to be a declining secular trend longer-term. Periods of price recoveries within the bands, such as the one in July, should reinforce rather that deter member countries from implementing the fundamental changes at home that would make them more resilient to what is likely to be a trickier future.

Article Link To The Bloomberg View:

Rove: Kelly’s Boot Camp For Presidential Aides

Trump’s new chief of staff knows how to impose discipline -- if the president lets him.

By Karl Rove
The Wall Street Journal
August 3, 2017

John Kelly has injected some Marine discipline into a chaotic White House—for a few days, at least. Sworn in Monday as chief of staff, Mr. Kelly immediately cashiered the communications director Anthony Scaramucci, told other senior aides that they report to him, and curtailed Oval Office walk-in privileges. If he hadn’t taken these actions to reduce conflict, friction and end-runs in the West Wing, the retired general would have been neutered from the start.

But how long this new tone will endure is unclear, given Donald Trump’s mercurial moods. Will Mr. Trump resist Mr. Kelly’s efforts to impose order? Or will Mr. Trump realize that a strong chief of staff reflects a strong president, much as James Baker’s service revealed Ronald Reagan’s confident leadership?

There are many methods Team Trump might use to repair the early damage to the administration, some of which would work better than others. One not-so-promising approach would be appealing to the party loyalty of congressional Republicans—an idea Mr. Trump raised in his recent address to the Boy Scouts. “As the scout law says, a scout is trustworthy, loyal,” Mr. Trump said. “We could use some more loyalty, I will tell you that.”

But Mr. Trump, having not been a paragon of partisan fealty, is hardly in a position to insist on it now. He was a registered Democrat or independent for most of his life. Before running for president some of his largest political contributions went to help elect Nancy Pelosi speaker in 2006. He later said his only criticism of her performance was that she hadn’t done enough to impeach President George W. Bush, whom Mr. Trump opposed in 2004 while supporting John Kerry.

Most congressional Republicans don’t believe they owe Mr. Trump. No matter how much they welcomed his victory, many feel they pulled him into office, not the other way around. Of the 22 Republican senators elected last fall, only five trailed Mr. Trump in their states. To its chagrin, the left-wing Daily Kos found only 34 of the 241 victorious Republican congressmen didn’t get more of the vote than Mr. Trump.

The absence of a close relationship between the White House and Republican congressional leaders creates another challenge. Some White House aides and outside allies have aimed to disrupt or even oust the GOP’s House and Senate leadership. Mr. Kelly should restrain these impulses during the coming battles over tax reform, the budget, the debt ceiling, infrastructure and—possibly—health care again. “A drop of honey catches more flies than a gallon of gall,” as Lincoln put it.

Mr. Kelly’s challenge is to help Mr. Trump win support the old-fashioned way: by making a substantive case that the president’s policies are good for America. This requires strengthening the White House policy-making apparatus. Top advisers must not only frame good decisions for the president, but should also arm him and his supporters with arguments, talking points, rebuttals, fact sheets, story lines and examples of people who will be helped by his policies.

Putting an emphasis on substance will also require focusing the president’s voice. Discipline is not one of Mr. Trump’s strengths. Mr. Kelly must make it one. The president won’t persuade Congress and American voters to back his agenda unless he makes his case consistently, without skittering from issue to controversy and back again. There should be more set-piece speeches spelling out policies in a sustained fashion and fewer tweets attacking fellow Republicans or cabinet members.

The chief of staff should name a key lieutenant to replace Mr. Scaramucci. This new communications director would work closely with colleagues across the administration, allies on Capitol Hill, and outside groups to organize support for Mr. Trump’s initiatives. The strategy must employ every available means to transmit the White House’s message—from tweets, to cable, print and digital media, to town halls and Oval Office addresses. So far the administration’s communications strategy has been nonexistent.

Mr. Kelly is a decorated combat commander, but he is also a veteran of Washington’s political wars. He completed tours as the Marine liaison officer to the House, assistant to the Supreme Allied Commander of Europe, legislative assistant to the Marine Commandant and senior military assistant to two defense secretaries, Robert Gates and Leon Panetta. This experience should serve him and the president well in the tough battles ahead.

The first six months of the Trump presidency have been marked by chaos, and the administration cannot survive another six months of the same. Mr. Kelly has the skills to help the president turn things around. The question is whether Mr. Trump will empower him to do so.

Article Link To The WSJ:

In Rare Bipartisan Display, Democrats Back Trump On China Trade Probe

By David Lawder and Lesley Wroughton
August 3, 2017

Three top Democratic senators, in a rare show of bipartisanship, on Wednesday urged U.S. President Donald Trump to stand up to China as he prepares to launch an inquiry into Beijing's intellectual property and trade practices in coming days.

Senate Democratic leader Chuck Schumer pressed the Republican president to skip the investigation and go straight to trade action against China.

"We should certainly go after them," said Schumer in a statement. Senators Ron Wyden of Oregon and Sherrod Brown of Ohio also urged Trump to rein in China.

Tensions between Washington and Beijing have escalated in recent months as Trump has pressed China to cut steel production to ease global oversupply and rein in North Korea's missile program.

Sources familiar with the current discussions said Trump was expected to issue a presidential memorandum in coming days, citing Chinese theft of intellectual property as a problem. The European Union, Japan, Germany and Canada have all expressed concern over China's behavior on intellectual property theft.

U.S. Trade Representative (USTR) Robert Lighthizer would then initiate an investigation under the Trade Act of 1974's Section 301, which allows the president to unilaterally impose tariffs or other trade restrictions to protect U.S. industries, the sources said.

It is unclear whether such a probe would result in trade sanctions against China, which Beijing would almost certainly challenge before the World Trade Organization (WTO).

The Chinese Embassy in Washington said in a statement to Reuters that China "opposes unilateral actions and trade protectionism in any form."

A spokesman for China's Ministry of Commerce told reporters in Beijing on Thursday that China puts a strong emphasis on intellectual property rights and that all WTO members should respect the rules of the organization.

"We hope the positive momentum of cooperation can continue" following recent bilateral trade talks, said commerce ministry spokesman Gao Feng.

Leverage For Negotiations

U.S. Section 301 investigations have not led to trade sanctions since the WTO was launched in 1995. In the 1980s, Section 301 tariffs were levied against Japanese motorcycles, steel and other products.

"This could merely be leverage for bilateral negotiations," James Bacchus, a former WTO chief judge and USTR official, said of a China intellectual property probe.

Some trade lawyers said that WTO does not have jurisdiction over investment rules such as China's requirements that foreign companies transfer technology to their joint venture partners, allowing sanctions to proceed outside the WTO's dispute settlement system.

But Bacchus argued the United States has an obligation to turn first to the Geneva-based institution to resolve trade disputes, adding: "There is an obligation in WTO to enforce intellectual property rights that is not fully explored."

Lighthizer and Trump's Commerce Secretary, Wilbur Ross, have complained the WTO is slow to resolve disputes and biased against the United States.

The threat comes at a time when Trump has become increasingly frustrated with the level of support from Beijing to pressure Pyongyang to give up its nuclear and missile program.

Trump has said in the past that China would get better treatment on trade with the United States if it acted more forcefully against Pyongyang. Beijing has said its influence on North Korea is limited.

China counters that trade between the two nations benefits both sides, and that Beijing is willing to improve trade ties.

A senior Chinese official said on Monday there was no link between North Korea's nuclear program and China-U.S. trade.

Wyden, the top Democrat on the Senate Finance Committee, wrote to Lighthizer urging action to stop China from pressuring U.S. tech companies into giving up intellectual property rights.

Wyden's state of Oregon is home to several companies that could make a case regarding intellectual property rights and China, including Nike Inc and FLIR Systems Inc.

Article Link To Reuters:

Struggling Americans Once Sought Greener Pastures -- Now They're Stuck

The country is the least mobile since after World War II, even in economically depressed rural locales.

By Janet Adamy and Paul Overberg
The Wall Street Journal
August 3, 2017

When she graduated from high school, Taylor Tibbetts was a bright star in this small Northern Michigan town. She won an $18,000-a-year swimming scholarship to Converse College in Spartanburg, S.C., and departed for her freshman year with high hopes.

Once on campus, however, she felt overwhelmed by her courses and scared and isolated among students from all over the country with different values. After just a week, her mother reluctantly agreed to bring her home.

Three years later, sitting on a vinyl booth at her family’s pizzeria in West Branch where she now works, Ms. Tibbetts, 21, says she longs to live in a thriving city like Denver or Nashville, and regrets her inability to leave here.

“I can’t be the kid that just stays here forever,” she says.

Like a lot of small towns in sparsely populated American counties, West Branch, population 2,067, is in an economic funk brought on by the decline of manufacturing and farm consolidation. In recent years, a handful of retailers, a flour mill and a carpet shop have all closed their doors.

What is troubling about this rural town and many places like it is that while lots of struggling residents see leaving as the best way to improve their lives, a surprising share remain stuck in place. For a number of reasons—both economic and cultural—they no longer believe they can leave.

When opportunity dwindles, a natural response—the traditional American instinct—is to strike out for greener pastures. Migrations of the young, ambitious and able-bodied prompted the Dust Bowl exodus to California in the 1930s and the reverse migration of blacks from Northern cities to the South starting in the 1980s.

Yet the overall mobility of the U.S. population is at its lowest level since measurements were first taken at the end of World War II, falling by almost half since its most recent peak in 1985.

In rural America, which is coping with the onset of socioeconomic problems that were once reserved for inner cities, the rate of people who moved across a county line in 2015 was just 4.1%, according to a Wall Street Journal analysis. That’s down from 7.7% in the late 1970s. It has fallen faster than the mobility rate in metropolitan areas, which the rural rate is now slightly below.

This drop in mobility is not only keeping rural residents from climbing a ladder to better livelihoods, it is choking off the labor supply for employers in areas where jobs are plentiful. This limits the economic growth that naturally occurs when people and capital cluster together, says David Schleicher, a professor at Yale Law School who has studied the issue.

It has also contributed to the nation’s deepening political divide. Small-town residents fed a populist revolt that helped put Donald Trump in the White House last year, reinforcing the administration’s plan to focus on issues such as curbing immigration and creating jobs through infrastructure spending.

For small towns, mobility has always been something of a problem: When the brightest youngsters leave and don’t return, “brain drain” can be a drag on the community, even if it is a boon for the other cities they settle in. Now, the lack of mobility has become a drag on the entire U.S. economy.

“We’re locking people out from the most productive cities,” says Peter Ganong, an assistant professor of public policy at the University of Chicago who studies migration. “This is a force that widens the urban-rural divide.”

A decade ago, Ogemaw County hit an economic peak thanks to a stable of manufacturing jobs that accounted for more than one-fifth of payrolls in the county, plus work on dairy, soybean and corn farms. Automotive industry workers from Detroit, 175 miles to the south, for decades snapped up waterfront cottages, creating a flow of people between town and country.

Longtime residents say they love the rhythms of the place; schools close for the first day of deer-hunting season and Friday summer festivals bring lots of residents downtown.

Today, manufacturers employ only a third the number of workers that they did 10 years ago, according to census data. Their payrolls have plummeted by 74% adjusted for inflation, or by $30 million. Unemployment has averaged 7.7% over the past year, compared with 4.7% nationally. In one of many ominous signs, census figures show that more residents are using wood to heat their homes.

Driving through town, Denise Lawrence, the mayor of West Branch, offered a bleak assessment. “The county is the closest thing to bankrupt that you could be,” she says.

Nevertheless, the inflow and outflow of people in Ogemaw County is so small that among its 21,000 residents, it only loses a net of one person a year for every 1,000 residents. Even some young people, who yearn to move to thriving nearby cities like Grand Rapids, find they can’t.

Julie Madsen, the assistant manager at the St. Vincent de Paul thrift store in West Branch, says as many as 80% of queries for financial help come from people under age 35.

Economists say there are several practical reasons for the declining rural mobility—the first being the cost of housing. While small-town home prices have only modestly recovered from the housing market meltdown, years of restrictive land-use regulations have driven up prices in metropolitan areas to the point where it is difficult for all but the most highly educated professionals to move.

A lawyer who leaves Alabama, Mississippi or South Carolina for a job in New York, New Jersey or Connecticut would spend just 21% of his income on housing after moving, Prof. Ganong has found. But a janitor making such a move would have his higher salary gobbled up by housing costs equal to 52% of income.

Shiloh Maier, 38, is desperate to leave West Branch and move to Grand Rapids so she can be closer to her 8-year-old daughter, who lives near there with her ex-husband. The graphic designer has applied for about 70 jobs this year. She is a college grad but finds that employers are bypassing her in favor of younger graduates, which are cheap and abundant in the state’s second-largest city.

She continues to work in West Branch as a customer service manager for a manufacturer earning $20 an hour. Every other weekend, she makes the nearly three-hour trip to bring her daughter back for a visit—two loops that result in 12 hours of weekend driving.

“I’m stuck,” she says.

For many rural residents across the country with low incomes, government aid programs such as Medicaid, which has benefits that vary by state, can provide a disincentive to leave. One in 10 West Branch residents lives in low-income housing, which was virtually nonexistent a generation ago. Civic leaders here say extended networks of friends and family and a tradition of church groups that will cover heating bills, car repairs and septic services—often with no questions asked—also dissuade the jobless and underemployed from leaving.

Tom Quinn, president of the local Kirtland Community College, says the rationale boils down to: “I’ve got good social services. I’m stuck in one big rut. If you ask me to go to Indianapolis, I can’t—even if there’s a job there.”

“People can’t move,” says Mandi Chasey, county economic development director.

Another obstacle to mobility is the growth of state-level job-licensing requirements, which now cover a range of professions from bartenders and florists to turtle farmers and scrap-metal recyclers. A 2015 White House report found that more than one-quarter of U.S. workers now require a license to do their jobs, with the share licensed at the state level rising fivefold since the 1950s.

Janna E. Johnson and Morris M. Kleiner of the University of Minnesota found in a nationwide study that barbers and cosmetologists—occupations that tend to require people to obtain new state licenses when they relocate—are 22% less likely to move between states than workers whose blue-collar occupations don’t require them.

Beyond the practical difficulties, rural residents and experts say there is another impediment to mobility that is often more difficult to overcome—the growing cultural divide.

Tom W. Smith, who runs the University of Chicago’s General Social Survey, says that cities’ welcoming attitudes toward immigrants from abroad, same-sex marriage and secularism heighten distrust among small-town residents with different values. That widens the cultural gulf.

Economists have tried to measure whether Americans’ eroding trust in one another is damping mobility—such confidence helps ease the transition to a new town—and found signs that this sliding trust may be keeping people from uprooting.

According to the GSS, the share of Americans who agree with the statement “Most people can be trusted” has fallen over the past four decades to 31% in 2016 from 46% in 1972. Raven Molloy, an economist with the Federal Reserve Board of Governors, found in research that states with large declines in overall trust were also places where job-switching had decreased markedly.

Cody Zimmer, 29, of Ogemaw County toyed with moving to work for an uncle in New Jersey or closer to Detroit after a decadelong career in skilled manufacturing periodically left him unemployed. But student debt and a divorce damaged his finances, and he says his best option ended up being renting his mom’s house outside West Branch. “If anything happened there, I’d be right back out on my own,” Mr. Zimmer says of these other places.

Bad experiences in cities also turned him off. In one job, he traveled the country cleaning Home Depot locations and recalls feeling uneasy when a black worker at a Kansas City McDonald’s told him to leave because white boys didn’t belong in that part of town, he says. He took his children to Detroit for a motocross event at Ford Field and panhandlers hit him up for money.

“Mainstream news media—not to degrade your position—they say Detroit is getting better, but I don’t trust it,” Mr. Zimmer says.

Many West Branch residents say that the town’s economic woes aren’t enough to make them leave. They point to the safety net the community provides—a helping hand to pay bills, or the way people come together when a neighbor is diagnosed with cancer. “One of the big cultural divides when people move from small towns to cities is this feeling that you can’t be involved in your community,” says David J. Peters, associate professor of sociology at Iowa State University. “You feel powerless to change large cities.”

Christopher Palazzolo grew up just north of Detroit, but after living in West Branch for 26 years, he can’t imagine going back. The 49-year-old father of three has watched his income slide to $11.63 an hour as a retirement home cook, down from the $15 per hour he paid himself when he co-owned a nearby restaurant until 2009. He calls the skinnier wage “rough.”

The bank foreclosed on his family’s home, and for the past eight years they have lived in a low-income housing development, where black rubber tires are strewn around the sand-filled playground, and early-model Pontiac Grand Am cars fill the parking lot. About 70 applicants are on a waiting list for units there.

“I don’t need a fancy car or a bigger house,” Mr. Palazzolo says. “I have no interest whatsoever in dealing with the city, the congestion. I like my little corner of the world.”

After leaving Converse College, Ms. Tibbetts enrolled the next year at Lincoln College in Lincoln, Ill., joined the swim team and felt more confident in the classroom. But she returned home after a semester because she clashed with her swim coach. As a conservative Christian, she also found the cultural divide on campus difficult to bridge. Students smoked pot, engaged in casual sex and had parties at their parents’ homes behind their backs. “Our world now is godless,” she says. “I don’t know if the places where I’ve been are places where I could discover God better.”

Determined to try again, she started at Olivet College in south central Michigan in 2016. But she struggled to fit in there, too. She felt uncomfortable when a professor asked students to write about why Donald Trump would make a bad president. Ms. Tibbetts began racing back to work at the pizzeria on weekends to avoid roommates who threw up in the shower after excessive drinking. She eventually moved home.

On a recent evening inside the pizzeria, where Tiffany-style lamps dot the ceiling, Ms. Tibbetts said she isn’t content with her decision. She looked around at the familiar faces and confessed she gets embarrassed when customers rib her about abandoning college.

After a brief stint teaching skiing in Colorado, she is still eyeing other paths out of town, such as a traveling job pitching Red Bull energy drinks at entertainment events.

“I was ready to go from the minute I graduated,” she says. “It was just so hard.”

Article Link To The WSJ:

How Dodd-Frank Hurts The Poor

An effort to limit credit card "interchange fees" backfires.

By Megan McArdle
The Bloomberg View
August 3, 2017

Think of any old newspaper. Every day, or every week, it prints up some sheets of paper covered with recent news and advertising, and sells those papers to consumers. Its revenue comes from both the consumers who buy the papers, and the advertisers who pay the papers to display their copy to those readers.

Economists call this “a two-sided market,” and they consider its many variants to be some of the most interesting creatures dotting the economic landscape. That’s because the optimal pricing strategy in a two-sided market is often unclear. Jack up your subscription rates, and fewer subscribers will buy your papers, which means your advertising slots are probably less valuable. But set them too low, and advertisers will start to doubt that subscribers are actually reading the paper, which will also tend to diminish your overall revenue.

That’s just the problem for papers, however; every two-sided market has its own weird and wacky conundrums. Ordinary folks rarely hear about them, because consumers tend to think about only one side of a market, the side closest to them. Regulators, on the other hand, often get very interested in two-sided markets, because their complicated and often opaque pricing leaves ample room for lawmakers and bureaucrats to decide that some price is unfair.

This is just what happened in 2010, when the Dodd-Frank financial reforms were being constructed. Suddenly, the whole public policy world was talking about “interchange fees,” which are charges retailers pay to have credit card transactions processed.

It was a little odd that this debate got as heated as it did, capturing the attention of more than just financial journalists. After all, interchange fees had nothing to do with the bank follies that led to the financial crisis; they were tacked onto the bill at the behest of Dick Durbin, the Democratic senator from Illinois. Moreover, they weren’t a populist consumer issue, either, because the evidence suggested that interchange fees had very little impact on consumers.

Sure, on the one hand higher fees financed “rewards” debit cards that let you earn airline miles on your purchases. On the other hand, they probably slightly increased the prices that cash consumers paid. But the effects on anyone’s household finances were trivial. Fundamentally, this was a battle between two powerful and well-heeled lobbies: the retailers on one side, and the bankers on the other. The nation’s commentariat had no real reason to become passionately attached to either of their causes.

Nonetheless, they did choose sides, and mostly along partisan lines: Left-leaning commentators tended to believe that high interchange fees were a national scandal; right-leaning ones thought an already highly-regulated sector probably didn’t need more legislative fiddling. Democrats were in power, and the left-leaning commentators won. In 2010 Dodd-Frank passed with provisions to regulate interchange fees, and in 2011, my Citibank airline rewards debit card went the way of all flesh.

But there was a silver lining even for those on this battle's losing side. Regulating a two-sided market offers the same sort of complications as pricing in one. Economically interested pundits could now see what unexpected developments popped up as the new regulations took effect.

And it has been complicated. If you’d asked an average reader in 2010 about interchange fees … well, frankly, that average reader probably would have given you a confused look. But if you’d surveyed the average reader who had heard of interchange fees, probably they would have told you that this was about banks and credit card processors making too much money off the backs of consumers. Or, if they were conservative, that the regulation would do nothing but add more red tape, as banks raised fees and lowered interest rates on bank accounts in order to recoup the lost revenue. They might have added that the regulation could cost consumers money on net, as money was transferred from banks to retailers, who didn’t bother passing the savings on to customers.

Who was right? Everyone, a little bit. A 2014 paper from the Federal Reserve indicated that banks had not managed to raise other fees enough to recoup their lost interchange revenue. And retailers probably ended up benefiting somewhat less than I expected. The gains from lower interchange fees were offset by losses elsewhere, like discounts that had previously been offered for small-ticket transactions.

A new Fed paper suggests that one prediction did bear out: Fees on bank accounts increased, and became harder to avoid, as banks made it harder to get free checking. The sums involved are not enormous; many households probably never noticed. But then, they probably never noticed their interchange fees, either.

Taken together, the research points to both small costs and small benefits. But it also suggests that maybe we were right to get worked up in 2010, because the distribution of those costs and benefits seems to be uneven. Affluent households probably don’t even know what their bank’s minimum balance for fee-free checking is, because their savings never dip anywhere near it. For low-income households, on the other hand, even small fees, or modest minimum balances, can represent a financial headache. Similarly, people with low incomes are most likely to be inconvenienced when stores set higher minimum purchases for accepting credit cards.

This group is worth worrying about, because they are at the highest risk of becoming “unbanked”: relying on check cashing and the like, which tend to be expensive and inconvenient compared with a bank account. So any regulation that makes their bank accounts more expensive should be scrutinized carefully.

Very few government regulations work exactly as expected; that’s simply the nature of the beast. But the more complex the markets, the harder it is to see exactly what you’re doing -- and the more likely it is that you’ll end up hurting the people you’d most like to help.

Article Link To The Bloomberg View:

Trump Signs Russia Sanctions Bill, Moscow Calls It 'Trade War'

By Roberta Rampton and Patricia Zengerle
August 3, 2017

U.S. President Donald Trump grudgingly signed into law new sanctions against Russia on Wednesday, a move Moscow said amounted to a full-scale trade war and an end to hopes for better ties with the Trump administration.

Congress overwhelmingly approved the legislation last week, passing a measure that conflicts with the Republican president's desire to improve relations with Moscow.

Trump signed the bill behind closed doors, without the fanfare that has customarily accompanied his signing of executive orders. He criticized the measure as infringing on his powers to shape foreign policy, and said he could make "far better deals" with governments than Congress can.

Russian Prime Minister Dmitry Medvedev called the sanctions tantamount to a "full-scale trade war," adding in a Facebook post that they showed the Trump administration had demonstrated "utter powerlessness."

"The hope that our relations with the new American administration would improve is finished," he wrote.

Trump's litany of concerns about the sanctions, which also affect Iran and North Korea, raised the question of how vigorously Trump will implement them regarding Russia.

"While I favor tough measures to punish and deter aggressive and destabilizing behavior by Iran, North Korea, and Russia, this legislation is significantly flawed," Trump said in a message to lawmakers known as a signing statement. He also issued a statement for the press about the bill.

The new law allows Congress, which passed the measure to punish Russia over interference in the 2016 U.S. presidential election and the annexation of Ukraine's Crimea, to halt any effort by Trump to ease sanctions on Russia.

His hands were tied after the Republican-controlled Congress approved the legislation by such a large margin last week that any presidential veto of the bill would have been overridden.

The legislation provoked countermeasures by Russian President Vladimir Putin, who said on Sunday that the U.S. diplomatic mission in Russia must reduce its staff by 755 people. Russia is also seizing two properties near Moscow used by American diplomats.

Trump has repeatedly said he wants to improve relations with Russia. That desire has been stymied by U.S. intelligence agencies' findings that Russia interfered to help the Republican against Democratic presidential candidate Hillary Clinton.

U.S. congressional panels and a special counsel are investigating. Moscow denies any meddling and Trump denies any collusion by his campaign.

Mixed Signals On Russia

Republican House of Representatives Speaker Paul Ryan welcomed the signing, saying it would send "a powerful message to our adversaries that they will be held accountable."

In his statements on the sanctions law, Trump complained about what he said was congressional infringement on the president's constitutional power to set foreign policy, saying the law reflected congressional "preferences" rather than a legal mandate.

“It is flagging those areas where the administration sees itself as having wiggle room to underenforce the law by citing claimed constitutional concerns," said Harold Koh, a Yale Law School professor who was a legal adviser to the State Department during the Obama administration.

The House's top Democrat, Nancy Pelosi, said the signing statement "raises serious questions about whether his administration intends to follow the law."

Trump said he was elected partly because of his successes in business, adding, "As President, I can make far better deals with foreign countries than Congress."

Trump's signing statement was the latest in a series of mixed signals from the administration on Russia.

"I feel like there's several policies being implemented at once, and they're not very compatible with one another. This is one more," said Olga Oliker, a Russia expert at the Center for Strategic and International Studies, a think tank based in Washington.

Vice President Mike Pence, touring Baltic countries adjacent to Russia, has followed a hawkish line. Pence said Trump's signing of the legislation would show that Congress and the president were "speaking with a unified voice" on Russia.

However, Secretary of State Rex Tillerson, like Trump, has been critical of the legislation.

"The action by the Congress to put these sanctions in place and the way they did, neither the president nor I were very happy about that," Tillerson said on Tuesday.

Targeting The Energy Sector

The sanctions will affect a range of Russian industries and might further hurt Russia's economy, already weakened by 2014 sanctions imposed after the annexation of Crimea.

Besides angering Moscow, the legislation has upset the European Union, which has said the new sanctions might affect its energy security and prompt it to retaliate if needed.

Several provisions of the law target the Russian energy sector, with new limits on U.S. investment in Russian companies. American companies also would be barred from participating in energy exploration projects where Russian firms have a stake of 33 percent or higher.

The legislation includes sanctions on foreign companies investing in or helping Russian energy exploration, although the president could waive those sanctions.

It would give the Trump administration the option of imposing sanctions on companies helping develop Russian export pipelines, such as the Nord Stream 2 pipeline carrying natural gas to Europe, in which German companies are involved.

Article Link To Reuters:

Millennials Unearth An Amazing Hack To Get Free TV: The Antenna

Cord-cutters accustomed to watching shows online are often shocked that $20 ‘rabbit ears’ pluck signals from the air; is this legal?

By Ryan Knutson
The Wall Street Journal
August 3, 2017

Dan Sisco has discovered a technology that allows him to access half a dozen major TV channels, completely free.

“I was just kind of surprised that this is technology that exists,” says Mr. Sisco, 28 years old. “It’s been awesome. It doesn’t log out and it doesn’t skip.”

Let’s hear a round of applause for TV antennas, often called “rabbit ears,” a technology invented roughly seven decades ago, long before there was even a cord to be cut, which had been consigned to the technology trash can along with cassette tapes and VCRs.

The antenna is mounting a quiet comeback, propelled by a generation that never knew life before cable television, and who primarily watch Netflix , Hulu and HBO via the internet. Antenna sales in the U.S. are projected to rise 7% in 2017 to nearly 8 million units, according to the Consumer Technology Association, a trade group.

Mr. Sisco, an M.B.A. student in Provo, Utah, made his discovery after inviting friends over to watch the Super Bowl in 2014. The online stream he found to watch the game didn’t have regular commercials—disappointing half of his guests who were only interested in the ads.

“An antenna was not even on my radar,” he says. He went online and discovered he could buy one for $20 and watch major networks like ABC, NBC, Fox and CBS free.

There is typically no need to climb on a rooftop. While some indoor antennas still look like old-fashioned rabbit ears, many modern antennas are thin sheets that can be hidden behind a flat TV or hung like a picture frame.

But many consumers still aren’t getting the signal.

Carlos Villalobos, 21, who was selling tube-shaped digital antennas at a swap meet in San Diego recently, says customers often ask if his $20 to $25 products are legal. “They don’t trust me when I say that these are actually free local channels,” he says.

Earlier this year, he got an earful from a woman who didn’t get it. “She was mad,” he recalls. “She says, ‘No, you can’t live in America for free, what are you talking about?’”

Almost a third of Americans (29%) are unaware local TV is available free, according to a June survey by the National Association of Broadcasters, an industry trade group.

Since the dawn of television, the major networks have broadcast signals over the airwaves. It is free after buying an antenna, indoor or outdoor, and plugging it into your TV set. It still exists, though now most consumers have switched to cable television, which includes many more channels and costs upward of $100 a month.

Much of the confusion dates to federal legislation that required broadcasters to stop sending analog signals in 2009 and shift to high-definition digital transmissions. The change meant old TVs wouldn’t get the broadcasts, forcing consumers to buy new televisions or converter boxes to pick up the free signals.

Scott Wills, a wireless-industry executive living in the San Francisco Bay Area, worked for over a year on the legislation that set the transition in motion. Mr. Wills discussed his work extensively with his son, who was almost a teenager at the time.

About a decade later, Mr. Wills had a hunch many people, especially young people, thought the transition simply killed TV signals, rather than made them better. He asked his son.

“His answer was, ‘Dad, you should know better than anyone that there’s no broadcast TV!” Mr. Wills recalls. “He thought broadcast TV went away.”

His son, Hunter, now 24 and living in Chicago, says he mostly watches Netflix. “I had no idea,” he said of broadcast’s continued existence. “I’m still not even that familiar with the concept.”

The Federal Communications Commission spent millions on a campaign to educate the public about the digital TV transition and Congress set aside more than $2 billion to help consumers pay for converters so old TV sets could process digital signals. But the focus was largely on older people who already relied on antennas.

William Lake oversaw the agency’s effort. A few years later, when he offered to buy an antenna for one of his daughters, then in her early 20s, so she and her roommates could get live TV, she had no idea what he was talking about.

“She thought it was some modern satellite service or something,” the former FCC official says.

In 2013, during a congressional hearing about the satellite-television industry, the discussion turned to a contract dispute that temporarily left Time Warner Cable subscribers unable to watch CBS.

“Can I make one point?” said Gerard Waldron, an attorney who testified on behalf of the National Association of Broadcasters. “I just want to emphasize that broadcast is a free, over the air service. So during the so-called blackout, the service was available 100% of the time. I realize that some people might not have antennas, or some people might have reception problems, but I do want to emphasize...”

“So I could have seen CBS if I had rabbit ears?” Congresswoman Karen Bass (D-Calif.) interjected. “I don’t think people knew that.”

A spokesman for Rep. Bass said she was aware TV antennas existed, just not that the station was still broadcast during a cable blackout.

Richard Schneider, founder of a St. Louis manufacturing company called Antennas Direct, says his occupation results in awkward small talk. “If I’m at a party and I tell people what I do for a living, they’ll say, ‘That’s still a thing?’ I’d think you’d be out of business by now.’”

Quite the opposite. He started selling antennas as a hobby more than 15 years ago and only expected to sell a few hundred each year. He says he sold 75,000 antennas in June. Even the latest high-definition flat-screen TVs need an antenna to get free broadcasts.

Michelle Herrick, 39, a photographer in Phoenix, says she was desperate to cancel her cable subscription after her bill topped $200 a month. The only reason she hadn’t was because she wanted local stations.

Then, about two years ago, her mother told her about modern antennas. Now, Ms. Herrick is the one who regularly has to explain to puzzled guests how she’s able to watch free television. “Everyone I talked to, they had no idea.”

Even for those who have an antenna it can take some getting used to. In May, Robert Tomlinson, a 21-year-old college student in Kalamazoo, Mich., was bummed when he couldn’t stream ABC’s “Dancing With The Stars” online. Then, he remembered his antenna. “I just forgot it was there.”

Article Link To The WSJ:

Protectionism Will Not Protect Jobs Anywhere

By Kenneth Rogoff
Project Syndicate
August 3, 2017

As US and European political leaders fret about the future of quality jobs, they would do well to look at the far bigger problems faced by developing Asia – problems that threaten to place massive downward pressure on global wages. In India, where per capita income is roughly a tenth that of the United States, more than ten million people per year are leaving the countryside and pouring into urban areas, and they often cannot find work even as chaiwalas, much less as computer programmers. The same angst that Americans and Europeans have about the future of jobs is an order of magnitude higher in Asia.

Should India aim to follow the traditional manufacturing export model that Japan pioneered and that so many others, including China, have followed? Where would that lead if, over the next couple of decades, automation is going to make most such jobs obsolete?

There is, of course, the service sector, where 80% of the population in advanced economies works, and where India’s outsourcing sector still tops the world. Unfortunately, there, too, the path ahead is anything but smooth. Automated calling systems already have supplanted a substantial part of the global phone center business, and many routine programming jobs are also losing ground to computers.

China’s economic progress may have been the big story of the last 30 years, but it struggles with similar challenges. While China is far more urbanized than India, it, too, is still trying to bring ten million people a year into its cities. Between jobs lost to automation and to lower-wage competitors such as Vietnam and Sri Lanka, integrating new workers is becoming increasingly difficult.

Recently, the rise in global protectionism has made this difficult situation worse, as epitomized by the decision of Foxconn (a major supplier to Apple) to invest $10 billion in a new factory in Wisconsin. Admittedly, the 13,000 new jobs in the United States is a drop in the bucket compared to the 20 million (or more) that India and China must create each year, or even compared to the two million that the US needs.

At the margin, the US and Europe might have some scope to make trade fairer, as Trump says he will do. For example, many Chinese steel plants have state-of-the-art pollution controls, but these can be switched off to save costs. When the result is that excess output is dumped at cheap prices into world markets, Western countries are fully justified in taking countermeasures.

Unfortunately, the long history of trade protectionism is that it rarely takes the form of a surgical strike. Far more often, the main beneficiaries are the rich and politically connected, while the losers are consumers who pay higher prices.

Countries that go too far in closing themselves off to foreign competition eventually lose their edge, with innovation, jobs, and growth suffering. Brazil and India, for example, have historically suffered from inward-looking trade policies, though both have become more open in recent years.

Another problem is that most Western economies have long since become deeply intertwined in global supply chains. Even the Trump administration had to reconsider its plan to pull out of the North American Free Trade Agreement when it finally realized that a lot of US imports from Mexico have substantial US content. Erecting high tariff barriers might cost as many US jobs as Mexican jobs. And, of course, if the US were to raise its import tariffs sharply, a large part of the costs would be passed on to consumers in the form of higher prices.

Trade will surely increasingly permeate the service sector, too. Amazon’s Mechanical Turk (named after the eighteenth-century chess-playing machine which actually had a person cleverly hidden inside) is an example of a new platform that allows buyers to contract very small specific tasks (for example, programming or data transcription) at third-world wage rates. Amazon’s clever slogan is “artificial artificial intelligence.”

Even if protectionists could shut down outsourcing of tasks, what would the cost be? To be sure, online service platforms do need to be regulated, as early experience with Uber has demonstrated. But, given the massive number of new jobs that India and China need to create every year, and with the Internet remaining highly permeable, it is folly to think advanced economies can clamp down tightly on service exports.

So how should countries deal with the relentless advance of technology and trade? For the foreseeable future, improving infrastructure and education can achieve a great deal. While the rest of the world floundered in the aftermath of the 2008 financial crisis, China continued to extend its vast logistical and supply chains.

In a world where people are likely to have to change jobs frequently and sometimes radically, wholesale changes in adult education are needed, mainly effected through online learning. Last but not least, countries need to institute stronger redistribution though taxes and transfers. Traditional populist trade policies, like those that Trump has espoused, have not worked well in the past, and are likely to perform even worse now.

Article Link To Project Syndicate:

Bitcoin Exchange Had Too Many Bitcoins

It's enough to make you wish for a blockchain. Oh, wait.

By Matt Levine
The Bloomberg View
August 3, 2017

A few months ago we talked about a weird legal dispute over the Dole Food Co. buyout. Dole's chief executive officer, David Murdock, had taken it private for $13.50 a share in 2013, but shareholders thought it was worth more. So they sued, and won, and Murdock was ordered to pay shareholders an extra $2.74 a share plus interest, and shareholders were told to submit claims for their money.

But there was a problem: People submitted more claims than there were shares. This turned out not to be fraud, or carelessness: People really owned more shares than there were shares! It's just that other people owned negative shares. In rough numbers, there were 37 million shares outstanding, and people owned 49 million shares, but other people were short 12 million shares. The way short selling works is that X borrows a share from Y and sells it to Z. So Y owns one share, and Z owns one share, and X owes one share, and everything balances out and there's only one share outstanding. So the millions of extra shares made complete sense.

But that doesn't answer the question of what to do about it. When the buyout closed, back in 2013, it was straightforward enough: If you owned a share, you got paid $13.50. If you were short a share, you had to pay $13.50. So shareholders got paid 49 million shares times $13.50 a share, and short sellers paid 12 million shares times $13.50 a share. (And David Murdock paid 37 million times $13.50 for the shares he was buying.) But in 2017, it was more complicated. If you owned one of the 49 million shares back in 2013, you were due the extra money in 2017. If you were David Murdock and you bought 37 million shares in 2013, you had to pay the extra money in 2017 -- but only on the 37 million shares you bought. But what if you were short the stock in 2013? Was your obligation discharged by paying the $13.50 in 2013, or are you still on the hook to come up with more, four years later?

The answer is a mess. The Delaware judge who heard the case sort of punted this issue to the Depository Trust Co., which keeps track of all the shares of all the companies, and told DTC to follow its procedures to figure it out. The practical answer seems to be that the short sellers' brokers were on the hook to come up with the extra money, and that the brokers' ability to go after the short sellers depended on the margin and stock-lending agreements they had with those sellers. Anecdotally, it seems that the brokers have mostly tried to seek payment from their customers who were short -- and that some of those customers feel pretty aggrieved about it. You can see why: They closed their trades four years ago, and whatever irregularities occurred in Murdock's buyout of Dole weren't their fault. Why should they have to pay for them? Even beyond the arguable unfairness, it is just administratively messy: Someone has to find all those short sellers. If you were short Dole shares in 2013, and subsequently closed your account, wound up your fund, or died, how would a broker get you to pay up?

It's all such a mess, in fact, that I wrote: "It does seem like a half-competent blockchain would be faster and cheaper and more transparent" than the messy current system of share ownership. Just, you know, blockchain it up, keep track of who owns what and who borrowed what from whom, and have a permanent legible record to keep track of these weird webs of contingent obligation.

Ha ha ha, what a fool I was. Here is an announcement from Bitfinex, a bitcoin exchange, that is mind-blowing and wonderful and far weirder than anything a Delaware court could come up with. It has to do with Tuesday's hard fork of bitcoin, in which each holder of a bitcoin ended up with both (1) the original bitcoin, on the original bitcoin blockchain, and (2) a new bitcoin, on a new "Bitcoin Cash" blockchain, which is trying to become a viable alternative flavor of bitcoin. (The convention seems to be to call original bitcoins BTC, and the new Bitcoin Cash bitcoins BCH or BCC. I'll use "BTC" and "BCH" here.) Jian Li writes:

"To use an imperfect analogy from corporate finance, you could think of the fork as a spinoff. For most of PayPal’s life, it was owned by eBay. Holders of the EBAY ticker owned the parent company eBay, which encompassed eBay proper as well as PayPal. On the day of the spinoff, eBay stockholders received, for each EBAY share they owned, one PYPL share. At the same time, they got to keep their existing EBAY shares."

Something a little like that is going on with the bitcoin fork, although it is a bit stranger metaphysically. It is also a bit stranger economically. In a spin-off, you'd expect the original company's value to drop by roughly the value of the spun-off company, which after all it doesn't own any more. BCH spun off from BTC on Tuesday afternoon, and briefly traded over $700 on Wednesday (though it later fell significantly). But BTC hasn't really lost any value since the spinoff, still trading at about $2,700. So just before the spinoff, if you had a bitcoin, you had a bitcoin worth about $2,700. Now, you have a BTC worth about $2,700, and also a BCH worth as much as $700. It's weird free money, if you owned bitcoins yesterday.

But what if you owned negative bitcoins yesterday? What if, that is, you had borrowed bitcoins in order to sell them short? Well, in stock lending situations, the normal way that this works is that the short sellers (stock borrowers) have to come up with whatever is distributed on a stock. If you are short a stock and it pays a $1 dividend, you have to come up with $1. If it spins off a subsidiary, you have to go out and buy a share of the subsidiary to deliver back to your stock lender. If it is acquired in a leveraged buyout for $13.50, you have to come up with $13.50. If it distributes a pony to each shareholder, you have to come up with a pony.

You could imagine bitcoin lenders taking the same approach: If you were short a bitcoin going into the fork, now you have to deliver one BTC and one BCH to your lender. Or not! In fact, when bitcoin distributed a pony of indeterminate value to its holders, Bitfinex decided -- not unreasonably -- that it would be unfair to make bitcoin borrowers come up with it. The value of Bitcoin Cash is uncertain and volatile, and forcing bitcoin shorts to go out and buy Bitcoin Cash to cover their shorts might create artificial demand for it and push up the price. So Bitfinex announced, last week, that short sellers would not have to come up with any BCH.

This creates a problem: If people are long 125 bitcoins, and other people are short 25 bitcoins, then there are a total of 100 bitcoins at the exchange. If there are 100 bitcoins, then 100 BCH will be distributed on them. But if people own 125 of those 100 bitcoins, and if you get only 100 BCH, and if the shorts don't have to come up with the shortfall, then you can't give one BCH to each bitcoin holder. One option here would be to just not give them any BCH, and ignore the whole thing, which seems to be the approach that several bitcoin exchanges took. But Bitfinex took the more customer-friendly -- though pretty ad hoc -- approach of just divvying up the BCH evenly among all the long holders of bitcoins. With my stylized numbers, if people were long 125 bitcoins and short 25, then each long holder would get 0.8 of the 100 BCH distributed to Bitfinex, and the short holders wouldn't have to come up with anything.

But this creates another, funnier problem: That's so easy to game! Here's what you do:

1. Set up an account, borrow one bitcoin, sell it short, collect $2,700.
2. Set up another account, buy a bitcoin, spend $2,700.
3. When the fork happens, your long account ends up with +1 BTC and +0.8 BCH.
4. Your short account ends up with -1 BTC and -0 BCH (because Bitfinex doesn't require you to come up with the BCH).
5. Net, you have $0, 0 BTC and 0.8 BCH.
6, The 0.8 BCH were worth as much as $560.
7. That money was totally free. 

This is such a dumb obvious arbitrage that lots of people tried it. Bitfinex was not happy. "After the methodology announcement on July 27th, several accounts began large-scale manipulation tactics in an attempt to obtain BCH tokens at the expense of exchange longs and lenders on the platform, causing the distribution coefficient to artificially plummet," said the exchange's Wednesday announcement, which claimed that "this kind of manipulation - including wash trading and self-funding shorts - is in violation of Bitfinex’s terms of service." So:

Upon careful review and analysis, we have decided to disallow any hedged BTC balances in excess of any such hedged balances that may have existed at the time of the July 27th distribution announcement. While this may be disappointing to some, it is welcome news to the many users with bona fide BTC exposure through settled wallet balances. This adjustment increases the distribution coefficient from 0.7757 to 0.8539.

Umm? That strikes me as fair, I guess? It is also a mess, though: Bitfinex announced a policy to deal with the fork, people took advantage of the policy, and Bitfinex changed its mind after the fact. Each of its decisions was rational, and quite plausibly the fairest option available to it. None of those decisions were required by, like, the nature of bitcoin, or of short selling: There is no single obviously correct solution to these issues. Instead, each decision was sort of weird and contingent and reversible: not the immutable code of the blockchain, but just humans sitting around and trying to figure out which approach would cause the fewest complaints. In that, it's a bit like the Dole settlement process -- only instead of a neutral judge making decisions based on written contracts and established precedent, it's the people running each exchange making their own judgment calls.

Part of me still stands by my dumb statement about Dole that a blockchain would help. It would help here too! A ledger of who was long and who was short before the fork would perhaps make sorting out these issues easier after the fact. But the bitcoin blockchain doesn't work that way: There's no primitive way to short bitcoins into the blockchain, so exchanges exist in part to provide lending services for people who want to be short. The blockchain has a certain stark logical completeness, but it doesn't address all of the actual human uses required of it. And so it has become encrusted with other human institutions. And those institutions turn out to be unsurprisingly human.

Article Link To The Bloomberg View:

Amazon Isn’t The No. 1 Villain In Retail Sector’s Demise

Americans spending their money on smart phones and health care.

By Vitaliy N. Katsenelson
August 3, 2017

Retail stocks have been annihilated recently, despite the U.S. economy eking out growth. The fundamentals of the retail business look horrible: Sales are stagnating and profitability is getting worse with every passing quarter.

Jeff Bezos and AMZN, -0.03% get most of the blame for this, but the criticism is misplaced. Nowadays online sales represent just 8.5% of total retail sales. Amazon, at $80 billion in sales, accounts for just 1.5%of total U.S. retail sales, which at the end of 2016 were around $5.5 trillion.

Though it is human nature to look for the simplest explanation, in truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

Americans’ consumption needs and preferences have changed significantly. Ten years ago we spent a pittance on mobile phones. Today Apple AAPL, +4.73% sells roughly $100 billion worth of “i-goods” in the U.S., and about two-thirds of those sales are iPhones. Apple’s U.S. market share is about 44%, thus the total smart mobile-phone market in the U.S. is $150 billion a year. Add spending on smartphone accessories (cases, cables, screen protectors, etc.) and we are probably looking at $200 billion total spending annually on smartphones and accessories.

Ten years ago (before the introduction of the iPhone) smartphone sales were close to zero. Nokia was king of the dumb phones, with sales in the U.S. in 2006 of $4 billion. The total dumb cellphone handset market in the U.S. in 2006 was probably around $10 billion.

Consumer income has not changed much since 2006, which means that over the last 10 years $190 billion in consumer spending has been diverted toward mobile phones.

It gets more interesting. In 2006 a cellphone was a luxury only affordable by adults, but today 7-year-olds have iPhones. Not to bore you with too many data points, but Verizon Communications’s VZ, -1.39% wireless-generated revenue in 2006 was $38 billion. Fast-forward 10 years and it is $89 billion — a $51 billion increase. Verizon’s market share is about 30%, making the total spending increase on wireless services alone close to $150 billion.

Between smartphones and their services, $340 billion will not be spent on T-shirts and shoes.

Between smartphones and their services, $340 billion will not be spent on T-shirts and shoes.

But we are not done. The combination of mid-single-digit health-care inflation and the proliferation of high-deductible plans has increased consumer direct health-care costs and further chipped away at discretionary dollars. Health-care spending in the U.S. is $3.3 trillion, and even a 3% rise in costs would be close to $100 billion.

Then there are soft, hard-to-quantify factors. Millennials and millennial-want-to-be generations don’t really care about clothes as much as we may have 10 years ago. After all, high-tech billionaires wear hoodies and flip-flops to work. Lack of fashion sense did not hinder their success, so why should the rest of us care about the dress code?

In the ‘90s casual Fridays were a big deal — yippee, we could wear jeans to work! Fast-forward 20 years, and every day is casual. Suits? They are worn to job interviews or to impress old-fashioned clients. Consumer habits have slowly changed, and we now put less value on clothes (and thus spend less money on them) and more value on having the latest iThing.

All this brings us to a hard and sad reality: The U.S. is over-retailed. We simply have too many stores. Americans have four- or five times more square-footage per capita than other developed countries. This bloated square footage was created for a different consumer, the one who in in the ‘90s and ‘00s was borrowing money against her house and spending it at her local shopping mall.

Today’s post-Great Recession consumer is deleveraging, paying off debt, spending money on new necessities such as mobile phones, and paying more for the old ones such as health care.

Yes, Amazon and online sales do matter. Ten years ago just 2.5% of retail sales took place online, and today that number is 8.5% — about a $300 billion change. Some of these online sales were captured by brick-and-mortar online sales, some by e-commerce giants like Amazon, and some by brands selling directly to consumers.

But as you can see, online sales are just one piece of a complex retail puzzle. All the aforementioned factors combined explain why, when gasoline prices declined by almost 50% (gifting consumers hundreds of dollars of discretionary spending per month), retailers’ profitability and consumer spending did not flinch — those savings were more than absorbed by other expenses.

Understanding that online sales (meaning Amazon) are not the only culprit responsible for horrible retail numbers is crucial in the analysis of retail stocks. If you are only asking “Who can best fight Amazon?” then you are only solving for one variable in a multivariable problem. These are the facts: consumer habits have changed; the U.S. is over-retailed; and consumer spending is being diverted to different parts of the economy.

Value investors are naturally attracted to hated sectors. But we demand a much greater margin of safety from retail stocks, because estimating their future cash flows (and thus fair value) is becoming increasingly difficult. Warren Buffett has said that you want to own a business that can be run by an idiot, because one day it will be. A successful retail business in today’s world cannot be run by by an idiot. It requires Bezos-like qualities: being totally consumer-focused, taking risks, thinking long term.

Article Link To MarketWatch:

Apple’s Breakthrough Product: Services

Services like App Store, iTunes and iCloud generated more than $27.8 billion in revenue in 12-month period.

By Tripp Mickle
The Wall Street Journal
August 3, 2017

When Apple Inc. last year began breaking out revenue from app sales, music subscriptions and payment transactions, the accounting change seemed opportunistic. Sales of iPhones were declining and services provided a growing business to showcase.

The change now appears more than justified.

On Tuesday, Apple said services—the App Store, iTunes, Apple Pay, iCloud and more—generated more than $27.8 billion in revenue for the 12 months ended July 1, making it the equivalent of a Fortune 100 company and larger than Facebook Inc.’s total revenue in 2016.

The company hit the Fortune 100 milestone a full quarter before predicted by Chief Executive Tim Cook, as rising subscriptions to Apple Music, Netflix Inc. and other services lifted services revenue 22% in the June quarter to $7.27 billion. The iPhone is still Apple’s chief moneymaker, but services combined with better-than-expected iPad and Mac sales reduced Apple’s total revenue from the iPhone to 55% in the quarter from 57% a year ago.

“The business is really impressive when you think about it in terms of scale compared to other publicly traded companies out there,” said Jeff Dillon, chief executive of Jackson, Mich.-based Dillon & Associates, which counts Apple among its largest holdings. “There’s a long runway to go there.”

Apple’s total revenue rose 7.2% in the quarter to $45.41 billion, while profit was up 12% to $8.72 billion. The company’s stock rose 5% in late-morning trading.

Apple grew services revenue while facing a host of challenges, including shuttered movie sales in China, shrinking iTunes market share in the U.S., and a music-streaming service that’s a distant No. 2 player in paid subscriptions to Spotify AB.

The company remains guarded about which sources are driving services revenue. Apple annually reports total payments to app developers and in June said Apple Music subscriptions hit 27 million. But it hasn’t broken out revenue from AppleCare, Apple Pay, iTunes, iCloud storage or any of the other pieces that contribute to the business.

The growth in services is driven by the size and quality of Apple’s user base. Apple now has more than 1 billion devices in use world-wide. Its pricier iPhones, iPads and Macs are typically bought by more affluent consumers who load them up with apps or pay extra to store photos in the cloud. The App Store generates nearly twice the revenue of Alphabet Inc.’s Google Play, according to App Annie, a tracking service.

Apple to some extent is drafting off broader consumer trends. An increasing number of customers are shifting from cable subscriptions to streaming-subscriptions services such as Netflix, HBO Now and Hulu, and many sign up through the App Store, giving Apple a 15% cut of the subscription.

Apple said its number of subscriptions rose 12% in the past 90 days to 185 million. In a call with analysts, Chief Financial Officer Luca Maestri credited some of the growth to making App Store purchases easier by adding more payment options, such as Alibaba Group Holding Ltd.’s Alipay in China.

The services business hasn’t been without headaches. In China, the government shut down Apple’s movie and book sales because they violated local media guidelines. Apple also has faced criticism globally for removing apps in China such as the New York Times earlier this year, and others that allowed users to evade the country’s censorship laws.

Apple’s streaming-music service continues to lag behind Spotify, which in June reported more than twice as many paid subscribers at 60 million. Movie rentals and sales on its iTunes service in the U.S. have been pressured by Comcast Corp. and Inc.,reducing its market share to about 20% from more than 50% in 2012.

The iPhone maker is trying to differentiate to gain Apple Music subscribers and video viewers by branching out into original content. It released the reality show “Planet of the Apps” in June and will add “Carpool Karaoke” next week. It recently hired two top Hollywood television executives to spearhead a push into original programming.

“We’ll see how this area goes, but it’s still an area of great interest,” Mr. Cook said on the call.

The services growth over the past decade is impressive considering late CEO Steve Jobs didn’t want an app store. The iPhone launched without one, and Mr. Jobs primarily wanted to offer only Apple services, but employees and outsiders prevailed in getting him to change his mind, former employees said.

The bulk of services revenue now comes from apps. In January, the company said customers spent $28.5 billion in 2016, with Apple collecting about $8.5 billion based on its 30% share of app sales.

Article Link To The WSJ:

Tesla Finishes First Solar Roofs -- Including Elon's House

Elon Musk spent the past week making good on promises, but there’s still a long way to go.

By Tom Randall
August 3, 2017

First the Model 3 electric car. Now the solar roof. In just one week, Tesla has challenged two distinct industries with radically new products.

Tesla has completed its first solar roof installations, the company reported Wednesday as part of a second-quarter earnings report. Just like the first Model 3 customers, who took their keys last week, the first solar roof customers are Tesla employees. By selling to them first, Tesla says it hopes to work out any kinks in the sales and installation process before taking it to a wider public audience.

“I have them on my house, JB has them on his house,” Musk said, referring to Tesla’s Chief Technology Officer J.B. Straubel. “This is version one. I think this roof is going to look really knock-out as we just keep iterating.”

Tesla opened up its online store in May and began taking $1,000 deposits for smooth black and textured-glass roof tiles that are virtually indistinguishable from high-end roofing. From most viewing angles, the slick modern shingles look like standard materials, but they allow light to pass through onto a solar cell embedded beneath a tempered surface. The first installations were supposed to start in June. Tesla didn’t say when the actual installations took place.

The company has been adopting an Apple Store strategy for solar power since acquiring SolarCity Corp. last year for $2 billion. The idea is to cut down on the high price associated with actively identifying new customers, and instead attract them passively through its upscale auto stores in shopping malls and other high-traffic locations. Initial trials found the new approach was 50 to 100 percent more effective than at the best non-Tesla locations selling SolarCity products. Tesla halted SolarCity’s door-to-door sales earlier this year and is staffing up more than 70 stores for solar sales.

For total quarterly solar installations, Tesla rebounded a bit from an underwhelming first quarter—its first full quarter after it bought SolarCity. It deployed 176 megawatts, up from 150 megawatts the prior quarter, but less than the 201 megawatts that SolarCity installed in the second quarter of 2016. At least part of the slowdown may be due to the cessation of door-to-door sales. The company said it expects to see growth again in the fourth quarter.

Production of the tiles began at Tesla’s Fremont solar plant in California, but will shift later this year to its new factory in Buffalo, New York, with additional investments from Tesla’s partner, Panasonic. Musk said previously that initial sales will be limited by manufacturing capacity. As production ramps up into 2018, sales will begin in the U.K., Australia, and elsewhere, along with the introduction of additional sculpted terra cotta and slate versions of the solar roof, according to previous reports from the company. 

Tesla’s basic premise is to make solar ownership more attractive and affordable by eliminating the need to install both a roof and solar panels. Tesla says it will manage the entire process of solar roof installation, including removal of existing roofs, design, permits, installation, and maintenance. The company estimates that each installation will take about a week.

Article Link To Bloomberg: