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Are Unicorns Killing the 2016 IPO Market?

Rising regulatory burdens combined with a surfeit of venture capital are making new stock offerings passé. That’s good for investors.

By Alexander Eule                
  

A paradox is brewing in Silicon Valley and beyond. Entrepreneurs and venture capitalists have spent the past decade creating bulletproof technology companies, a direct response to the Valley’s 1990s failures. The private firms—such as Uber Technologies, Dropbox, and Airbnb—have legitimate business models that are disrupting mature markets, and capital has poured in. The so-called unicorn class now has 147 members, each with a value, on paper, of at least $1 billion.

But the mythical beasts are running into a mundane reality. While venture capitalists are eager to pump money into the potential “next big thing,” individual investors are hardly clamoring to get into the act. There hasn’t been an initial public offering for a Silicon Valley–based tech company in seven months.
 
The IPO lull isn’t just in tech. Five months into the year, just 31 companies have gone public in the U.S. That’s down from 69 in the first five months of 2015, and 115 over the same five-month period in 2014, according to Renaissance Capital, manager of IPO exchange-traded funds, including Renaissance (ticker: IPO). While the public’s coolness has been well reported by the business press, there’s a more important message buried beneath the headlines: The bad news for IPOs could be a bullish sign for the market.

U.S. IPOs are in long-term decline. (Hand) iStock; (Egg) Masterfile

Since 2000, there have been eight calendar years with fewer than 100 IPOs. In the 12 months following each of those years, the Standard & Poor’s 500 index climbed an average of 13.1%, including dividends, according to data compiled by Jay Ritter, a University of Florida professor who has studied the IPO market for 35 years. In the 12 months following a strong year for IPOs—100 or more offerings—the S&P 500 lost an average of 1.2%.

There are many factors at play here. A robust IPO market typically comes during a period of irrational stock market exuberance. IPOs peaked at 677 in 1996 and averaged 474 in the late 1990s before the Nasdaq crashed in early 2000. They picked up steam again in 2004, heading into the housing crash. Usually, rising markets beget more IPOs, which adds to the paradox of the current climate. “The lack of IPOs when stock indices are near their record highs is unprecedented,” Ritter says.

Bankers, lawyers, and accountants say a confluence of events has contributed to the current IPO lull. The brutal stock market crash of 2008-09 has curbed investor enthusiasm for speculation, and, not coincidentally, new sources of liquidity have emerged for company founders and insiders. At the same time, regulatory changes have simultaneously made it easier to stay private and harder to be public.

And in a business where timing is everything, getting it wrong is more devastating than ever. Take Square(SQ), the financial technology firm, which went public in November. The stock has struggled to maintain its IPO price, which was already lowered by bankers prior to the offering. Other notable tech outfits that went public last year, including Fitbit (FIT), Box (BOX), Etsy (ETSY), and Pure Storage (PSTG), have suffered even worse fates.

CURIOUSLY, WHILE IPOS have faded, venture-capital firms are still cashing in through mergers and acquisitions. M&A for VC-backed companies has held fairly constant for the past decade, at about 120 mergers per quarter. The first three months of 2016 saw 112 such VC-backed deals, according to Dow Jones VentureSource.

                 
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Put another way, the IPO weakness is less about the sellers and more about suddenly discerning buyers. “The IPO market has become more institutional, because most individual investors and their advisors are buying indexed products,” says Kathleen Smith, principal at Renaissance Capital. “They are not in there flipping IPOs. The individual investor participation, which tends to be the easy money, is not there, and it’s very unlikely to come back.”

Thus, Uber continues to grow behind closed doors. Last week, the ride-hailing service raised $3.5 billion from Saudi Arabia’s Public Investment Fund. With a $62.5 billion valuation, Uber is more valuable than 85% of the companies in the S&P 500. Lodging-rental platform Airbnb already rivals the world’s largest publicly traded hotel companies, with a value of $25.5 billion.

But there are cracks forming in the lavish world of private investment that go beyond the unicorn class. A year ago, venture-capital investments were being made at a median valuation close to $60 million, a record high. The valuation fell precipitously in the first three months of this year, to $19.7 million, according to Dow Jones VentureSource.

Many think the corrections are necessary to revive the IPO market. Square’s IPO price valued the company below its last round of private investment, leading some to believe that companies and bankers were taking the corrective needed to restore public offerings. Instead, the market for tech IPOs entered an even-deeper freeze, leading to the current seven-month lull.

There are new signs that the freeze might be thawing, albeit slowly. Several small IPOs have priced in recent weeks. San Francisco–based Twilio filed its IPO papers two weeks ago, suggesting it could be listed soon. The firm, which helps companies build mobile-communication tools, is valued at $1 billion, according to a Wall Street Journal/Dow Jones VentureSource database.

James Palmer, head of equity capital markets for the Americas at UBS, says IPOs have been complicated by a host of global events this year, including the timing of the Federal Reserve’s interest-rate hikes, the Spanish election, and the U.S. election. “I think you’ll see the real IPO retest in 2017, as it relates to Silicon Valley,” he says.

EVEN IF ALL OF THE UNICORNS find a way to go public, it won’t change a broader point: U.S. IPOs are in long-term decline. From 1980 to 2000, an average of 310 companies went public every year, according to Ritter. Since then, the average has fallen to just 111. The Nasdaq has recovered from its dot-com bubble woes, but IPOs have not.

The new dynamic has forced mutual funds to look at private firms for growth opportunities. Fidelity Investments, T. Rowe Price Group, and Wellington Management all have sizable stakes in unicorns, though they remain a small slice of their total holdings.

Andrew Boyd, head of global equity capital markets at Fidelity, views the moves as down payments on long-term investments, and he expects the companies to go public when they’re ready—even if it takes some time. Fidelity invested in Facebook (FB) prior to its IPO, for example, and is now its largest investor.

“The detriments have grown,” Boyd says of going public, but “the benefits have not shrunk. You just have to need to be more prepared than you were in the past.”

In effect, Fidelity and others have created a well-funded minor-league system in which companies can hone their business models outside of the public spotlight. Public investors are spared pain when immature companies flame out. A similar path in the 1990s might have spared investors much agony.

MOST PARTICIPANTS in the IPO process say being public has become a hassle that’s best avoided for as long as possible. The U.S. Congress obliged, to a certain degree, when it passed the JOBS Act in 2012.

While the legislation was intended to ease the IPO process for small companies, the net effect has been to stall the market.

In one key provision, the JOBS Act allowed companies to accumulate up to 2,000 private investors before being forced to disclose public-company type information, and that limit no longer includes employees granted stock as compensation; previously, the limit was 500. The original, lower figure forced Facebook to go public in May 2012, before it was ready. While Facebook is thriving today, the stock stumbled out of the gate, mainly because it had not yet figured out how to make money on smartphones.

PwC has built a consulting practice to avoid those scenarios, says Mike Gould, a PwC partner and its IPO-services leader. The firm offers an IPO-readiness assessment and provides counseling on how to go—and how to be—public. “Fifteen years ago, we used to get a phone call that said we’re putting a registration statement together in the next few months. It was very much a fire drill,” Gould says. “Now, we’re generally getting the phone call two to three years earlier. It’s a more orchestrated process.”

Josh Bonnie, an IPO-focused partner at law firm Simpson Thacher & Bartlett, has more to discuss with clients since Congress passed the Sarbanes-Oxley Act in 2002, which raised the bar for public-company disclosures. “The truth is the IPO market took a one-two punch,” he says.
“The tech bubble crashed in 2000—that dried up a lot of the flow of new companies to the market. We had a financial crisis, and Congress responded with the Sarbanes-Oxley Act. The bottom line is that it became more expensive to be a public company. It just naturally shifted the cost-benefit analysis for companies to stay private until they were bigger.”

Congress is also using public companies to advance policy goals. Bonnie points to mineral mines in the Congo, which are helping to fund warfare. Instead of passing a law against the importation of the minerals, Congress pointed its quill at public companies, requiring a new set of disclosures. “When you’re a public company, you get hit with all this public-policy stuff,” Bonnie says. “It’s just become that much more of a hassle.”

Notes UBS’ Palmer: “With the speed and availability of information, which has come concurrently with the advent and growth of the hedge fund industry, stocks move like lightning, particularly at lofty valuations, where there aren’t traditional earnings metrics.”

Fitbit, the activity-tracking pioneer, has delivered a series of better-than-expected quarterly reports after going public last June. Even so, its shares are down 26% since then, and the company’s every move is being tracked in the harsh light of the stock market. The company’s new smartwatch was deemed a failure by investors months before it hit the shelves. By the time the watch was available, it barely mattered; the stock had already fallen 50%. Decent sales for the watch have hardly revived the stock.

LAST YEAR, Nasdaq (NDAQ)—the still-dominant market for tech stocks and a major beneficiary of IPOs—agreed to buy SecondMarket Solutions, a well-known marketplace for private stock. The acquisition will bolster Nasdaq’s own fledgling private-market business, which includes Pinterest, DocuSign, Shazam, and Tango, all members of the $1 billion-plus unicorn club. In a 2015 year-end report, the unit, known as Nasdaq Private Market, said transaction volume had reached $1.6 billion, a slight uptick from 2014.

Shortly after the SecondMarket deal was announced last year, Nasdaq CEO Bob Greifeld told Barron’s that it would prove significant over the coming years. “I certainly think it’s our job to provide to companies that want to stay private for a longer period of time the ability to bring liquidity—one, to their employees, and two, to their early-stage investors,” he said. “That need is there.”

The typical company on the private Nasdaq exchange is now nine years old with 440 employees and is worth $1.8 billion. “This profile is similar to the traditional definition of a public mid-cap company,” Nasdaq Private Market noted in its recent report. “The line between public and private is becoming increasingly arbitrary.” 


The Limits of Oil’s Rebound

Anatole Kaletsky
. oil pumping jack sunset


LONDON – For the first time since last October, the price of a barrel of oil has broken through $50.
 
So it seems a good time to update the analysis I presented in January 2015.
 
Back then, I argued that $50 or thereabouts would turn out to be a long-term ceiling for the oil price. At the time, with crude prices still above $60, almost everyone believed that $50 would be the rock-bottom floor. After all, futures markets predicted prices of $75 or higher; the Saudi and Russian governments needed $100 to balance their budgets; and any price much below $50 was considered unsustainable, because it would put the US shale-oil industry out of business.
 
As it happened, the price of Brent crude did fluctuate between $50 and $70 in the first half of last year, before plunging decisively below $50 in early August, when it became obvious that the lifting of sanctions against Iran would unleash a massive increase in global supply. Since then, $50 has indeed proved to be a ceiling for the oil price. But now that this level has been exceeded, will it again become a floor?
 
That seems to be what many investors are expecting. Hedge funds and other “non-commercial” speculators have increased their long positions to an all-time high of 555,000 of the main oil contracts traded on the New York futures market, compared to the previous record of 548,000 contracts, set just before the oil price peaked at $120 in June 2014. The return of speculative enthusiasm is usually a reliable sign that the next big price move will probably be down. More important, the fundamental arguments are more compelling than ever that $50 or thereabouts will continue to be a price ceiling, rather than a floor.
 
The case begins, as it did in January 2015, by observing that the oil market is no longer controlled by the monopoly power of OPEC (or the Saudi government and OPEC). Because of new sources of supply, advances in energy technology, and environmental constraints, oil is now operating under a regime of competitive pricing, like other commodities do.
 
This is what happened for two decades from 1985 to 2004, and, as the chart below shows, trading in the spot market during the past 18 months has been consistent with this idea. So has trading in the futures market: oil for delivery in 2020 has fallen to $56, from $75 a year ago.
 
Oil price
If this competitive regime continues, the price of oil will no longer be determined by the needs and desires of oil-producing governments. Saudi Arabia or Russia may want, or even “need,” an oil price of $70 or $80 to balance their budgets. But oil producers’ need for a certain price does not mean that they can achieve it, any more than iron-ore or copper producers can achieve whatever price they “need” to keep paying the dividends their shareholders expect or want.
 
Similarly, the fact that many debt-burdened shale producers will go bankrupt if the oil price stays below $50 is no reason to expect a rebound. These companies will simply lose their oil properties to banks or competitors with stronger finances. The new owners will then start to pump oil again from the same acreage, provided prices are above the marginal cost of production, which will now exclude any interest payments on loans that are written off.
 
A clear illustration of the “regime change” that has taken place in the oil market is the current rebound in prices to around the $50 level (the likely ceiling of the new trading range). The steepest part of this increase occurred after April 17, when OPEC failed to agree on a new price target and persuade the Saudi, Russian, and Iranian governments to coordinate the output cuts that would be required to achieve any such target.
 
Now that all of the main oil producers are unequivocally committed to maximizing production, regardless of the impact prices, oil will continue to trade just like any other commodity (for example, iron ore) that is in oversupply in a competitive market. Prices will be determined as described in any standard economics textbook: by the marginal costs of the last supplier whose production is needed to meet global demand.
 
When oil demand is fairly strong, as it is now and tends to be in early summer, the price will be set by the marginal production costs in US shale basins and Canadian tar sands. When demand is weak, as it often is in autumn and winter, the market-clearing price will be set by marginal producers of cheap but less accessible oil in Asia and Africa, such as Kazakhstan, eastern Siberia, and Nigeria.
 
From now on, the costs faced by these marginal producers will set the top and bottom of oil’s trading range. Low-cost producers in Saudi Arabia, Iraq, Iran, and Russia will continue to pump as much as their physical infrastructure can transport as long as the price is higher than $25 or so. The price needed to elicit enough production from US shale and Canadian tar sands to meet strong demand may be $50, $55, or even $60, but it is unlikely to be much higher than that.
 
Unpredictable shifts in supply and demand will, of course, cause fluctuations within this trading range, which past experience suggests could be quite large. In the 20-year period of competitive pricing from 1985 to 2004, the oil price frequently doubled or halved in the course of a few months.
 
So the near-doubling of oil prices since mid-January’s $28 low is not surprising. But now that the $50 ceiling is being tested, we can expect the next major move in the trading range to be downward.
 
 


Race to the Bottom Gaining Traction: Negative Rates Amplify Currency Wars

By: Sol Palha

"Ability is a poor man's wealth."  
~ M. Wren

If you had told individuals before 2009 that we would be living in a negative rate environment in the near future, most would have treated you like a lunatic that just escaped from Ward 12.

Fast forward a few years and viola, bankers all over the world are embracing negative rates.

China devalued the Yuan once again, adding further fuel to the already blazing fire. The Fed will have no option but to lower rates and then Jump onto the negative rate bandwagon. Don't listen to the nonsense the Fed has been mouthing for months that all is well. We can already see the all is good slogan breaking down to "it's not as good as we thought" slogan; this will eventually change to "oh my God it's darn right ugly out there" and we need to lower rates to prevent a catastrophe slogan. The same strategy has been used again and again; it works marvellously so why stop now. The masses like Pavlov's dogs have been trained very well, so there is absolutely no need to change the game plan. Keep the lie simple, repeat it over and over again and the masses will swallow it hook line and sinker. Crowd psychology clearly illustrates that the mass mindset is self-destructive; individuals with this mindset claim they are looking for something better but their actions speak otherwise. We will cover this issue in more detail in a separate article.

The first experiment was to maintain a low rate environment; the second one was to Flood the system with money; this was achieved via QE. The third phase was to get the corporate world in on the act of flooding the markets with money. This was achieved through massive share buyback programs. The next stage is to introduce negative rates to the world to fuel the mother of all bubbles; this program is currently underway.

Central bankers are aware that people will save more and more due to fear; uncertainty is a great catalyst and moves a person from state of calm to a state of panic rather rapidly. They know that many will continue to remain wary even when banks start charging them a fee to hold onto their money. People are saving more and more because of uncertainty; they don't know what the future holds, so they save even though it means taking on a loss. Experts will state that central bankers miscalculated, but the truth is that they did not miscalculate; this event was planned years in advance and with meticulous precision. Watch with surprise how the rate hike slogan will fizzle into "the cut the rates slogan"; Yellen already sounds more dovish with the passage of each day.

Many experts have stated that negative rates are a bad idea; this is true to a degree, but it depends on the angle of observation. If you sit down and take no action, then the response is "yes they are terrible". However, if you are proactive, you can use negative rates to your advantage. For example, this family is getting paid interest on their mortgage instead of paying interest to the bank. In other words, they are getting paid to take a mortgage.

Stock markets will trend higher

Cheap Money leads to speculation, and the stock market is the best place in town to speculate.

Expect corporations to borrow even more money and use these funds to buy back their shares thereby artificially boosting EPS. There is no shred of decency left in Wall Street and as corporate officers bonuses are tied to performance. These chaps will do whatever it takes to boost share prices, even if it means creating an illusion that earnings are rising, when in fact, they could be flat or even dropping. All they want to do is make a killing; they could care less about the small guy. It's easy, and Congress has deemed it to be legal, so there is nothing to stop them and everything in place to encourage this behaviour. We covered this topic in detail several times, over the past 12 months and repeatedly stated that the every pullback was to be viewed as a buying opportunity.

Property prices will rise

Negative rates will lower the cost of mortgages and in many cases; individuals will receive a check from the banks for interest payments on the mortgage. Negative rates are already fuelling a property bubble in Sweden, and real estate prices have surged significantly in the U.K; it's a matter of time before we experience the same phenomenon in the U.S. Bankers will almost certainly lower lending standards in the US; Barclays Bank has recently announced 0% down mortgages.

Improving GDP

While such a proclamation appears insane, the chart below clearly reveals the opposite to be true. Negative rates do create the illusion that the economy is improving, and the masses seem to agree silently.

Negative Interest Rates Improved Denmark's GDP

Denmark's GDP started to rise, and that is and was the whole purpose of the program. Note that shortly after the crisis of 2008-2009; rates were pushed lower faster than at any period before in the last 20 years; the lower they dropped, the higher the GDP; in fact, one can conclude that it's in an uptrend.

Game Plan

China's decision to devalue on the Yuan clearly illustrates that the "devalue or die" program is being embraced worldwide. Nations will continue to devalue their currencies in a bid to stay competitive; the global economy is weak and only hot money is creating the illusion that all is well. Mass psychology indicates that the masses love to be told a sweet lie as opposed to the blunt truth. In that sense, they will get what they secretly desire, a market that looks magnificent from the outside but is rotten to the core from the inside. As we have yet to embrace negative rates, there is a lot more upside left in this market. This market is not going to soar higher because of fundamentals; fundamentally speaking this market should be in the toilet. It will soar higher because of hot money. We expect property prices to continue trending upwards in the US and eventually when lending standards are lowered; we expect another property bubble to unfold. Regarding the stock market, the sentiment is negative, and a lot more money will flood this market once negative rates are here. The stock market will most likely continue trending higher, but don't expect it trend upwards in a straight line. Traders should be prepared for wild swings in both directions.

"The way of paradoxes is the way of truth. To test Reality we must see it on the tight-rope. When the Verities become acrobats we can judge them." 
~ Oscar Wilde

Austrian Foreign Minister Kurz

'Europe's Values Cannot Be Negotiable'

Interview Conducted by Walter Mayr and Mathieu von Rohr
. 


At 29, Austria's Sebastian Kurz is the world's youngest foreign minister. He speaks with SPIEGEL about the rise of the far right in his country and Europe, the immigrant crisis and the dangers of dependence on Turkey.

SPIEGEL: Foreign Minister Kurz, in recent weeks, the entire world has been watching Austria, which is rather rare. How does it feel?

Kurz: It depends on the occasion. We are not always totally happy about how we are portrayed.

SPIEGEL: In recent presidential elections, almost 50 percent of eligible voters cast their ballots for Norbert Hofer, the candidate of the right-wing populist Freedom Party of Austria (FPÖ). This came as a shock for many people in Europe. Do you have an explanation?

Kurz: Yes, and it is not as simple as the one that is sometimes given. There is, first of all, a serious dissatisfaction with the government and with the political system, in part because important reforms are not taking place. The second main reason is the refugee crisis. In Austria last year, we had 90,000 asylum applicants -- the second-largest per capita figure in all European countries. There was a phase of uncontrolled influx into Europe. Many politicians tried to tell the people that this is not a problem in terms of security or integration. Both led to a strengthening of right-wing populist parties, which is not purely an Austrian phenomenon.

SPIEGEL: Even you, a conservative, had to choose between a representative of the Green Party and one from the FPÖ in the May 22 vote. Which one did you vote for?

Kurz: I made my choice responsibly as a citizen.

SPIEGEL: You don't want to say?

Kurz: The elections were free and democratic, and any result would have to be accepted.

SPIEGEL: Why did your party, the Austrian People's Party (ÖVP), not issue any endorsement?

Kurz: Both governing parties, the Social Democratic Party (SPÖ) and the ÖVP, decided not to make any endorsements for the runoff. Many people believe a recommendation from the government may even have harmed its recipient.

SPIEGEL: German Deputy Chancellor Sigmar Gabriel, a member of the Social Democrats, recommended that Austrians not vote for Hofer. Was that a welcome endorsement?

Kurz: Commentators say that, at best, Sigmar Gabriel's advice was welcomed by Hofer because it actually may have driven some voters toward him (laughs). Jokes aside, I believe the interest from across Europe to be a positive thing.

SPIEGEL: Now, for the first time, you have a Green Party head of state in the form of Alexander Van der Bellen. What are your expectations?

Kurz: I expect that he will fulfill his role in a very dignified manner.

SPIEGEL: Your ministry had made preparations in anticipation of having to explain Hofer's election outside the country. Is the FPÖ representative a politician whom Austria must apologize for?

Kurz: For us, it was about answering potential questions. They were, of course, to be expected. We would have explained that the election was fair and democratic -- regardless whether one likes the result or not.

SPIEGEL: Austrian writer Robert Menasse says that people who support FPÖ head Heinz-Christian Strache are "patriots who don't know that they're fascists."

Kurz: I do not see the use in insulting half of Austrians as fascists and idiots. It is not just our country that has shifted to the right. More and more people in the middle are unhappy. Clearly the established parties have, for a long time, thought it to be a matter of course they would get elected.

SPIEGEL: Have the traditional mainstream parties in Austria run out of steam, along with the decades-long model of a Grand Coalition, placing the ÖVP and the SPÖ in a government together?

Kurz: You would probably like me to draw conclusions about the future of the Grand Coalition (between the center-left Social Democrats and the conservative Christian Democrats) in Germany. I cannot say anything about that. In practice in Austria, the model has become ever more unpopular in the last few years, because both parties have obstructed each other on important issues. But the change in chancellor to Christian Kern provides an opportunity. It will probably be the last one.

SPIEGEL: There is discomfort not only with established parties, but also with the European project across the entire Continent. Was Austria a precursor, so to speak, with this election?

Kurz: Yes, of course. When we look at the situation in the EU, we need to honestly admit that it desperately needs to develop further, that we need to strengthen it when it comes to the bigger questions -- and allow member nations to make more decisions about the smaller questions themselves.

SPIEGEL: More direct responsibility at the national level is one of the FPÖ's main demands.

Kurz: Then you can also accuse me of sharing the opinion of European Commission President Jean-Claude Juncker, who is also in favor of this. I would like to have a Europe that has a strong foreign and defense policy, ensures economic growth and is active in addressing the issues of the refugee crisis. But perhaps not one that imposes new regulations on allergens that requires food menus to be changed everywhere. When that happens, it creates the feeling that the wrong priorities are being set.

SPIEGEL: Is Austria a divided country?

Kurz: Right now, we should be filling in the divides -- and doing so by taking people's existing concerns seriously. We in Austria have always had lots of immigration. But when one starts, as happened in Europe last year, to open the borders and to transport people northwards as fast as possible, then of course it's not just Syrians who come. People from all around the world then see their chance to quickly come to Europe.

SPIEGEL: Austria reacted by closing the western Balkan route.

Kurz: That was overdue. There was massive resistance to our plans. But I think it has now been recognized that it was the right step.

SPIEGEL: In Berlin too?

Kurz: I have regular contact with German ministers and parliamentarians, and have received very positive feedback.

SPIEGEL: The German chancellor and the interior minister complained at the time about Austria "going it alone."

Kurz: It wasn't a case of "going it alone." It was a regional measure, coordinated with our neighboring states.

SPIEGEL: In Germany, some insinuated that Austria was reverting to the imperial era and throwing its weight around as a regional power in its former sphere of influence.

Kurz: We are neither a regional power nor are the Balkans our sphere of influence. These are self-confident countries. We should be particularly thankful to Macedonia, a country that has taken on a very difficult task without profiting from it. Quite to the contrary: Instead of praise, there was criticism from the international media. The reason for our decision was that we were being massively overstretched -- we had to stop the influx. Whether that also had a positive impact in Germany, that judgment must be made there.

SPIEGEL: Did you have the feeling you were doing the Germans' work on their behalf, and then being scolded for it?

Kurz: If you put it that way yourself, then I, of course, don't have to (laughs). We have, thank God, a very good relationship with the German government. There were resentments, but they've been resolved. Germany is the strongest player and Angela Merkel is the strongest government leader in the EU.

SPIEGEL: What was the primary reason for the decrease in refugee numbers: the agreement with Turkey or the closing of the Balkan route?

Kurz: We should not set off individual achievements against each other. The closing of the western Balkan route, however, was a considerable contribution. Even the Greek foreign minister recently admitted as much. It has become less attractive for people to make their way to Europe. Working together with Turkey can be a further building block. It may be able to create short-term relief. But I also warn against us relying on the Turkey deal. Otherwise we may ultimately be left in the lurch.
SPIEGEL: Are you afraid that Europe is making itself dependent on Turkey?

Kurz: The Turkey deal can only be Plan B. Plan A needs to be a strong Europe that is prepared to defend its external borders on its own. If we do not do that, then we are living in a Europe that is dependent -- on other countries, and possibly even on personalities like President Erdogan. And dependency is dangerous.

SPIEGEL: Control of the external EU border is a nice catchphrase, but how is that supposed to work, for example, off the Libyan coast?

Kurz: The people need to be rescued, but that cannot be packaged with a ticket to Central Europe. That only promotes the influx. We need to become active as fast as possible in Libyan waters, so that the people cannot even embark for Italy.

SPIEGEL: What would be the alternative to the deal with Turkey?

Kurz: The issue is, first of all, joint protection of the EU's external borders. Secondly, more humanitarian aid is needed (in the areas where the flight originates), so that living conditions there improve. And thirdly, we should say clearly: It is we in Europe, and not the human traffickers, who decide whom we take in. Whoever wants to enter illegally has forfeited their chance. At the same time, countries like Austria and Germany are declaring themselves willing to bring some of the poorest of the poor to Europe through resettlement programs. The decision cannot merely benefit the young men who are fit enough to withstand the journey. We do not have to immediately grant someone who arrives in Lesbos the right to move into an apartment in Berlin. Once we communicate that message, Europe will become significantly less attractive.

SPIEGEL: How do you know that?

Kurz: I am also integration minister and speak with many refugees. When I ask if they came with the goal of living in Greece or Poland, most of them answer "no."

SPIEGEL: Is the Turkey deal actually working in practical terms? So far only a few hundred people have been sent one way or the other.

Kurz: Chancellor Merkel got Turkey to cooperate through perseverance. There has at least been a serious effort on the Turkish side to prevent people from setting off for Europe. Recently, only about 100 people have been arriving in Greece per day. Last year, it was several thousand daily at times.

This effort can, however, also very quickly dwindle.

SPIEGEL: Political developments in Turkey are worrisome. The immunity of lawmakers was recently lifted. Is this a result of the deal -- because Erdogan now has free rein?

Kurz: Not a result of the deal, but a matter of fact. How we deal with it is crucial. Europe's fundamental values cannot be negotiable. Keyword visa-liberalization: There cannot be any exceptions for Turkey either.

SPIEGEL: Erdogan is threatening to terminate the agreement, which creates the impression that he is pushing the Europeans around.

Kurz: If we Europeans are not in a state to be able to solve the refugee crisis ourselves, if we only depend on Plan B with Turkey -- then that is not simply an impression, it is the truth. But Europe cannot be susceptible to blackmail or be weak. I am, in any case, not in favor of having a deal with Turkey at any price.

SPIEGEL: Turkey is refusing to reform its anti-terror law. Do you think that the liberalization of visa regulations will still take place this year?

Kurz: That depends. I have gotten the sense in the last year that developments when it comes to human rights are very alarming. In the long term, it needs to be in our interest to have a Turkey in which human rights are respected. Anything else would mean destabilization right on our border. If we look away, the developments in Turkey will constantly get worse.

SPIEGEL: Is your warning also aimed at Angela Merkel?

Kurz: No, I do not mean the German chancellor. I mean all of us, we Europeans. We need to show the necessary strength together.

SPIEGEL: Could the Turkish model be repeated in an African country -- that governments demand money in exchange for stopping migrants?

Kurz: Of course.

SPIEGEL: It looks likely that the upper ceiling Austria has established for the number of asylum applicants it wants to accept each year will be reached this autumn. Then what?

Kurz: Then it will be necessary to turn people back at the Austrian border.

SPIEGEL: Will Austria close the Brenner Pass if a growing number of refugees arrive from Italy?

Kurz: We would like to avoid having to do inspections at the Brenner Pass. That would also be difficult for us for emotional reasons, because of the connection to South Tyrol.

SPIEGEL: Now, at the age of 29, you have already been in government for five years and are seen as the only person who can still save your party, the faltering ÖVP. Why aren't you grabbing the reins and reaching for power, as the new party head or as a candidate for chancellor?

Kurz: That is a non-issue, because we have a party chairman and deputy chancellor in the form of Reinhold Mitterlehner. He has my full support.

SPIEGEL: In 2000, your party formed a coalition government with the right-wing populist FPÖ under the leadership of Wolfgang Schüssel. Would you rule out a repeat?

Kurz: The candidate from the FPÖ just received almost 50 percent of the votes. If they do half as well during the next parliamentary election, it may no longer be possible to have a coalition without the FPÖ. At the moment, I cannot rule out any coalition, whether it is one between the SPÖ and the FPÖ, or the ÖVP and FPÖ or one that is a purely FPÖ government -- but I will work to ensure that things to do not go that far.

SPIEGEL: Foreign Minister Kurz, we thank you for this interview.

If the Trans-Pacific Partnership Crumbles, China Wins

Roger Cohen


HO CHI MINH CITY, Vietnam — An American who has been a resident here for a few years said to me the other day: “You know, they still look at us here the way we want to be looked at. America equals opportunity, entrepreneurship and success. That’s not true in so many places anymore.”
 
Four decades after the war, in one of the world’s consoling mysteries, the United States enjoys an overwhelming approval rating in Vietnam, reflected in the outpouring of enthusiasm for President Obama during his three-day visit last month. In this fast-growing country of 94 million people, about one-third of them on Facebook, America is at once the counterbalance to the age-old enemy, China, and an emblem of the prosperity young people seek.
 
The best way to kick Vietnamese aspirations in the teeth, turn the country sour on the United States, and undermine the stabilizing American role in Asia, would be for Congress to fail to ratify the Trans-Pacific Partnership, Obama’s signature trade agreement with 11 Pacific Rim countries including Vietnam but not China.
 
If T.P.P. falls apart, China wins. It’s as simple as that. Nonratification would signal that Beijing gets to dictate policy in the region, and the attempt to integrate Vietnam comprehensively in a rules-based international economy fails.
 
But such long-term transformations, pulling hundreds of millions out of poverty in Asia, are not the stuff of an American election characterized by anger above all. Among the popular one-liners is this: International trade deals steal American jobs. Not one of the three surviving candidates backs the Trans-Pacific Partnership. Hillary Clinton was for it — and right — before she was against it — and wrong. Bernie Sanders and Donald Trump are simply against it, big time.
 
The trade agreement — with countries including Peru, Mexico, Australia, New Zealand, Canada and Malaysia — has flaws, of course. There are issues it does not address, like currency manipulation. Legitimate concerns have been raised about the impact that patent enforcement will have on affordable medicines.
 
The Obama administration has acknowledged that some manufacturing and low-skilled jobs will be lost, but argued this will be offset by job growth in higher-wage, export-reliant industries. The Peterson Institute for International Economics, in a report issued this year, found the accord would stimulate job “churn” but was “not likely to affect overall employment in the United States,” while delivering significant gains in real incomes and annual exports.
 
What the agreement will do, as Clinton noted when she backed the deal, is deliver “better jobs with higher wages and safer working conditions, including for women, migrant workers and others.” It obliges countries like Vietnam to allow workers to form independent unions; it requires a minimum wage and higher health standards; it bans child labor and forced labor. It binds Vietnam to countries where the rule of law is arbiter rather than authoritarian diktat.
 
At a time when a drought in the Mekong Delta, Vietnam’s rice bowl, and a massive fish kill along the coast have sparked protests and sharpened concerns about global warming, the agreement is also designed to combat overfishing, illegal logging and other environmental scourges. It commits countries to shift to low-emissions economies.
 
To which, all Donald Trump has to say in a recent article in USA Today is that T.P.P. is “the biggest betrayal in a long line of betrayals” of American workers. But when pressed in a Republican debate on which parts of the deal were badly negotiated, he could only cite currency manipulation and “the way China and India and almost everybody takes advantage of the United States.”
 

China and India, of course, are not part of the Trans-Pacific Partnership.
 
As for Clinton, she believed in 2012 that the T.P.P. “sets the gold standard in trade agreements,” before deciding last October that “I am not in favor of what I have learned about it.” The best that can be said about this is that it was probably a tactical cave-in she would reverse if she wins.
 
Developed economies face huge problems that have produced this season of rage. But the world has enjoyed growing prosperity over decades because of continuously reduced trade barriers. A reversal would be the road to conflict. Like the best trade accords, the Trans-Pacific Partnership is also a strategic boost to liberty and stability in the fastest-growing part of the globe. Congress should resist populist ranting and ratify it.

Bank Stress Tests: The Bar Keeps Getting Higher

As stress-test results loom, U.S. banks may face barriers to sharply increasing capital returns

By Aaron Back



Banks are better positioned than ever to withstand the Federal Reserve’s annual stress tests.

But investors still shouldn’t count on smooth passage.

Sometime this month, the Fed will unveil the latest results of this exercise under which banks have to show how they would contend with myriad challenges including a financial shock and global recession. This is crucial to investors in bank stocks: The tests determine how much banks can pay out in dividends and share buybacks. Around a week after the results are published, the Fed will say whether it has approved or rejected individual bank capital-return plans.

The good news is that lenders have steadily built up capital in the year and a half since the last tests. This gives them substantial buffers to get through the Fed’s adverse scenarios. The six biggest U.S. banks all essentially passed the last round. That said, Bank of America BAC 0.81 % had to resubmit its plan, and others, including J.P. Morgan Chase JPM 0.64 % and Goldman Sachs, GS 0.31 % had to tweak their capital-return requests.

Since the third quarter of 2014, the starting point for the previous tests, these six banks have grown their common equity Tier 1 capital ratios—the most important measure of balance-sheet strength—by around 1 percentage point, to 12.1% on average. That is a strong position.

The bad news is that the Fed’s risk scenarios are much harsher this time around. Under the most extreme scenario, banks must envision a global recession that drives U.S. unemployment up by 5 percentage points, a bigger jump than in previous tests, to 10%. In a first, the Fed also has asked banks to anticipate what would happen if rates on short-term Treasury notes fell into negative territory.


This opens up several unknowns. If, for example, the Fed thinks a bank’s technical systems for trading bonds aren’t prepared for negative rates, that could be grounds for a failing grade.

It is important for investors to remember that banks’ capital plans are assessed both on quantitative and qualitative grounds. So it isn’t enough to simply pass the stress tests on a numerical basis. The Fed can still turn around and fail a bank for more subjective reasons, as has happened in the past.

What’s more, banks are already looking ahead to stress tests in 2017 and beyond. In these, the Fed could add to the capital that banks deemed globally significant must hold, even under severe scenarios. The need to prepare for this could affect how much capital banks are willing to send back to shareholders currently, says Credit Suisse analyst Susan Roth Katzke.