Archive for the ‘U.S.’ Category

Affordable Housing Bonds Are Good Investments (If You Can Find Them)

April 12, 2018

Smith’s Affordable Housing Finance Conference returned to Fort Lauderdale, Florida, this year. It was another great year for housing bond investors, as the S&P Muni Bond Housing Index illustrated by posting a 250.85% Ever To Date Total Return and 2.95% Annual Total Return.

More than double your money AND no worries about credit problems given the very strong average credit quality.

Compare those investment parameters to the increasingly volatile stock market moves over the past week and its easy to see why housing bonds play a role in the municipal investment process. (https://us.spindices.com/indices/fixed-income/sp-municipal-bond-housing-index)

The U.S. stock market has gone berserk in the face of national public policy positions that undermine global trading strategies. It shouldn’t come as any surprise since Smith’s Regulars know that stocks are inherently more volatile.

Law of Unintended Consequences
With hopes of improving Portland’s brand-new mandatory affordable housing policy, Portland City Council recently agreed to woo developers with its original (optional) affordable housing policy: the Multiple-Unit Limited Tax Exemption (MULTE). The old plan would incentivize (read optional) residential developers to lease 20 percent of their apartments to low-income renters.

The Portland City Commission’s decision comes at the end of the city’s year-long slog to create and retain affordable housing after passing its “Inclusionary Housing” (IH) policy. The new program requires any new apartment building with 20 or more units to lease a chunk of those units below market rate.

Sure, those “below market rate” units are not really that affordable when compared to other cities around the country.

But, instead of spurring a wave of affordable new housing across the city, the IH policy has practically ground the affordable housing construction to a complete halt.

Months before the IH policy went into effect on February 1, 2017, developers wanting to avoid the onerous rule, submitted building permits for no less than 19,000 units across the city. Since then? Only 12 buildings (containing a total of 682 units) have applied for new permits from the city’s Bureau of Development Services. In the past, the city fielded permits for between 3,000 to 6,000 new units a year—making 2017’s numbers look even more pathetic.

Norworst
If you think Portland’s affordable housing crisis bad, take a look at Seattle, where during a one-year period in 2015–16, Seattle rents increased by 9.7 percent — four times the national average. In 2017, the cost of an average two-bedroom topped $2,000. The results have been predictable: nearly half of Seattle renters are currently “housing-cost burdened,” meaning they spend more than 30% of their income on rent.

A recent Zillow study cited the connection between even modest rent increases and resulting homelessness. King County’s 2017 One Night Count tallied 11,643 homeless people, which is second only to New York and Los Angeles in homelessness.

Seattle’s Housing Affordability and Livability (HALA) program claims it will create 6,000 affordable housing units over the next ten years.

To put it into some context, Seattle’s population has risen by an average of 15,000 every year since 2010, growing by nearly 21,000 in 2015–16 alone.

Touted by Seattle politicians as the result of a tough negotiation between the city and developers, it’s little more than a giveaway, as the overwhelming majority of apartments constructed as a result of the “Grand Bargain” will be sold and rented at market rates.

Indeed. The affordability mandate is currently as low as 2% in some parts of Seattle.

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French Elections and Les Autres Stuff

April 24, 2017

Summary:  April has turned out to be an active month on the geopolitical front and in markets.  The last week of the month is not going to be an exception as France, the United States, Italy, North Korea and Venezuela are all likely to remain in the headlines.  The net impact is that while the news out of France was good for markets and the global economy, there are significant risks with other developments which dampen investor expectations. The U.S., in particular, is likely to see considerable negative political press as the Trump administration seeks to advance a continuing budget resolution through the Congress, but positive economic data probably will continue to demonstrate economic expansion, evidenced by strong earnings.  The VIX ended last week at 14.63 and the 10-year Treasury was 2.237%; look to the VIX to go lower initially, but climb again through the week and for the 10-year Treasury yield to remain roughly where it is as risk mounts in the U.S. and North Korea.

France – Round Two!: The first round of the French presidential elections has already produced plenty of corny titles for articles, with one of the worst being, “Le Pen is Not Mightier than the Macron”. No doubt that as France heads toward the May 7th second round vote between far-right candidate Marine Le Pen and centrist Emmanuel Macron, more bad titles will follow. However, the outcome, which is currently projected with Marcon at 23.7% of the vote and Le Pen at 21.7%, is positive for markets.  French opinion polls proved relatively accurate and currently indicate that Macron should handily defeat Le Pen in the next round, roughly 60% to 40%.  We think it could be a little closer, but Marcon should winThe euro has already rallied on the news.

Projected Results April 23, 2017
Macron  (Le Mache!)          23.9%
Le Pen  (National Front)    21.4%
Fillon  (Republicans)          19.9%
Melenchon  (LFI)                19.6%
Hamon (Socialists)               6.3%
Dupont-Aignan (DLF)         4.7%
Others                                     4.2%
Total                                   100.0%

A few points are worth noting for what comes next. Round one was a victory for the “outsiders”. Although the cases can be made that both Le Pen and Macron have been part of the “system” for a long time, what is striking is that Le Pen’s National Front and Macron’s En Marche! (established only late last year) have never been in power.  The two major blocs, represented by the center-right (through various parties, the latest being the Republicans) and Socialists have dominated Fifth Republic politics since 1958.  This is the first presidential contest in which one of the major parties did not place a candidate, reflecting a deep disenchantment with the traditional parties and a willingness to embrace outsiders. Benoit Hamon, the Socialist candidate, is projected to win only 6.5%.

The new political alignment that will be played out in the remaining two weeks of the election will stress Le Pen’s emphasis on the nation-state, strong defense of the borders (from both terrorists and immigrants), protectionism in trade, a return to the franc, a referendum on leaving the European Union, closer relations with Russia, and an extension of the state into the economy and society (more benefits and a roll-back of labor reforms undertaken by the outgoing Hollande government).  Le Pen will also seek to paint Macron as part of the establishment, especially after he has received the endorsements of Fillon and Hamon.

This will be in contrast to Macron’s call to make the European Union work better, overhaul state finances, reduce the social welfare state, maintain the autonomy of the central bank, support NATO and push more labor market deregulation. Indeed, Macron’s plans call for the reduction of 120,000 public sector jobs and 60 billion euros in spending.

One last item on the French front is that the worst-case scenario was averted — a second round between Le Pen and far left Jean-Luc Melenchon, who finished fourth and had enjoyed a late surge in the polls.  French voters now have to endure two more weeks of electioneering as the two candidates left standing battle for their attention.  We remain true to our first call — Macron will be the next president of France. The first round result is good for markets and the euro.

Les autres stuff…
While the French elections dogged markets last week, they are likely to recede as a risk factor. Indeed, we would venture that next week the drama will return to the U.S., where the Trump administration is pushing Congress to avoid a government shutdown on April 28, while pushing the legislative body to move quickly on another attempt to pass a repeal bill of the Affordable Care Act (ACA).  President Trump also indicated that he plans to unveil his plan to overhaul the tax code.

The funding bill is probably the most significant story, as in addition to asking for funding to keep the federal government running, the Trump administration is asking for $3 billion for border security and the construction of a border wall and an additional $30 billion for defense spending. These items incur Democratic opposition and generate mixed feelings within the Republican camp.

There is considerable pressure on President Trump to have something to show on the legislative front for his first 100 days. The last effort to repeal and replace the ACA failed. However, presidencies are not determined by the first 100 days, but through their duration.  The outcome will probably be another extension on funding the government as Congress, especially the Republicans, do not want to be blamed for shutting the government down.  We would also expect that between tax reform and a new effort on healthcare, the Trump administration will pull something through the Congressional mire over the next several months. Funds for the construction of the border wall may have to wait.

Investors should also be aware that North Korea has not left the stage. North Korea usually follows significant dates with an ongoing stream of military power demonstrations. On Tuesday, North Korea celebrates the founding anniversary of its military. South Korean officials are warning that Kim Jung-un could opt to conduct a new nuclear test or launch its maiden test of an ICBM.  Indeed, U.S. commercial satellite images indicate increased military activity around North Korea’s nuclear test site, while Kim has indicated that the country’s preparation for an ICBM launch is in its “final stage”.

North Korea’s actions are closely tied to one thing — regime survival. While the rest of the world regards North Korea’s actions as highly provocative and the Trump administration has noted that strategic patience is over, much of the Kim regime’s actions are to probe how far it can go and hope to extract something from its actions. At the same time, the North is well aware that any efforts, like the U.S. strike in Syria, would lead it to threaten to turn “Seoul into a sea of flames” or strike out at Japan.  This makes striking North Korea a very risky venture.

We suspect that China has leveled considerable pressure on North Korea.  There have been reports that gasoline, which is imported from China, is in short supply in the North. China does not want the U.S. to strike at North Korea — an action that could unleash war on its border and radically change the geopolitical structure of international relations in Northeast Asia. Look for more North Korean drama, but the Kim regime’s actions may a little more limited. Ultimately, we suspect that North Korea will see regime change, much along the lines of what happened in Romania in 1989, but with considerable Chinese help. For those who do not remember, the near-totalitarian regime of Nicolae Ceaușescu ended when the aging despot and his power-hungry wife, Elena, were ousted from power and then lined up in front of a firing squad on Christmas Day.

And what about Italy?: Now that fears over a Le Pen victory are receding, Italy takes its place as our biggest risk factor in Europe. The economy is likely to struggle to get to 1.0% real GDP this year, while unemployment stood at 11.5% in February.  The ruling Democratic Party-led coalition remains in control of the government for now, but it has fractured with a number of more leftist members setting up their own anti-austerity party.  At the same time, the populist and anti-EU Five Star Movement has led in opinion polls, which could pose big problems for the rest of Europe should that party and other anti-EU parties gain an outright majority in parliament.

Italy Economic Data

2014 2015 2016 2017 2018
Real GDP % 0.5 0.8 0.9 0.9 1.0
Inflation % 0.2 0.1 -0.1 0.8 1.0
Unemployment rate % 12.6 11.9 11.5 11.0 10.7
Gen. govt. fin. Bal/GDP % -3.0 -2.6 -2.4 -2.4 -2.4
Gen. Govt. debt/GDP %

(Maastricht definition)

131.8 132.4 132.1 132.2 132.0

Source: http://www.oecd.org/eco/outlook/economic-forecast-summary-italy-oecd-economic-outlook-november-2016.pdf.

The Five Star Movement favors ditching the euro and returning to the lira, as well as cutting taxes and raising social benefits.  Considering the weak condition of Italian banks, the political overhang is not good news for their business or the general economy.

On April 21 Fitch cut Italy’s sovereign ratings from BBB+ to BBB, with a stable outlook. The rating agency said the downgrade was due to huge debts (equal to 132.6% of GDP), a stagnant economy and divided politics.  At the same time, Fitch’s outlook for Italy’s banking sector was negative, reflecting the high level of non-performing loans and weak profitability. Three banks – Monte dei Paschi di Siena (one of the largest in the country), Banca Popolare di Vicenza and Veneto Banca – are seeking public intervention to keep them afloat. The Italian banking sector as a whole is weighed down by some 203 billion euros ($US 217.68 billion) of bad loans. Fitch said that ahead of next year’s election, the “risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy.”

Fitch is not alone in having concern over Italy’s creditworthiness. Canadian rating agency DBRS cut Italy’s sovereign rating in January 2017 due to the same problems highlighted by Fitch. Moody’s Investors Service also has the country on a negative outlook, meaning a downgrade looms. No election is officially scheduled, but Italy is in its third government since the last election and speculation is growing that the country could go to the polls before 2018.

Last, but hardly least is Venezuela.  The country’s economy is in free-fall as are its politics. While basic staples for daily life are difficult to obtain, law and order appears to be breaking down. It could well be that the Maduro regime’s socialist experiment is reaching into its end-game — if it cannot control the streets with a combination of police, thugs and the military, the country is heading into civil war.  This means that the state-owned oil company, PDVSA, long expected to default on its debt, could finally do so.

Venezuela Economic Data

Economic Snapshot 2016 2017 2018
Real GDP % -18.0 -7.4 -4.1
Consumer Prices 254.9 720.5 2,068.5
Current Account bal./GDP % -2.4 -3.3 -2.1
Unemployment % 21.2 25.3 28.2

Source: International Monetary Fund

We are also concerned about the impact of a failed state in Venezuela on the neighborhood, including Colombia, Guyana, Suriname, the Dutch islands of Aruba, Bonaire and Curacao, and Trinidad and Tobago.  A failed state could see a surge in Venezuelans fleeing conflict, greater illicit flows of money and arms throughout the Caribbean and an upsurge in drug trafficking through Venezuela and into the Caribbean, pushing cocaine to northern markets in North America and Europe. This could complicate economic policymaking and debt management for some of these countries.

Dr. Scott B. MacDonald
The Global Economic Doctor

Smith’s Political Event Risk Grading Alert: U.S. Sanctuary Cities (-1)

February 14, 2017

Smith’s Political Event Risk Grading Alert was issued the first week of February for U.S. Sanctuary Cities (-1).

Smith’s Research & Gradings (SRG) publishes its SRG Political Event Risk Grading whenever Smith’s Sentinel System triggers a predetermined response. SRG was founded in 1992 to provide principles-based, independent, conflict-free (Paid By Investor/Stakeholder) analysis.  One of the principles is to provide credit analytics that are “Universal” so investors can compare risks across all classes of investments.

Smith’s Gradings have three components: 1) long-term payment probability gradings 2) recovery gradings, 3) event risk gradings.

Smith’s reported a Political Event Risk Alert for the United States Treasury Debt at Smith’s Affordable Housing Conference in March of 2011. “Probability of Sovereign Debt Crisis Now Escalating to Over 40%”, according to Terence M. Smith, CEO, SRG.  He noted the “Weak US$ Policy vs. Weak Chinese Yuan”.

Smith’s Political Event Risk Covers (classes):
1) Currency inconvertibility (CI) and exchange transfer (FX);
2) Confiscation, expropriation and nationalization (CEN);
3) Political Violence (PV) or War (including revolution, insurrection, politically motivated civil strife, terrorism);
4) Breach of Contract, Contract Frustration (CF), Contract Repudiation.
5) Wrongful Call of a Guarantee (WCG).

The 2016 Presidential election of Donald Trump was as much about the middle class revolting against the political  class in Washington, D.C., and the concentration of wealth in America, as it was about “Making America Great Again.”   President Trump is not much of a Republican, really, which is why he could move so swiftly to secure the borders and address immigration.

In his wake, the Republicans (the real ones) are moving to quickly move to consolidate legislative power.  And, once one grasps why he was elected, the likelihood that the U.S. Senate and Congress will become even more conservative is inevitable. To quote a well-respected friend on Wall Street, “The political correctness of the Democratic Party is what defeated them because no one told the truth during the polling. Everyone lied about Hillary and the polls were wrong when they said she was going to win.”

Sanctuary Cities
Steve Salvi, Founder of Ohio Job and Justice PAC, has the oldest non-governmental website that tracks Sanctuary Cities. He started in 1997.

Mr. Salvi explained that in 1996, the 104th U.S. Congress passed Pub. L. 104-208, also known as the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA). The IIRIRA requires local governments to cooperate with Department of Homeland Security’s Immigration and Customs Enforcement (ICE) Agency.  Despite the IIRIRA, hundreds of urban, suburban, and rural communities have ignored the law and adopted so-called “sanctuary policies.”

Generally, sanctuary policies instruct local or state government employees not to notify the federal government of the presence of illegal aliens living in or passing through their communities, counties, or states. These policies may also blur the legal distinction between legal resident aliens and illegal aliens, so illegal aliens can have access to the same taxpayer funded programs and benefits available to legal permanent resident aliens.
Sanctuary policies exist in two forms, formal and informal.

Already, in the wake of President Trump’s comments,  many sanctuary cities have taken steps to revoke formal sanctuary policies, such as Fairbanks and Juneau, Alaska.  However, some people express skepticism about these “formal” repeals being substituted with informal sanctuary policies.

U.S. Senator Jeff Sessions has been one of the strongest advocates for immigration law enforcement in the U.S. Congress. He introduced Senate Bill 1640 (S. 1640) in June, 2015, to address Sanctuary Cities.  Senator Sessions’ bill gives states and local governments the authority to enforce immigration laws. It is named the Davis-Oliver Act, after two law enforcement officers who where murdered by illegal aliens.  Congressman Trey Gowdy introduced a companion bill in the U.S. House (H.R. 1148).

SRG will remain vigilant to monitor the political event risks facing investors in the bonds of sanctuary cities.

 

Italy – Beyond The ECB’s Fairy Dust

December 5, 2016

On Sunday, December 4th, Italian voters went to the polls and strongly rejected the proposed constitutional reforms advanced by the government of Prime Minister Matteo Renzi by a margin of 59.41% to 40.59%. In the aftermath of the defeat Renzi resigned, potentially setting the stage for a new crisis in Europe.

The problem is that Italy’s banks are weak and need capital infusions (which they are supposed to get from either bail-ins from equity and bondholders or capital markets). Economic growth is weak, expected to be 0.8% this year after a flaccid 0.6% last year (according to the OECD). Italy’s public sector debt is also an issue as it stands at euro 2.33 trillion, equal to 135% of GDP and access to markets to critical for it to be financed. To keep the Italian ship of finance afloat the government and its banks are at the mercy of international markets. The No vote outcome is not a confidence-building action.

Renzi’s proposed reforms sought to streamline Italy’s political system so his Democratic Party-led government could push through a major economic reform package. Along these lines, the referendum would have allowed a restructuring of the government – reducing the number of senators and limiting the senate’s power relative to the lower house of parliament. It would have also curtailed the political power of Italy’s regions and provided the largest party in the lower house after elections with an additional bloc of seats to guarantee a solid majority and stop the country’s rotation of governments. Italy has had over 60 governments since the end of the Second World War. Renzi’s government lasted longer than most – two and a half years.

No one disputes that the Italian economy needs reform. Indeed, The Independent’s Alexandra Sims (December 5, 2016) noted: “Few dispute that economic reforms are necessary: the Italian economy has essentially gone nowhere for 16 years and unemployment is high at 11.5 per cent. With the exception of Greece, Italy has had the worst performance of any eurozone country since the 2008 financial crisis.” Her comments are not reassuring for markets.

Post-referendum Italy sits in uncertain territory. Renzi has resigned and the country’s head of state, President Sergio Mattarella, can accept the Prime Minister’s resignation (which is likely) and ask other parties to form a new coalition government or set a date for new elections. The latter course implies that the President appoints an interim administration. Considering it is December, the likelihood is that any new elections would take place in January, but more likely in February of March. This leaves the all-important post of finance minister open at a time when Italian banks are struggling with large levels of non-performing loans and capitalization issues. Under the circumstances, it will difficult for Italian banks to raise capital and sends the wrong signal to international debt and equity markets.

What further leaves global investors and economic policymakers with a degree of angst is the potential outcome of new elections. A new parliamentary vote could bring the Five Star Movement to power, which was strongly opposed to constitutional reform. The populist party was created by the comedian and internet populist Beppe Grillo, whose slogan is Vaffa! (fuck off) to more or less everything, including the euro.

Grillo wants another referendum to pull Italy out of the eurozone, which he sees as an important step in breaking the so-called German mercantilist hold over Italy’s economy. He also favors an end to EU-mandated government spending limits, income guarantees for all citizens, and possibly defaulting on the country’s debt (which would reduce the burden on the country).

In recent opinion polls, the Five Star Movement, at 28%, is just behind Renzi’s Democratic Party (32%). However, the undisputed winner of December 4th is Grillo and it remains to be seen if he can capitalize on the victory. He still has a lot of work to do if he wants to gain enough votes to be the leading force in forming a new government. Nonetheless, the No victory reinforces the populist tide in the West, which fits in with the Brexit vote and Donald Trump’s victory in the United States. It is no shocker that Grillo announced that he likes Trump.

Italy’s vote adds considerable pressure on Chancellor Angela Merkel and Germany. Berlin is already dealing with Brexit, a looming change of government in France (most likely with a move to the right), and elections in the Netherlands (with its own populist movement under Geert Wilders likely to gain ground or have a say in the government). At the same time, in Germany the anti-immigrant right has gained ground in local elections and the Chancellor faces a new election test later in 2017. Turkey looms as a headache on the foreign policy front, with relations with Germany and the EU taking a downturn over the Erdogan government’s human rights violations in the aftermath of the July coup attempt. The Turkish president has indicated that he might be willing to loosen up control over refugees in his country, which could put pressure on the EU’s southern front again. It would certainly become an election hot button in German elections.

One last item on Berlin’s and Brussels’ foreign policy agenda is that Algeria’s leader for 17 years is quite ill. His departure could open the door to a crisis in that country, including the strong possibility of a renewed civil war between the military and Islamists. This could complicate energy security for France and Italy as well as open a new front on the migration issue if a new civil war broke out in North Africa. For anyone looking France and Italy are due north of Algeria.

The Italian referendum has come and gone. Renzi has done the same, unseated by rising populist forces, much like David Cameron in the UK. The No victory clearly gives a boost to populist forces throughout Europe and trumps the victory of the green candidate over the far right candidate in Austria’s presidential election this weekend. Italy represents the potential for a major crisis as the country is too big to fail: if there are problems in its ability to refinance debt or to keep its banks afloat, it will take more than what journalist Ambrose Evans-Pritchard has called “the European Central Bank’s fairy dust of quantitative easing” to save the day. It is doubtful the same political will could be raised to “save” Italy the way Greece, Portugal and Ireland were saved. Equally important, it is questionable if Italy would want to go through a Greek-style structural adjustment program; rather an exit from the eurozone would probably be preferable. Hopefully Italy’s No vote does not slide into a new European crisis, but it clearly raises the potential for higher volatility in markets and casts a very dark cloud over the country’s finances.

Dr. Scott B. MacDonald
The Global Economic Doctor

The Election of 2016 and Its Implications

November 9, 2016

Asian markets are tumbling.

The U.S. presidential election of 2016 was decidedly one for the history books.  Although 2016 is certainly not 1860, which led to the U.S. Civil War, it was a dirty, brutal and personalized campaign that tapped into the angst of a voting public angry with widening socio-economic disparities, sub-par economic growth and a dysfunctional Washington. 

Why did Donald Trump, the Republican candidate, win?

1. Public frustration with Washington’s corruption and its seeming ineffectiveness in addressing the country’s major problems.  Clinton was clearly seen as more of a Washington insider than Trump, who has never held an elected political office before.

2. The ongoing whiff of corruption that surrounded Democratic contender Hillary Clinton (not that Trump is a saint), related to her emails and the finances of the Clinton Foundation. Past Clinton “scandals” did not help.

3. The intervention of the FBI and WikiLeaks into the electoral process via disclosing embarrassing emails, which only maintained attention on Clinton’s email scandal. Furthermore, having her name associated with former Congressman Anthony Weiner (with his sexting scandal) obviously did not help Clinton in the last days of the campaign.

4. The growing divisions in U.S. society, especially along an urban-rural divide. One thing that gave Trump an appeal to many living in rural areas was that he appeared to listen to them and mocked the political correctness that many found stifling.   

5. The Democrats underestimated Trump.  As General Colin Powell stated: “No battle plan survives contact with the enemy.”  This was certainly the case of Clinton with Trump.

6. The appeal of a strongman leader. The last reflects a major paradigm change in global politics — the rise of strongman leaders, who offer simple solutions to complex problems. Considering the scope of U.S. problems and the challenging nature of international relations, Trump’s “tough guy” persona was a point of attraction to some voters. There are certainly echoes of this in other countries.

What next?  A Trump victory was not expected by global markets or political leaders in many other countries (many of whom have been critical of the Republican leader now president-elect).  The next week is likely to see an unwinding of the “Clinton trade” (risk on) in global debt and equity markets, downward pressure on oil prices, and a further pounding of the Mexican peso. 

Investors find a Trump victory unsettling from the standpoint that during the campaign he was anti-trade, opened up the possibility of negotiating the U.S. debt, and wants to overhaul of the U.S. alliance system around the world (such as with NATO). The last time the U.S. embraced protectionist trade policies in a major fashion was the 1930s, in the form of the Smoot-Hawley Tariffs. U.S. protectionism was a major cause of the deepening of the global Depression. The extent of the market downdraft will depend on Trump’s acceptance speech, his comments on policy matters before he gets into the White House and who he appoints to his cabinet. 

The major challenge in the days ahead will be to find a way to reunite the country after the election.  In many regards, this may be an impossible process, considering the bad blood between Democrats and Republicans since 2008.  A dangerous development in U.S. politics is the destruction of the political center – the area where compromise and dialogue are reached and policies can move forward. 

The U.S. sovereign ratings are Aaa/AA+/AAA, with a stable outlook.  The policy format of the incoming Trump administration will no doubt be carefully examined, in particular on its debt management and trade policies. 

For American politics to become more workable, President Trump will have to demonstrate an ability to lead, but also work within a constitutional system that he might find constraining.  As he moves to “drain the swamp”, Trump will have to make the transition from candidate to elected official and from someone who is critical of Congress to a leader who will have to find the means to work with it.  For their part, both the Republican Party (which held on to both the Congress and Senate) and Democratic Party will have to adjust to a President who has not emerged from their ranks.  A new Washington looms on the horizon – hopefully it works.

Dr. Scott B. MacDonald
The Global Economic Doctor

The Global Economic Doctor

August 2, 2016

Global Economic Doctor_thumb

 

 

The Global Economic Doctor– Click link to read the full edition.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Lead Us Not into Temptation

“Lead us not into temptation. Just tell us where it is; we’ll find it.”
 — Sam Levenson, American humorist

Summary: High risk assets have been in demand.  It has been so tempting. Everything from high yield and emerging market debt to leveraged loans have been sucked up by investors driven to looking for yield.  Even investment grade debt has been in demand.  Lipper US Fund Flows noted that Corporate US Investment Grade bonds pulled in $1.475 billion net inflow for the week ended July 27th and it is estimated the new supply for August could be $70-$80 billion. As advanced economy central banks are still following the mantra of “lower for longer” in terms of rates, liquidity has trumped Brexit, tremors over Italian banks, and even bad economic data. The last  was best exemplified by Q2 2016 real GDP, which was expected to be over 2.0% and came in at disappointing 1.21%; the VIX (Volatility Index) ended last Friday at a low of 11.87 (and has since nudged up to around 13.00).   But for anyone watching, markets are frothy, having hit highs, to a backdrop of flaccid corporate earnings, low levels of corporate capital expenditures, anemic economic growth and an uncertain political situation in the fall.  And that is just in the United States!  (Europe has a cornucopia of political and economic risk and Asia’s two major economies, China and Japan, are struggling with their own set of issues.) Moreover, the US central bank increasingly seems to have lost its way.  This was reflected by Jeffrey Gundlach, CEO of DoubleLine Capital (which manages $100 billion in assets), who stated at the end of July: “The Fed is out to lunch. Does the Fed look at what’s going on in the economy?  It is unbelievable.” Gundlach is not alone in questioning Federal Reserve policy, which is a serious development.  He is recommending gold (which he expects to hit $1,400) and gold mining companies. Considering growing concerns about the potential for a US recession and political uncertainty surrounding the November presidential elections and their aftermath, it is critical that the central bank leadership is able to project a degree of confidence. While Chair Janet Yellen is a competent economist, one has to wonder about her ability to steer through the storms that loom ahead. And the storms are coming.  We expect that August is likely to see the risk-on trade in markets continue a little longer, but the fall could well be setting up to be filled with volatility and downward pressure. Too much temptation can be a bad thing.

 

 

The Global Economic Doctor

July 12, 2016

Global Economic Doctor_thumb

 

 

The Global Economic Doctor– Click link to read the full edition.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Life During Wartime

This ain’t no party, this ain’t no disco,
This ain’t no fooling around
No time for dancing, or lovey dovey,
I ain’t got time for that now
— Talking Heads, Life During Wartime.

Summary:

The narrative for the global economy is going to be dominated by political risk factors through the rest of 2016 and well into 2017. Brexit was certainly a factor in the US Federal Reserve’s decision not to raise rates in June and July; the massive injection of uncertainty into markets in the aftermath of the British vote will pressure the US central bank not to raise rates again in 2016. There will be further pressure not to raise rates from the uncertainty surrounding the US presidential election in November. Other headwinds to global growth include what could be a worsening bank crisis in Italy, a recession in the UK and possibly other countries in Europe. Asia, the Middle East and Latin America have their own set of political risk factors, which add stress to markets. Moreover, Q2 2016 US corporate earnings, which start this week with Alcoa, are not likely to lift markets on a sustained or meaningful basis. The consensus view is that the S&P 500 Index companies are expected to see another drop; this time a 5.1% decline year-on-year.  This is better than Q1’s 6.8% decline in profitability. The thing to watch with earnings is the outlook for the rest of the year.  Markets will be keying in on what CEOs have to say about the business environment for the second half of 2016. Our view is that they will be saying what they have been stating over the last several quarters – it is difficult to forecast due to weak global growth, slowness in wage expansion in the US, and political uncertainty. The exclamation point on all of this was the tragic, racially-charged violence that very recently marked the US in Minnesota, Louisiana and Texas. It is, therefore, easy to look at the world through the lens of the Talking Heads song, some of which is quoted above. The path forward is through a fog of uncertainty and risk. If political and economic conditions deteriorate further, the issue facing investors is increasingly going to be not one of a getting a higher rate of return, but preservation of capital. Cash remains attractive and gold, gold stocks, utilities and US Treasuries are likely to have a good run as we sift through the variables in challenging markets and investors are driven to safe harbors.

 

Smith’s Critical Infrastructure Review: Water

June 16, 2015

j0321110Smith’s  Critical Infrastructure Review of Water (an essential resource)

We have found the United States continues to face dramatic event risks.  Tops on the list of Smith’s Event Risks for Water is Global Climate Change.

Smith’s has found more than half of the dams in the United States are beyond their expected useful life. Smith’s Gradings of reservoirs go hand-in-hand with dams.  The water level behind a dam is very important to measure slow moving events, like droughts, or fast moving events like floods. The loss of human lives and property damage factors into Smith’s Sentinel System that powers Smith Information System.

Smith’s Database of Critical Infrastructure Assets includes Safe Drinking Water and Clean Waste Water. Smith’s Drinking Water Research includes water mains, which are driven, in part, by water main breaks. These water main breaks occur 850 times a day (on average), and when coupled with slow leaks, are the reasons why one-sixth (1/6) — 2.1 trillion gallons of  treated drinking water — never reach the faucet.

The age of the water mains is a key performance indication (KPI) for Smith’s Water Main Gradings. Other H2O KPIs include the pipe material, soil, climate/weather, seismic faults/activity, location, and any recent pipe inspections.

America’s older urban areas, such as major cities along the East Coast and Mid-Atlantic, have water systems that are well beyond their expected lives.  Baltimore’s water system suffers more than a 1,000 breaks a year, for example.

The American Water Works Association, a lobbying group for non-profit and corporate water works, estimated the cost of repairing the U.S. underground water system at more than US$1 trillion.

Principal Aquifers of the U.S. Source: U.S. Geological Survey

Principal Aquifers of the U.S.
Source: U.S. Geological Survey

Smith’s Aquifer Gradings

Understanding water, as an essential resource, requires digging deep into the subject matter to learn about the aquifers, which are underground water-bearing layers of rock that serve as subterranean rivers and lakes. Smith’s Aquifer Gradings maps to 62 different aquifers in the United States.

The Great Plains Ogallala Aquifer is one of the world’s great aquifers, but in places it is being rapidly depleted by growing municipal and agricultural use. Even this huge aquifer, which underlies portions of eight states, is being depleted. It contains primarily fossil water from the time of the last glaciation. The annual recharge, in the more arid parts of the aquifer, is estimated to total only about 10% of annual withdrawals.

Moreover, Smith’s review has shown an increased presence of chemicals used in pesticides/fertilizers, proven to be harmful to human beings.

Understanding the three major Aquifers that form the Florida Aquifer is essential to investing over the next 10 to 30 years. It is one of the world’s most productive aquifers. It is under all of Florida as well as large parts of coastal Georgia and areas of coastal Alabama and South Carolina.  The Florida Aquifer provides fresh water to major cities, such as Savannah and Brunswick in Georgia, as well as Jacksonville, Tallahassee and St. Petersburg, Florida.

Smith’s Florida Bond Gradings reflect our growing concerns about the saltwater intrusion, particularly in South Florida, where the unconfined Biscayne Aquifer merges with the Atlantic Ocean. Smith’s Aquifer Gradings are linked to the bond credits of Miami and Dade County.

The Edwards Aquifer in Central Texas provides clean water to more than 2 million people.  It is located in the Permian Basin, which is famous for natural gas and the movie “Friday Night Lights”.  What’s more, the Central Texas Aquifer remains fully charged due to the tremendous recharging from local lakes, streams and rivers.

The Mahomet Aquifer is located in central Illinois. It supplies water to some 800,000 people and contains approximately four trillion gallons of water.

The Kirkwood-Cohansey Aquifer is located under the Pine Barrens (New Jersey) of southern New Jersey. It not only contains 17 trillion gallons of water, it provides some of the purest water in the world.

The Buried Valley Aquifer System is in the central basin of the Passaic River watershed as defined by the U.S. Army Corps of Engineers and U.S. Environmental Protection Agency. This aquifer impacts drinking water sources and, thus Smith’s Gradings for twenty-six municipalities in four northern New Jersey counties: Morris, Union, Essex, and Somerset.

In California, Smith’s Aquifer Gradings include the Bishop Sub-basin, which supplies San Ramon, California in Contra Costa County. The Bishop Sub-basin, together with the Mocho Sub-basin, are candidates for recharging from “reclaimed reverse osmosis waters.” to support communities in the Livermore Valley.

The Santa Clara Valley Aquifer provides drinking water for the south San Francisco Bay area.  It has been under enormous pressure, which resulted in the water pressure dropping below 200 feet — which in turn, resulted in the ground dropping (subsiding) 15 feet in some areas.

The largest groundwater basin in California is the Turlock Basin, which is a sub-basin of the San Joaquin Valley groundwater basin, and it occupies approximately 13,700 total square miles. The Turlock Basin aquifer is located within California’s Central Valley and is to the east of the city of Turlock. Unlike most of California, the groundwater in the Turlock Basin occurs in older alluvial deposits and it is the sole source of water for the City of Turlock. Smith’s Aquifer Gradings reflect that portions of the San Joaquin Basin have “overdrafted” water, allowing infiltration of agricultural water pollutants and creating overall poor water quality.

Smiths Aqueduct Gradings
Smith’s Database of Critical Infrastructure Assets includes tunnels, which can be used to transport vehicles (cars, trucks, bus) or water, which are called aqueducts. The largest existing aqueduct in the world is the Thirlmere Aqueduct in North West England. It was built between 1890 and 1925 and runs 96 miles through the English countryside.

New York Aqueduct System

New York Aqueduct System

The second largest aqueduct in the world is New York Water, which has a storage capacity of 550 billion gallons and provides 1.2 billion gallons of fresh water per day to 8 million New Yorkers. In an engineering feat that rivals the great pyramids of Egypt, more than 95% of New York aqueduct’s water is moved by gravity. The New York water system has three aqueducts and three tunnels. The aqueducts serve as reservoirs and the tunnels serve as the distribution system.

The New Croton Aqueduct is the oldest in New York and it was completed in 1890 to transport water from New Croton reservoir in Westchester and Putnam counties. Today it supplies about 10% of New York City’s water needs.

The Catskill Aqueduct is the newest asset in the New York system. It was completed in 1960 to bring water from two reservoirs in the Eastern Catskill Mountains.  It supplies about 40% of New York City’s water needs.

The Delaware Aqueduct is the largest by volume.  It was completed in 1945 to bring water from tributaries of the Delaware River in the Western Catskills and it provides about 50% of the New York City’s water supply.

In terms of length, the top title would go to the California Aqueduct. It is 444 miles long and runs from the Sacramento Delta to Lake Perris.

No. 2 in length is the Colorado River Aqueduct, which supplies the Los Angeles area with water from the Colorado River nearly 250 miles to the east.

Smith’s Canal Gradings
America’s first financial boom and the birth of Wall Street came with the construction of the Erie Canal.  Prior to the canal, Philadelphia was the heart of banking, brokering and commerce. It was the Philadelphia Exchange which promulgated rules for traders, such as no spitting on the floor of the exchange and no feet on desks.

Smith’s Canal Gradings includes 18,241 canals. These are man made canals. Each state has given a name to the canal, which may be only a narrow irrigation or drainage ditch or a large ship, municipal water and/or irrigation canal. States with extensive agricultural acreage may have several hundred to thousands of canals. Smith’s Gradings consider the canals as economic arteries and cultural veins.

The longest canal is the Intercoastal Waterway, which is 3,000 miles long and extends from the Gulf of Mexico up the entire Eastern Seaboard.

The most important canals in America today, perform the same duties they did when created.

For example, the Augusta Canal still provides transportation and is the primary source of fresh water for Augusta, Georgia.

The Chain of Rocks Canal, “Lock No. 27”, allows traffic on the Mississippi to bypass the dangerous Chain of Rocks that can make the river unnavigable during low water. During droughts, Smith’ Gradings monitors the area as a major bottle neck for logistics and barges.  Situated just south of where the Missouri River flows into the  Mississippi, Lock No. 27  handles more  cargo than any other structure on the Mighty Mississippi.

Still, not every canal has been a success. The Mississippi River – Gulf Outlet Canal (abbreviated as MRGO or MR-GO) is a 76 mi. channel constructed by the United States Army Corps of Engineers in the 1950s that provided a shorter route between the Gulf of Mexico and New Orleans’ inner harbor Industrial Canal via the Intracoastal Waterway.

In 2005, although disputed by the Corps of Engineers, the MRGO channeled Hurricane Katrina’s storm surge into the heart of Greater New Orleans, contributing significantly to the subsequent multiple engineering failures experienced by the region’s hurricane protection network. In the aftermath the channel was closed. A permanent storm surge barrier was constructed in the MRGO in 2009, and the channel has been closed to maritime shipping.

Smith’s Ferry Gradings
Ferry systems provide transportation at a much lower capital cost than, say, bridges or tunnels, for communities located along waterways.

The Washington State Ferries operates the largest Ferry System in the United States. With ten routes on Puget Sound and the Strait of Juan de Fuca, the Washington Ferries transit between terminals in Washington and Vancouver Island. In 2012, Washington State Ferries carried 22 million passengers and 10 million vehicles.

The Staten Island Ferry is the nation’s single busiest ferry route by passenger volume. New York City also has a network of smaller ferries, aka “water taxis”, that shuttle commuters along the Hudson River from locations in New Jersey and Northern Manhattan down to the midtown and financial district in lower Manhattan.  Over the past decade ferry companies started to offer service linking midtown and lower Manhattan with locations, such as LaGuardia airport in the boroughs of Queens, as well as Brooklyn, by crossing the city’s East River.

Cape Cod is connected to the islands of Martha’s Vineyard and Nantucket by The Woods Hole, Martha’s Vineyard and Nantucket Steamship Authority. The ferry leaves Woods Hole to stop at Vineyard Haven (Martha’s Vineyard) as well as Hyannis and Nantucket.

New Orleans operates the Algiers Ferry, which has been in continuous operation since 1827. It is one of the oldest operating ferries in North America.

San Francisco operates the Blue and Gold fleet of Ferries that travel the San Francisco Bay area. The majority of ferry passengers are daily commuters (which is a pleasant way to get to work) and tourists.

SRG’s database of Ferries includes the Bridgeport-Port Jefferson Ferry.  The Bridgeport & Port Jefferson Steamboat Company was founded in 1883 by Phineas Taylor Barnum. It operates year round with two ferry boats that travel on a synchronized schedule (each leaving at the ports at the same time so as to maximize the dockspace/facilities)  Over 1 million people use the Bridgeport-Port Jefferson ferry and 500,000 vehicles are transported.

Smith’s Ferry Gradings consider weather, the age of the ferries, the inspection process, as well as the management  when making its assessments.  The ferries are often overlooked and many could potentially benefit from municipal bond financings.

Iowa: Smith’s Avian Influenza Event Risk Alert (-1)

May 26, 2015

Deadly avian influenza viruses have affected more than 33 million turkeys, chickens and ducks in more than a dozen states since the start of 2015.

Iowa, which produces 20% of the nation’s eggs (layers), has been hit hard. More than 40% of its egg-laying hens are dead or dying. The high density of layer birds at the egg farms explains why the flu, which can kill 90 percent or more of a flock within 48 hours, has decimated more birds in Iowa than in any other state.
The most recent Census of Agriculture reported 233,770 poultry farms in the United States in  2012.  In 2014, the U.S. poultry industry produced 8.54 billion broilers, 99.8 billion eggs, and 238  million turkeys. The combined value of production from broilers, eggs, turkeys, and the value of  sales from chickens in 2014 was $48.3 billion, up 9 percent from $44.4 billion in 2013.

South Dakota reported its first possible infection on a chicken farm with 1.3 million birds last Thursday.(See Map)

Smith’s Regulars can contact Pam Kilbourn for quotes on how to immunize investment portfolios using Smith’s Avian Influenza Event Risk Gradings. (pamkilbourn@smithsresearch.net)Avian Influenza

Egg Prices Expected to Increase
China, Japan, and Mexico have banned poultry imports from the United States.  Already, U.S. consumers may have noticed a rise in the price of eggs.

When a egg farm is identified as having the avian flu,  the extermination of the birds requires hiring a company to  gas the entire barn with carbon dioxide.

Even when the Avian flu has been identified at a farm, the hens are still laying eggs in barns that had yet to be emptied.  Those eggs are being sold as a liquid product after undergoing a federally required extra pasteurization.  The liquid eggs are used in many food products, including cakes, ice cream, and cookies.

Once the barns are cleared, a mandatory 28-day period must pass before it is tested. Once the test comes back negative, then the barns can be put back into production.

The U.S. Department of Agriculture believes consumers may see an increase in the price of foods using liquid eggs, too.

Pathogens
HPAI, or “high path” AI, spreads rapidly and is often fatal to chickens and turkeys. The HPAI H5N8 virus originated in Asia and spread rapidly along wild bird migratory pathways during 2014, including the Pacific flyway.  In the Pacific flyway, the H5N8 virus has mixed with North American avian influenza viruses, creating new mixed-origin viruses. These mixed-origin viruses contain the Asian-origin H5 part of the virus, which is highly pathogenic to poultry.

The N parts of these viruses came from native North American avian influenza viruses found in wild birds.  USDA has identified Eurasian H5N8 HPAI and mixed-origin viruses, H5N2 and a novel H5N1, in the  Pacific  Flyway.  The HPAI H5N2 virus strain has been confirmed in several states along three of the four North American  Flyways:  Pacific, Central and Mississippi.

I Heard America Talking

April 1, 2014

Five years ago I drove from Salt Lake City, Utah to New Jersey because a snow storm in the Northeast had closed the airports.

I wonder, What do those American voices say, today?

 

Driving from Salt Lake City to Newark, New Jersey, I heard America talking on the late night radio. As I hurried across the Great Divide, the voices from New Mexico and Washington gave rise to growing concerns about our national economy, but soon they began to fade.


Rolling down across the high desert to Laramie and Cheyenne, I heard the voices rise, again.  Carried by the towers in West Texas, Iowa, and Minnesota and Detroit, I listened as America voiced its fury at the great corporate criminal conspiracy.  Never had so few stolen so much from so many people.


Then, with Dawn’s Rose-Tipped Fingers Spread against the sky, I listened to the pressing question: Why?


Like a straight razor’s edge that ran across Nebraska: Was it Wall Street’s failure or the slumbering of a regulator?

Image

Council Bluffs, Iowa


Council Bluffs sent us weaving round the ancient earthworks in the bright early morning. 


Then we found the cause of our misery was here on Main Street, USA.  At an exit, we heard Main Street was awakening from the dream that owning a home meant never having to work, again.  Americans had sold their future, and their childrens’ future, for the price appreciation of dot.com stocks and the second mortgages on their homes.


The voices rose ever higher and we pushed the pedal into Illinois looking for an answer. 

Homeland of our President.  Home of the Mighty Blackhawk nation. Hoping to find a bright future. Only to drive past a failed Ethanol energy facility — with  long lines of black train cars waiting with their golden grain fuel.    Here we learn of a tea-party that is planned for the summer months on the Lake Michigan Midway.


I hear America asking for forgiveness on credit card loans.  Like an angry mob that doesn’t know why it wants to fight, but it is still afraid to die.


At Noon on the Eisenhower Expressway, I felt the sun beating down on sleepless eyes and I listened to the pressing question: Why?

Following a privatized American highway — I wondered about the public trust.  Do the tongues that have sworn the oaths to protect and serve ever give pause to wonder about what I heard?


This land is your land. This land called Indiana.  Home of the Hoosier and barn burners and the family farm. Strong and steady as the shadows stretch from the fading western sun.


Into the night as the engine runs. Looking for the return of the public’s capital, we find O-H-I-O. We drive along the shore of the Great Lake: Erie.  I hear America wanting to work. Here in the night we pass its great inland seaports of Toledo and Sandusky and Cleveland that have served to forge our industrial heartland. I hear America workers in Youngstown and Columbus wanting to build, again.


The Pennsylvania thruway runs up and down through the Mountains.   Truckers race down the bottom of the hills and then ride slowly, up the grade, and finally to the other side.


Again, I hear America calling with angry words.  The reasons are lost.  Banks weren’t the problem in the Great Depression — over-capacity was the reason for the boom/bust.    It took a great world war to destroy the over-capacity and return U.S. factories to full utilization.


Finally, we cross the Delaware Water Gap.  On to New Jersey. Speak to me during these troubled times of my America.


I hear America calling for us to build it better.  Better with bonds.  Leverage the public’s capital to make repairs with thoughtful borrowing over the lifetime of the roads and bridges and ports — while retiring the consumer debt that has driven Americans to despair.