The Month That Was - May 2018

Sydney M. Williams

The Month That Was – May 2018

May 31, 2018

“As full as spirit as the month of May,

And as gorgeous as the sun in midsummer.”

                                                                                                Henry IV, Part I

                                                                                                Williams Shakespeare

What a month! The anti-Trump venom persisted…and worsened. It came into sharper focus with the news that the FBI, under the Obama Administration, had inserted Stefan Halper as a spy (or informant, as the New York Times euphemistically called him) into the Trump campaign – ‘Operation Crossfire,’ as it was dubbed – “benign information gathering,” as James Clapper put it[1]. This is in addition to the dubiously obtained FISA warrants to surveil the Trump organization. Not since Lyndon Johnson spied on Goldwater in 1964 has the FBI been so blatantly used for political purposes. But, where is the outrage over the use of government to silence the opposition? Incredibly (and fortunately), it is having little effect on Mr. Trump’s policies here or abroad – like the tax bill, deregulation, North Korea, Jerusalem and Iran. 

As for the latter, the EU is upset over Mr. Trump’s failure to recertify the Iran nuclear deal. Only a people who viewed Mr. Obama’s Iran deal through the commercial lens of their largest companies would be so unconcerned with a rogue nation that has used its new-found wealth to fund militarization and terrorism. Only a people protected by their big brother in North America would not fret about the nuclear ambitions of Iran.(Despite the EU having a slightly larger economy, the U.S. spends more than two and a half times what the EU does on defense, and a big slice of that spending is in defense of Europe.)

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Consider the month’s news: The spiking of the Iran nuclear deal (a deal which Mr. Obama realized the Senate would never support); setting a date (possibly) to meet with Kim Jong-un, and re-locating (finally) the U.S. Embassy in Israel from Tel Aviv to Jerusalem. Curiously, but not surprisingly, the Left derided all three decisions. Nancy Pelosi criticized the President for meeting with Mr. Kim and then criticized him for renegotiating the terms. The movement of the U.S. Embassy to Jerusalem was accomplished, but both Iran (financial sanctions and a new deal) and North Korea (denuclearization of the Peninsula) remain works in progress. The Left is in denial: How does an outsider, a boorish, unprincipled ignoramus, with dyed-blonde hair, accomplish what sanctimonious political elites could not? 

North Korea released three American hostages and blew up tunnels at its Punggye-ri testing site. (Admittedly, that site was probably unusable.) To protest the opening of the U.S. Embassy, Hamas (and Iran) showed their true colors, sending (paid) demonstrators to their deaths in Gaza. Iran fired rockets at Israel’s Golan Heights from bases in Syria, which were knocked down by Israel’s superior technology. Later, a number of Iranian bases in Syria were destroyed by Israel’s air force. Trade wars spurted, spluttered and spurted. Republicans in Congress took issue with Mr. Trump’s decision to rescue China’s telecom company ZTE. But, we must remember that Mr. Trump, like the fox to Congress’s hedgehog, is playing multiple hands with China – North Korea, relations with Iran, a laser attack from an air base in Djibouti and military bases in the South China Sea. Congress, playing to special interests and the media, like the hedgehog, takes on one issue at a time.

Nicolas Maduro’s re-election in Venezuela was fore-ordained and will worsen the condition of its people. Following imposition of new sanctions, the U.S. Envoy in Caracas was expelled. In a surprise, Iraq’s Muqtada al-Sadr’s coalition was the big winner in his country’s Parliamentary elections. Mr. al-Sadr was strongly anti-American during the 2003 invasion but is now strongly anti-Iran. Shia terrorist groups Hezbollah and Amal were the big winners in Lebanon’s election. Ninety-two-year-old former Malaysian Prime Minister Mahathir Mohamad defeated his former mentee, current Prime Minister Najib Razak. The latter has been embroiled in corruption charges. This was the first defeat for the Barisan Nasional coalition since Malaysia was untethered from Great Britain in 1957. In Italy, President Sergio Mattarella’s decision to reject the attempt of two rival populist parties – 5-Star Movement and the League – to form a government was applauded in Brussels and y the liberal media, but it risks democracy in the Eurozone’s third largest economy. In a decision that could have come from Lewis Carroll, Syria was named president of the United Nation’s Conference on Disarmament. For virtually the entire month Hawaii’s Kilaueu’s volcano on the Big Island has been spilling lava, releasing toxic gasses and erupting molten rocks. 

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The latest school shootings in Texas, in which ten people died, means we must re-think our response to mass gun violence. We are living with an epidemic that is expanding geometrically. The Left says curtail guns. The Right insists on adherence to the 2^ndAmendment. We must think outside the box. Stricter rules regarding gun-ownership make sense and I see no civilian need for automatic assault rifles. But guns have always been common. Our home in the small New Hampshire town where I grew up was likely the only one without weapons, yet even gun accidents were rare. Personally, I am not a fan of guns; nevertheless, it is not the weapon that is at fault. It is the individual who pulls the trigger.

Wikipedia lists school and college shootings by decade. While perhaps not precisely accurate, the numbers suggest a trend. In the 1940s, there were eight such shootings, with eleven dead. In the 1950s, the number doubled to sixteen, with fourteen dead. In the 1960s, nineteen shootings left forty-four dead. In the 1970s, there were thirty-one attacks, leaving thirty-seven dead. In the 1980s, that rose to forty-one, with fifty-one losing their lives. In the 1990s, sixty-six shootings left ninety-three dead. In the 2000s, sixty-five shootings caused one hundred and eleven to die. And, in the 2010s, just through 2014, there have been 93 shootings, with ninety-one dead. If we take this contagion seriously, as we must, Congress will have to consider, besides gun laws, the role of mental health and the culture of violence that permeates our lives, from Hollywood to rock music, video games and late-night talk shows. Families and communities must be unafraid to call-out mental issues where they exist. Political correctness should be abandoned. Parents and schools must re-focus on old-fashioned rules: civility, respect, manners and decency. 

During the month Connecticut joined eleven states and the District of Columbia in approving a National Popular Vote compact, which would require each participating state to allocate its electors to the winner of the national popular vote, regardless of how its citizens voted. What they want: eliminate the Electoral College. Connecticut’s vote, hasty and unwise, was taken in response to the 2016 election. Keep in mind, Mrs. Clinton’s popular victory was made possible because of only two states – New York and California. What is being implied (but unsaid) is that smaller states don’t count. Ironically, at the Constitutional Convention in 1787, the author of the Great Compromise, which gave Congress its bicameral structure, was Connecticut’s Roger Sherman. The Compromise ensured that small states would get equal representation in the Senate, while the House would reflect population. It is one of the fundamental elements in the checks and balances that have allowed our government to survive over two hundred years. “I do not, gentlemen, trust you,” said Gunning Bedford of Delaware. “If you possess the power, the abuse of it could not be checked; and what then would prevent you from exercising it to our destruction?” Wiser heads than those in Connecticut, I hope, will prevail.

In a case that pitted the National Collegiate Athletic Association against the State of New Jersey, the Supreme Court, in a 6-3 decision, struck down a 1992 law, the Professional and Amateur Sports Protection Act, which prohibited states from authorizing gambling. The federalist in me said that was a good thing, individual states should make such decisions. The financier in me said this will help states in economic distress. However, the moralist in me said this was a terrible decision. It will encourage gambling – the belief that riches can come from little or no effort. Gambling is addictive and encourages bad behavior. It can lead to depression, criminal activities and bankruptcy. The National Council on Problem Gambling claims that 16% of Americans gamble at least once a week. Like the lottery, it will provide funds to states but do so via a regressive tax. If not accompanied by fiscal restraint, it will do nothing to reduce deficits. 

Elsewhere, domestically, Gina Haspel was confirmed as the first woman Director of the CIA. Midterm and state elections are under way. Primaries and conventions were held in Connecticut, Indiana, Ohio, West Virginia, Idaho, Nebraska, Oregon, Pennsylvania, Arkansas, Georgia, Kentucky and Texas. 

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Stocks meandered, on light volume, with diminished volatility. For the month, the DJIA closed up 2%. It is the bond market where attention should be paid. James Grant, in the May 4 issue of “Grant’s Interest Rate Observer,” wrote: “For the first time since 1981, Treasuries (U.S.) have delivered a negative, inflation adjusted return over the trailing three years.” The U.S. bull market in bonds began in September 1981 when the yield on the Ten-year reached 15.68%. It troughed two years ago (thirty-five years later), with the yield at 1.39%. It closed this month at 2.8%. Like any market, prices (and yields) don’t go in straight lines, but one can infer whether one is in a long-term bear or bull market. My conclusion is that a bear market in bonds began two years ago; but tops and bottoms of markets can extend across months, if not years. Central banks around the world have become (or are becoming) less expansionary, but you wouldn’t know it when looking at yields on some European bonds. The yield on the U.S. Two-year, at 2.4%, exceeds the yield on government Ten-year bonds in Germany, France, the UK and Spain. I find it hard to believe that Europe, with its slower economic growth and more socialist ways, is more credit worthy than the U.S. However, that spread differential – undeserved, in my opinion – has strengthened the Dollar and could cause U.S.  Treasury yields to moderate in the near term, but I suspect that in ten years yields will be higher. 

The concern for stocks is liquidity. Increasingly, trading is dominated by machines: High Frequency Traders (HFTs), index funds and ETFs, where individual company fundamentals matter less than asset allocation decisions. The floor of the NYSE is almost fully automated, not dissimilar to the NASDAQ. The question, to which no one has an answer: what happens when a mini flash-crash turns into a full-blown panic? Ultimately fundamentals would carry the day, but the short term could be scary. Markets are based on faith, trust and confidence – characteristics of people, not machines. One answer: dividends – the ultimate return on stocks. And the IRS could treat dividends as returns of capital, which is what they are. 

The month also saw further declines in the Argentina Peso and the Turkish Lira. Currency depreciation is a concern and reflects a lack of confidence in government and its monetary policy. (The Venezuela Bolivar has fallen 90%, since Maduro came to power in April 2013.) To stem the decline, Argentina’s central bank raised rates to 40%, while the Turkish Central Bank raised its lending rate to 16.5%. The price of crude oil was volatile but flat on the month, but still on an upward path that began in January 2016. The Dollar nudged higher, driven by higher yields on U.S. Treasuries, and Bitcoins were lower by about 20%. Investment manager AllianceBernstein announced a move from Manhattan to Nashville, following other money managers, like PIMCO, Charles Schwab and Fidelity, who are opening offices in Austin, Phoenix, Denver and Dallas. High state and local taxes (and regulatory practices) arewatched by businesses. The second revision to first quarter U.S. GDP showed the economy gaining 2.2 percent.

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The number of births in the U.S., according to the National Center for Health Statistics, dropped by two percent last year, to 60.2 for every 1000 women between the ages of 15 to 44 – the lowest in forty years, giving the U.S. a fertility rate of 1.76. We were at 2.12 in 2007. While there are those who are not concerned about these numbers, lower birth rates reflect a pessimistic view of the future and imperil economic growth. Pope Francis, straying from his spiritual responsibilities, declared that financial derivatives, like credit default swaps are “amoral” and “a ticking time bomb.” This is a man not particularly fond of capitalism, which he has described as “terrorism against humanity.” All Catholic Bishops in Chile offered to resign following revelations of a sex abuse scandal. President Trump announced he wanted to form a fifth branch of the military – a space force. UK reporter Tommy Robinson was jailed on breach of peace charges in Leeds for filming Muslims charged with rape and pedophilia. Missouri Governor, Republican Eric Greitens resigned over a sex scandal. ABC cancelled Roseanne Barr’s show because of a racist Tweet about Valerie Jarret. Ms. Barr blamed Ambien. Ms. Jarrett blamed President Trump. Meghan Markle married her Prince.

Speaking at a tech conference, President Obama said, “I didn’t have scandals, which seems like it shouldn’t be something to brag about.” Has he forgotten Lois Lerner at the IRS, targeting conservatives, or letting Nakoula Basseley Nakoula take the fall for the Benghazi attack that caused the death of Ambassador Chris Stevens?  Does he no longer remember Uranium One or ‘Fast and Furious?’ Ireland voted to allow women to have abortions in the first twelve weeks of pregnancy. While I agree that women should have control over their bodies, there was something unseemly about young women gloating over receiving permission to take a life.  What about personal responsibility? A male student in an Indiana high school opened fire before being tackled by seventh-grade science teacher Jason Seaman. Mr. Seaman was wounded, as was one other student. But his action prevented more casualties.

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In sports, “Justify” won the Kentucky Derby and the Preakness, both on sloppy tracks. He will head to New York for the Belmont Stakes and a chance at the Triple Crown. The Golden Knights (Las Vegas) and the Capitals (Washington) will play for the Stanley Cup, and the NBA Championship will pit the Golden State Warriors (Oakland) against the Cleveland Cavaliers.

Death took Tom Wolfe, best known for his novel that captured the ‘80s, The Bonfire of the Vanities. He died at 88. Philip Roth – author of Goodbye Columbusand Portnoy’s Complaint– died at 85. Professor Bernard Lewis, one of the great scholars of Islam, died at 101. Richard Pipes, the leading intellectual opponent of détente and an escapee from Poland in 1946, died at 94. Alan Bean, the fourth man to walk on the moon died at 86. And I lost a good friend, former classmate of my wife and former Lieutenant Governor of Connecticut, Eunice Groark. Eunice was 80.

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We approach the midpoint of the year and the year’s longest day. Like all months, it will bring good news and bad, the expected and the unexpected. Let us hope that wisdom prevails, that respect dispels disdain and crudity makes way for comity. Above all, I hope the month brings peace and good health.

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[1]I wrote that Halper was a spy; that is an opinion; however, one based on extensive reading and strong belief.

"The Month That Was - December 2017"

Sydney M. Williams

swtotd.blogspot.com

The Month That Was

December 2017

January 1, 2018

“December’s wintery breath is already clouding the pond,

frosting the pane, obscuring summer’s memory.”

                                                                                                John J. Geddes

                                                                                                Author, “A Familiar Rain,” 2011

Seventy-six years ago, December 7, the Japanese bombed Pearl Harbor, drawing the United States into a World War that had been raging, formally, for over two years, since Germany invaded Poland on September 2, 1939. But Nazi militancy had begun earlier. They had re-armed beyond what they were allowed under the Treaty of Versailles in the early ‘30s.  They had reoccupied the Rhineland in 1936 and they had annexed Austria in March 1938. A year later, in March 1939, Czechoslovakia fell. But the Allies did nothing. Eight years earlier, in September 1931, the Kwantung Army of the Empire of Japan invaded Manchuria. The world was aflame when Pearl Harbor was attacked. But a giant was stirred, and by war’s end over 60 million people (roughly three percent of the world’s population) were dead – approximately one killed every three seconds!

The most consequential news for the U.S. this past month, and perhaps for all of 2017, was the passage and signing of the Tax Cuts and Jobs Act of 2017. Its support was narrow and partisan, so has been compared to the Affordable Care Act of 2010. But, there is a significant difference. The ACA was designed to give government more resources, and greater control and power. This Bill gives government fewer resources, and less control and power. Its center piece is the reduction in the stated federal corporate tax rate from 35% to 21%, which is slightly below the world average. The Bill allows businesses to expense capital expenditures (investments) when occurred. As well, companies are incentivized to re-patriate about $2.5 trillion held abroad. Tax rates for individuals were lowered, albeit modestly. The deductibility of state and local income taxes (SALT), which serves to mask aggressive spending on the part of many states, including California, New York, Illinois, New Jersey and my state of Connecticut, will be limited. That will negatively affect high-earners in those states. I would have preferred a simpler bill, and one, for instance, that acknowledges that “carried interest” is income. But this was the first time in a generation major tax reform has been achieved. The Bill should help boost economic growth.

As significant for economic growth has been the rolling back of regulations. For example, an apple farm in upstate New York, according to The New York Times, is subject to 5,000 rules. The repeal of Net Neutrality was a victory for free markets. The Act had nothing to do with neutrality and everything to do with regulation. It re-categorized broadband from Title I to Title II under the 1934 Communications Act, which meant carriers would be regulated as public utilities. Its elimination was a win for competition and the promise of 5G wireless, which may obviate the monopolies and duopolies of cable and fixed-line carriers.

Elsewhere domestically, the Mueller investigation suffered credibility issues, as anti-Trump bias was shown to be prevalent with a number of Mueller’s senior personnel: Bruce Ohr, Peter Strzok, Andrew Weissmann, Jeanie Rhee and Andrew McCabe. Increasingly, it looks like the collusion that should be investigated was that between the Clinton campaign and the FBI, rather than Russia and the Trump campaign. The Santa Barbara County wildfire in California became the State’s largest. Governor Jerry Brown said such fires are the “new normal!” Late in the month, the Northeast and Midwest of the U.S. were subjected to a prolonged arctic freeze. President Trump signed an Executive Order substantially reducing acreage in Utah’s Bears Ears National Monument, a tract of land so-named on December 28, 2016 by President Obama. Mr. Trump’s decision caused an uproar about separation of powers. However, National Monuments are created by Presidential edict, while National Parks are established by Congress. Doug Jones beat Ray Moore for the Alabama Senate seat vacated by Attorney General Jeff Sessions. Whether this proves good for the citizens of Alabama remains to be seen, but it was good for the nation and especially for the Republican Party. In a 7-2 decision, the Supreme Court backed the President’s travel ban from six predominantly Muslim nations. ISIS-inspired Akayed Ullah, a U.S. citizen and native of Bangladesh, was badly hurt when his suicide vest detonated prematurely on a Times Square subway platform. There were no other injuries.

President Trump announced that he would do what the three most recent Presidents promised but never did – move the U. S. Embassy from Tel Aviv to Jerusalem, Israel’s capital. The anti-Israeli (and anti-US) bias of the UN was shown in a ceremonial vote condemning the U.S. decision, which passed 128-9, with 35 abstaining and 21 not participating. Voting with the majority were China, Russia, most EU nations, and such bulwarks of democracy as Cuba, North Korea, Syria, Iran and Venezuela. I am proud that Nikki Haley is our UN Ambassador. She was the first female governor of South Caroline, is the daughter of immigrants, and is a staunch defender of liberty. Guatemala announced it would move its embassy to Jerusalem. The Czech Republic and nine other countries are in discussions with Israel to do the same. An ISIS Caliphate in Syria is over, but in December over 400 people died in about 60 Islamic terrorist attacks.

A 2018 “red alert for the world” was issued by the Secretary General of the UN. Finance ministers from the five largest EU countries warned that the Republican tax proposal would flout international agreements. (They must fear a more competitive U.S.) Brussels dissed Poland’s judicial overhauls, triggering a never-used sanction procedure, a “nuclear option,” – the final stage of which would be the suspension of Poland’s voting rights within the EU. The dispute is over the appointment and removal of judges, with Warsaw claiming the need to purge judges appointed during the country’s Communist past, and Brussels arguing that doing so violates separation of powers. In a New York Times article last month, Liz Alderman wrote of how Europe’s thirst for cheap labor has fueled a boom in “disposable workers” – her words. EU rules allow citizens to work anywhere within the 28-nation bloc, but there are no requirements that contracts be written in a language understood by the employee, and there are no requirements that minimum wages be paid or that overtime matches that of the country in which they are working. (The EU has become less and less democratic. It serves its largest members, Germany and France, at the expense of its southern and eastern members. The Euro has provided Germany with a cheap currency, while giving southern and eastern European countries an expensive currency.)  In my opinion, Britain is wise to exit the Union.

During the month, President Trump made a major foreign policy speech, which Arthur Herman of the Hudson Policy Institute suggested may usher in a new era of global stability – something at odds with conventional thinking. Chile’s former president Sebastián Piñera defeated center-left candidate Alejandro Guillier who had been backed by the outgoing Leftist president Michelle Bachelet. The shift to the right saw the Ipsa stock index jump seven percent. Separatists won the majority of elections in Catalonia, indicating concerns with Madrid remain. In a replay of the failed 2009 Green Revolution, protests broke out in Iran, with twelve people killed, so far. Further sanctions were imposed on North Korea.

In financial markets, stocks rose modestly for the month, but provided the year with their best performance since 2013. The bull market is now nine years old. Nobody can predict its end. But, as one investment advisor recently wrote, “…be careful what you buy.” In the U.S., the value of IPO’s (initial public offerings) doubled in 2017, after 2016’s ten-year low. Volatility, measured by the DJIA rising or falling more than one and a half percent in a single session, fell to record low levels. In 2017, there were only two such days. To put that in perspective, 2016 had that level of volatility on nineteen days, and in 2008, at the height of the credit crisis, the DJIAs rose or fell by more than one and a half percent on a hundred days. A dangerous complacency? Perhaps, but consumer confidence is at a 17-year high (or just below, as it fell modestly in December) and unemployment is at a 17-year low. During the month, the Federal Reserve raised Fed Funds rates by 25 basis points to 1.5%, double what it was a year ago, with the consequence being a yield curve flattening. During the year, the yield on the Three-month rose from 0.46% to 1.39%, while the yield on the Ten-year fell from 2.48% to 2.43%. Bitcoins began the month at $9,872.15, reached $19,597.75 on December 17, and closed at $14,405.00. (Keep in mind, they began the year at $976.65.) Are they a fraud? I don’t know, but they have no intrinsic value. I don’t own any and would not. Goldman Sachs announced on December 7 that they would clear Bitcoin futures’ contracts, “for at least some clients.” A $69 billion CVS proposed merger with Aetna was announced, which will result in the latter’s CEO having a $500 million pay day! The Dakota Access Pipeline has increased oil production, and reduced oil-train traffic, a bane for Warren Buffett’s Burlington Northern, but a boon for the environment. A strong Holiday shopping season and a boost in November jobs suggest fourth quarter GDP growth will come in above 3%. If it does, it will be the strongest consecutive period of economic growth since 2007. Interest rates in Europe remain low: At the start of the month Portugal issued €1.3 billion of five-year, floating-rate notes with a yield of 1.1%. Given their reported consumer price inflation of 1.4%, the buyer is getting a negative return of minus 30 basis points, before taxes. Do we have any bridges for sale?

In other news, Russian election officials barred opposition leader Alexei Navalny from running in next year’s election. In Australia, Chan Han Choi, a native of South Korea, was arrested for brokering the sale of missiles and missile components to North Korea. Fifteen UN peacekeepers (all from Tanzania) were killed in the Democratic Republic of Congo by “militant extremists.” Playing God has consequences. Efforts to save the Sumatran tiger is negatively impacting the Sumatran elephant, and requiring the need for more protected forests on Indonesia’s largest island. Uber is the disruptive technology the establishment hates most. It is anti-union. The European Union’s highest court ruled that the company, which owns no cars, is a transportation company, not a technology platform, so subject to myriad rules and regulations.

A Gallup Poll showed millennials are growing skeptical toward capitalism and favorable toward socialism. A failure to check sources, along with a visceral hatred for President Trump, have given legitimacy to White House charges of “fake” news. According to a report in The New York Times (which excluded itself from any culpability) examples of fake news have been seen in stories published by CNN, ABC and “several news outlets, including Bloomberg and The Wall Street journal,” The Times also commented – oddly – that the tax bill risks “overheating” the economy. For the second year in a row, life expectancy in the U.S. fell. The drug overdose epidemic was blamed. An apartment building fire in the Bronx killed twelve. A daughter was born to a couple from an embryo frozen twenty-four years ago – the oldest to result in a live birth. And, sadly, twenty-four horses died of smoke inhalation in a barn fire in Simsbury, Connecticut.

Death appeared. The infamous Christine Keeler died at 75; corporate star from the 1980s William Agee at 79; M&T Bank chairman Bob Wilmers, who I knew slightly in the 1960s, at 83; Olympian Bill Steinkraus at 92; Author William Gass at 93; John Anderson, 1980 Presidential candidate, at 95, and King Michael of Romania at 96. Also dying in December was a good friend, John Willson, an expert on Theodore Roosevelt.

December ends with the Christmas season, the most joyous time of the year, even if many of us no longer celebrate its religious aspects with the fervor we once did. Nevertheless, we should not forget its origins, nor its enormous impact. Two thousand years after His birth, Jesus is celebrated by almost a third of the Earth’s population. His message was (and is) one of peace and love. He encourages generosity and fosters the relieving of suffering. But, we know that we (and it) are fallible, that envy, greed and disloyalty entice us. We know that Christian nations were, in part, responsible for the horrors of the last century’s two world wars. But we also know that it was Christian-Judeo nations who stood up to the evil of Nazism, Fascism and Communism. A steep price was paid, but ultimately the good guys won. As we leap into the New Year, I wish you the very best, that peace may reign and that we may voice our opinions without rancor or fear. And I thank you again for your readership.