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Trump Agenda Could Promote Economic Growth

Money managers are hopeful that the next president will enact pro-growth policies, not protectionist measures.        

 
Hours before the TV networks called Tuesday’s election for Donald J. Trump, the stock market declared him the winner—and wasn’t happy about it. At about 8 p.m. that night, the Dow Jones Industrial Average went into a free-fall, plunging about 900 points, or 4%, in the futures market before bottoming at 17,500.

The selling ended when the market’s so-called circuit breakers kicked in at midnight, halting the slide.
 
Mandel Ngan/AFP/Getty Images
 
 
With the downward momentum stopped, stocks began to recover, kicking into overdrive around 3 a.m. when President-elect Trump began to deliver a measured victory speech, pledging to be “president for all Americans.” Conciliatory talk is a good start, but what investors really seemed to like is the next president’s pro-growth agenda, which ought to win rapid approval from his fellow Republicans, who retained control of Congress in Tuesday’s vote. The stock market thundered higher Wednesday and Thursday, inched down Friday, and ended the week up 3.8%, as measured by the Standard & Poor’s 500 index.

The big question for investors is whether Trump’s pro-growth, tax-reform, and fiscal-stimulus policies will outweigh his protectionist views, says Matthew Peron, head of global equities at Northern Trust Asset Management. “This is the debate many on Wall Street will be having,” he says. “Right now, the positive case for economic growth is strong.”

Robert C. Doll, the chief equity strategist at Nuveen Asset Management, puts it even more succinctly: “Which Trump will prevail, the one that will do tax reform or the one that stomps on [free] trade?”

Among money managers, there is hope that the realities of the presidency and pressure from Congress will cause Trump to rein in his grandstanding against trading partners like China and Mexico, which he argues get an unfair deal at the expense of U.S.-based manufacturers and their workers. During the campaign, Trump called for a 45% tariff on Chinese goods coming into the U.S. “On trade, he may end up speaking loudly but carrying a small stick,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.

AS A RULE, investment professionals are wary of discussing politics. They’re schooled in fundamental analysis, and earnings models don’t easily accommodate uncertain political scenarios.

“Bottom-up stockpickers are paid not to worry about politics,” says Peron. “But as top-down strategists, you always need to take Washington policy into account. Since the global financial crisis, we are in a new world in which policy really does matter because of political intervention in the markets and a stringent regulatory regime.”
 
Peron says that a Trump presidency, with a Republican-controlled Congress, will usher in a “regime change” in Washington, as gridlock caused by divided government gives way to single-party rule.

Trump’s stated goals of corporate and individual tax cuts, a big infrastructure-stimulus package, and the repatriation of corporate profits from overseas could, he says, “release some animal spirits into the economy.”

On the other hand, “protectionism is the one [issue] that we worry about the most,” Peron says.
“Free trade is good for global growth, but [Trump] has taken a stand against that.”
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WE ASKED SOME top market professionals what they’re investing in now to take advantage of the Trump victory. After all, biotech stocks, as measured by the iShares Nasdaq Biotechnology ETF IBB (ticker: IBB), have already rallied 10% since Tuesday’s close, on the well-founded belief that Trump will go easier on these business than Hillary Clinton would have.

Arun Daniel, a senior fund manager at JO Hambro Capital Management Group, thinks there’s still room to run, arguing that the benefits of a Trump administration to the bottom lines of biotech and drug companies aren’t fully priced into the stocks yet. “The good news is not baked in the cake of biotech fully,” he says. “You will see the effects over time.”

Daniel is also bullish on stocks levered to fresh government-fueled infrastructure spending. Among his favorites: Jacobs Engineerin (JEC) and Martin Marietta Materials MLM).

He has also identified companies that will probably be allowed to bring home at a low tax rate billions of dollars of profits currently parked overseas, which they can put to work for shareholders. They include Nike (NKE), Procter & Gamble (PG), Caterpillar (CAT), and credit-card processors Visa (V) and Mastercard (MA). For more picks and pans, see the story “Trump Triumph Creates Winners, Sinners.”

Nuveen’s Doll says that his firm hasn’t made any changes yet to its asset-allocation models as a result of the election. But he suspects that Trump’s plans to lower corporate taxes and increase infrastructure spending might lead to somewhat faster economic growth, “buttressing our existing allocation,” which overweights stocks and underweights bonds.
Like others on Wall Street, he buys the view that long-term interest rates could creep higher in the coming years because of rising inflation and Trump’s seeming lack of interest in reining in the federal deficit. For more on the outlook for bonds, see our interview with Jeffrey Gundlach.

Joseph Amato, the equities chief investment officer at Neuberger Berman, also believes that a Trump administration will be better for stocks than bonds. “If [Trump] takes a measured approach and gets some level of concessions for U.S. workers, the trade concerns may be much ado about nothing,” Amato says.

“But that’s a big if.”

Another wild card—perhaps the biggest of all—is Trump’s shoot-from-the-hip style and somewhat unconventional views on global affairs. The president-elect, like any president, is more than the sum of his policy prescriptions. Might he unnecessarily inflame global tensions—or worse? “There is a certain personality risk with Trump,” says Kelly of J.P. Morgan. “A lot of polling shows that people’s major concern is about his temperament.”

But Kelly thinks there is reason to believe that Trump poured on the bombast simply because it was effective on the campaign trail. And he wouldn’t be the first politician to engage in saber-rattling for political effect. “He may well attempt to change his approach” for his new job, Kelly says, before quickly adding, “I’m no psychologist.” 


domingo, noviembre 20, 2016

IRON WAFLER / THE ECONOMIST


Iron waffler

Germany and its chancellor are still too hesitant to be able to lead the free world            
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TO VISIT Berlin is to be confronted at every turn by reminders of the evils that Germans do. Memorials to the Holocaust and other wartime atrocities dot the city. In Kreuzberg, a scruffy-but-hip neighbourhood, posters and leaflets denounce milder German iniquities, from urban gentrification to the Transatlantic Trade and Investment Partnership (TTIP), a hated trade deal between the European Union and America that the election of Donald Trump may have killed for good.

Outside Germany, though, Mr Trump’s victory has left disaffected liberals gasping for German benevolence. Brexit, the refugee crisis and the rise of drawbridge-up populists across Europe had already punctured the West’s self-confidence. Now, after an election campaign in which Mr Trump trashed immigrants, vowed to rewrite trade deals and threatened to withdraw America’s security guarantee, the West’s indispensable nation appears to have dispensed with itself. Desperate for a candidate to accept the mantle of leader of the free world, some alighted on Angela Merkel, Germany’s chancellor.

It is easy to see why. Unflappable and patient, dedicated to the freedom she had thrust upon her as a young East German physicist in 1989, Mrs Merkel is a beacon to those who fear the flickering of the liberal flame. She likes markets, trade and good governance. Her commitment to helping refugees fleeing strife in Syria contrasts with the anti-migrant turn elsewhere in Europe. Mr Trump’s victory should extinguish any speculation that Mrs Merkel will not seek a fourth term as chancellor next year in Germany’s federal election; expect an announcement soon.

Yet anyone expecting Germany to fill America’s shoes will be disappointed. Consider Mrs Merkel’s approach to crisis management, from the euro to Ukraine to refugees. Each played out differently, but Mrs Merkel’s prevarication was consistent: humming and hawing over bail-outs for indebted governments; taking Vladimir Putin at his word before realising he was a liar; reacting to the refugee surge rather than trying to prevent it. For those seeking stability, Mrs Merkel’s taste for hesitation may be a feature, not a bug, but it hardly makes for bold leadership.

Nor does German assertiveness inside Europe run smoothly. Seventy years after the second world war, protestors in Greece and Spain who resent Germany’s strict approach to fiscal stewardship still resort to Nazi tropes. The occasional attempt to form “anti-austerity” (read: anti-German) axes inside the EU elicits terror in Berlin. The world’s progressives may have loved it, but some in Berlin were uneasy at the chiding tone of Mrs Merkel’s letter of congratulation to Mr Trump, which pledged co-operation on the basis of a commitment to liberal values. “We are protected by our terrible history,” says Joschka Fischer, a former foreign minister. “You cannot say, ‘Make Germany Great Again’.”

More importantly, Pax Americana has always required American bite. Germany, with a defence budget one-fifteenth that of the United States, no nuclear deterrent and an instinct for pacifism, has neither the ability nor the aspiration to act as the world’s liberal hegemon. This is a country that went through agonies over whether to arm Iraqi Kurds battling Islamic State.

Inside Europe, let alone elsewhere, only France and Britain have the ability to project power, and that suits Germans fine. Put bluntly, if Mr Putin’s tanks roll into the Baltics it will not be the Bundeswehr that takes the lead in rolling them back.

Mrs Merkel’s ambitions are altogether smaller. First among them is to hold together the fracturing EU, via a blend of prayer and policy. Germany is pinning its hopes on France, its eternal partner inside the EU, electing a sane president next year—ideally Alain Juppé, the centre-right front-runner.

Franco-German comity should help EU governments find common ground on defence co-operation, the focus of their efforts over the next few months. (Mr Trump’s questionable commitment to NATO should provide another spur.) Should the politics prove propitious, Germany may one day be open to more ambitious schemes, such as greater integration of the euro zone. But grand visions of EU institutional change, let alone a German-led reshaping of the world order, are off the menu in Berlin.

The priority is stopping the rot.

Meanwhile Mrs Merkel, her political capital depleted by the refugee crisis, must hold the line at home. Owing in part to the rise of the anti-immigration Alternative for Germany (AfD) party, the coalition that emerges from next year’s election will probably command a Bundestag majority far smaller than the one Mrs Merkel’s centrist grand coalition enjoys today. That will limit the chancellor’s room for manoeuvre, at home and in Europe. The political fragmentation is also disinterring old questions about Germany’s geopolitical allegiance. The Westbindung (Western integration), a staple of German foreign policy since Adenauer, is fraying as extremist parties on the left and right cosy up to Russia.

Leading from the mittel
 
And what about Mr Trump? For now, Germany retains a touching faith in America’s institutions to rein in the president-elect’s worst impulses. But from his vicious campaign to the chaotic management of his transition, there is every sign that Mr Trump will prove to be another of the erratic politicians, like Silvio Berlusconi and Nicolas Sarkozy, who have tested Mrs Merkel’s patience. Russia is a particular worry. If Mr Trump abandons Ukraine and allows America’s sanctions to wither, Mrs Merkel’s task of maintaining European unity will become almost impossible.

Germany’s stake in the global liberal order is immense. Its export-led economic model relies on robust international trade; its political identity is inexorably linked to a strong EU; its westward orientation assumes a friendly and engaged America. All of these things may now be in jeopardy, and Germany would suffer more than most from their demise. But do not look to Mrs Merkel to save them, for she cannot do so alone.


When Republicans Take Power

By GEOFFREY KABASERVICE
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President-elect Trump, his wife, Melania, and Mitch McConnell, the Senate majority leader, after a meeting on Capitol Hill last week. Credit Al Drago/The New York Times                    

 
Washington — On the morning of Nov. 8, Republicans in the nation’s capital were grim-faced and resigned to Hillary Clinton’s impending triumph, hoping only that Donald J. Trump wouldn’t lose so badly as to cost the party the Senate. By midnight they were in ecstasy, as it became apparent that Mr. Trump would take the presidency and Republicans would maintain majorities in both houses of Congress. A few months from now, it’s all but certain that Mr. Trump will nominate, and the Senate will confirm, a new conservative Supreme Court justice.

At that point, Republicans will control all three branches of government.
 
The Republican Party has rarely won this trifecta of power. In fact, over the past seven decades, Republicans have controlled the presidency and both houses of Congress for a grand total of six years: two during the presidency of Dwight D. Eisenhower and four under George W. Bush.
 
Republicans now have an unusual opportunity to achieve their goals. But they aren’t accustomed to exercising control of government, and the conservative ideology that pervades much of the party is based on the belief that government is the enemy. What will Republicans do with their newfound power? And how will the exercise of that power change the party?
 
It doesn’t require a huge stretch of the imagination to envision Mr. Trump’s trying to use the power of the presidency to punish his enemies, withdraw from military and diplomatic alliances, start trade wars, and engage in a wide-scale roundup of illegal immigrants that would call to mind Operation Wetback in the 1950s crossed with the internment of Japanese-Americans during World War II. However, such a divisive policy inevitably would split the country and the Republican Party as well, leading to a crushing loss in the 2018 midterm elections.
 
If Mr. Trump wants to be popular (and we know that he does), and if he wants a shot at winning re-election in 2020, he will follow a more prudent course.
 
While Republicans can’t issue a Roman-style damnatio memoriae effacing Mr. Obama’s name and image from the historical record, they will do all they can to erase his legacy. This won’t do much to encourage bipartisanship and healing.
 
But Republicans may be forced against their will to embrace Mr. Obama’s overarching emphasis on national unity and even some of his policy emphases. Party strategists are well aware that the G.O.P. has now lost the popular vote in six of the last seven elections. Despite Mr. Trump’s ability to maximize the white vote, and his more surprising ability to bring some minority voters along, it’s still not in the party’s long-term interest to write off the minorities, particularly Hispanics, who are a growing part of the country’s population.
 
And a party that’s seen to move in the direction of white nationalism will also turn off college-educated white voters, who still form a critical part of the Republican coalition. The demands of the G.O.P.’s constituents may force a revision on issues such as trade and climate change, particularly if the waters continue to rise in coastal red states like South Carolina, Georgia and Florida.
 
Republicans will run into additional difficulties when they try to eliminate Mr. Obama’s signature accomplishment, Obamacare. Republicans in Congress have voted more than 60 times to repeal the Affordable Care Act, but they’ve spent far less time thinking about how to replace it. Would the 20 million Americans who have gained health insurance lose it? Would a Republican version of the law retain its prohibitions against insurance companies’ denying coverage to patients with pre-existing conditions?
 
Throughout the Obama administration, the G.O.P. has had the mind-set of an opposition party, condemning policies without thinking deeply about how to reform them. When Republicans have total control of the government, they will bear the responsibility for its failures. Perhaps this will encourage a new Republican seriousness about policy and an honest attempt to educate their base about the trade-offs inherent in governing.
 
Over the past several decades, the Republican Party has become a coalition of conservative ideologies rather than a coalition of interests. A shared opposition to Democrats has helped paper over the contradictions between libertarians, social conservatives, fiscal conservatives and neoconservatives. Now that the common enemy has been vanquished (at least temporarily), the rival conservatives will be tempted to go to war with one another. Rogue Republican factions in Congress like the House Freedom Caucus could even use the threat of a government shutdown or debt default against their own administration. The need to keep order in his ranks may encourage Mr. Trump to become a Richard Nixon-style leader, pursuing an agenda that gives enough to each faction that it remains sullen but not mutinous.
 
Mitch McConnell, the Senate majority leader, is wary of repeating the overreach that occurred the last time the Republicans controlled all three branches. The attempt to reshape the Middle East was the most obvious example, but so, too, was George W. Bush’s push to partially privatize Social Security. Yet Mr. McConnell and others have been promising for years that if the party were given complete control of government, the conservative utopia would follow.
 
The establishment may now be forced, at long last, to stand up to those on the right who are calling for Republicans to repeal the institutions of the New Deal and the Progressive era.
 
One split that’s likely to develop will be over how long the party is expected to maintain its control over the government. Those who anticipate only a two- or four-year window will press for the rapid enactment of a maximalist conservative program, even at the risk of an intense backlash. Others, however, will focus on the long game. They’ll try to build an enduring Republican coalition by doing everything possible to increase productivity and stimulate broad-based economic prosperity, and they’ll enact legislation that can command at least some degree of bipartisan support.
 
Such an agenda would begin with Mr. Trump’s ambitious goal of leveraging as much as a trillion dollars to rebuild our deteriorating infrastructure. Mr. Trump will not be able to bring back the manufacturing jobs he promised, but he could put his supporters to work building roads and bridges instead.
 
Republicans could also take a page from Mr. Ryan’s playbook to encourage private sector investment in distressed communities and retrain unemployed workers in the skills needed for advanced manufacturing. Other policies aimed at improving life for working-class Americans could include efforts to combat the epidemic of opioid addiction and improve our mental health system.
 
Mr. Trump said in his acceptance speech that he wanted to “bind the wounds” opened, in part, by his campaign; he could do so by following the counsel of the National Greatness Conservatives who flourished briefly in the late 1990s. Long before Mr. Trump conceived of his “Make America Great Again” slogan, these conservatives called for bringing the country together around grand projects.
 
They were inspired by past national missions such as the settlement of the West, the construction of the national highway system and the March of Dimes fund-raising campaign, which led to the polio vaccine. They longed for comparable national undertakings that would bring out the best in both citizens and their government.
 
Mr. Trump could invoke the tradition of national greatness by asking Americans to join him in pursuing a cure for Alzheimer’s disease, which may present the single greatest threat to our physical and fiscal health in the 21st century. Or he could rally our national energies around the construction of the world’s first driverless highway, or technology to restore full mobility to paralyzed veterans, or a pilgrimage to revive the economically depressed and spiritually despondent regions of Appalachia.
 
Mr. Trump and the Republican Party should keep in mind that Ronald Reagan was able to achieve his greatest victories through cooperation and compromise with Democrats as well as a concerted campaign to convince the public of the virtues of supply-side economics and small government. The success of Mr. Trump’s administration ultimately will be determined more by its ability to persuade than compel.
 
 


What America’s Economy Needs from Trump

Joseph E. Stiglitz
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Income disparity US

NEW YORK – Donald Trump’s astonishing victory in the United States presidential election has made one thing abundantly clear: too many Americans – particularly white male Americans – feel left behind. It is not just a feeling; many Americans really have been left behind. It can be seen in the data no less clearly than in their anger. And, as I have argued repeatedly, an economic system that doesn’t “deliver” for large parts of the population is a failed economic system. So what should President-elect Trump do about it?
 
Over the last third of a century, the rules of America’s economic system have been rewritten in ways that serve a few at the top, while harming the economy as a whole, and especially the bottom 80%.
 
The irony of Trump’s victory is that it was the Republican Party he now leads that pushed for extreme globalization and against the policy frameworks that would have mitigated the trauma associated it. But history matters: China and India are now integrated into the global economy.
 
Besides, technology has been advancing so fast that the number of jobs globally in manufacturing is declining.
 
The implication is that there is no way Trump can bring a significant number of well-paying manufacturing jobs back to the US. He can bring manufacturing back, through advanced manufacturing, but there will be few jobs. And he can bring jobs back, but they will be low-wage jobs, not the high-paying jobs of the 1950’s.
 
If Trump is serious about tackling inequality, he must rewrite the rules yet again, in a way that serves all of society, not just people like him.
 
The first order of business is to boost investment, thereby restoring robust long-term growth.
 
Specifically, Trump should emphasize spending on infrastructure and research. Shockingly for a country whose economic success is based on technological innovation, the GDP share of investment in basic research is lower today than it was a half-century ago.
 
Improved infrastructure would enhance the returns from private investment, which has been lagging as well. Ensuring greater financial access for small and medium-size enterprises, including those headed by women, would also stimulate private investment. A carbon tax would provide a welfare trifecta: higher growth as firms retrofit to reflect the increased costs of carbon dioxide emissions; a cleaner environment; and revenue that could be used to finance infrastructure and direct efforts to narrow America’s economic divide. But, given Trump’s position as a climate change denier, he is unlikely to take advantage of this (which could also induce the world to start imposing tariffs against US products made in ways that violate global climate-change rules).
 
A comprehensive approach is also needed to improve America’s income distribution, which is one of the worst among advanced economies. While Trump has promised to raise the minimum wage, he is unlikely to undertake other critical changes, like strengthening workers’ collective-bargaining rights and negotiating power, and restraining CEO compensation and financialization.
 
Regulatory reform must move beyond limiting the damage that the financial sector can do and ensure that the sector genuinely serves society.
 
In April, President Barack Obama’s Council of Economic Advisers released a brief showing increasing market concentration in many sectors. That means less competition and higher prices – as sure a way to lower real incomes as lowering wages directly. The US needs to tackle these concentrations of market power, including the newest manifestations in the so-called sharing economy.
 
America’s regressive tax system – which fuels inequality by helping the rich (but no one else) get richer – must also be reformed. An obvious target should be to eliminate the special treatment of capital gains and dividends. Another is to ensure that companies pay taxes – perhaps by lowering the corporate-tax rate for companies that invest and create jobs in America, and raising it for those that do not. As a major beneficiary of this system, however, Trump’s pledges to pursue reforms that benefit ordinary Americans are not credible; as usual with Republicans, tax changes will largely benefit the rich.
 
Trump will probably also fall short on enhancing equality of opportunity. Ensuring preschool education for all and investing more in public schools is essential if the US is to avoid becoming a neo-feudal country where advantages and disadvantages are passed on from one generation to the next. But Trump has been virtually silent on this topic.
 
Restoring shared prosperity would require policies that expand access to affordable housing and medical care, secure retirement with a modicum of dignity, and allow every American, regardless of family wealth, to afford a post-secondary education commensurate with his or her abilities and interests. But while I could see Trump, a real-estate magnate, supporting a massive housing program (with most of the benefits going to developers like himself), his promised repeal of the Affordable Care Act (Obamacare) would leave millions of Americans without health insurance. (Soon after the election, he suggested he may move cautiously in this area.)
 
The problems posed by the disaffected Americans – resulting from decades of neglect – will not be solved quickly or by conventional tools. An effective strategy will need to consider more unconventional solutions, which Republican corporate interests are unlikely to favor. For example, individuals could be allowed to increase their retirement security by putting more money into their Social Security accounts, with commensurate increases in pension benefits.
 
And comprehensive family and sick leave policies would help Americans achieve a less stressful work/life balance.
 
Likewise, a public option for housing finance could entitle anyone who has paid taxes regularly to a 20% down-payment mortgage, commensurate with their ability to service the debt, at an interest rate slightly higher than that at which the government can borrow and service its own debt. Payments would be channeled through the income-tax system.
 
Much has changed since President Ronald Reagan began hollowing out the middle class and skewing the benefits of growth to those at the top, and US policies and institutions have not kept pace. From the role of women in the workforce to the rise of the Internet to increasing cultural diversity, twenty-first century America is fundamentally different from the America of the 1980s.
 
If Trump actually wants to help those who have been left behind, he must go beyond the ideological battles of the past. The agenda I have just sketched is not only about the economy: it is about nurturing a dynamic, open, and just society that fulfills the promise of Americans’ most cherished values. But while it is, in some ways, somewhat consistent with Trump’s campaign promises, in many other ways, it is the antithesis of them.
 
My very cloudy crystal ball shows a rewriting of the rules, but not to correct the grave mistakes of the Reagan revolution, a milestone on the sordid journey that left so many behind. Rather, the new rules will make the situation worse, excluding even more people from the American dream.
 
 


No ideologue?

Donald Trump chooses Jeff Sessions for attorney-general
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DONALD TRUMP's nomination of Senator Jeff Sessions of Alabama (pictured) as attorney-general—making the hardest of nativist hardliners the country’s top law officer and head of the Department of Justice—is a timely reminder that words spoken on the campaign trail have meaning, that politics is not showbusiness, and that America’s government takes decisions that make or break lives, shape economies and set norms across the globe. In the immediate aftermath of Mr Trump’s election, some boosters suggested that the president-elect is not really an ideologue, might bring moderates into his administration and is perhaps barely interested in the business of governing at all—for all the world as if P.T. Barnum were headed for the White House. The nomination of Mr Sessions suggests that is wishful thinking.

The 69-year-old senator from Alabama, one of Mr Trump’s earliest supporters and his closest adviser from the world of professional politics, will have sweeping powers over immigration enforcement. If confirmed by the Senate, he will immediately hold in his hands the fate of such groups as the 728,000 migrants granted the right to stay and work in America by President Barack Obama under the Deferred Action for Childhood Arrivals scheme (DACA), after being brought into the country as children. Mr Sessions, the Senate’s most consistent and ferocious critic of both illegal and legal immigration, has several times sought to pass laws abolishing the DACA scheme. He unsuccessfully tried to bar the Obama administration from extending its benefits—which include social security numbers and work permits—to more migrants. His legislation would have prohibited current DACA recipients from renewing their papers, which last two years at a time—effectively leaving them unable to work or travel without fear of deportation.

There are some 11m migrants in America without the right legal papers—a number so large that many of Mr Sessions’s colleagues in the Senate, from both parties, believe that not all can possibly be deported, so that law-enforcement should focus on those guilty of serious crimes and the government should offer a path to legal status for those who have built productive lives.

Mr Sessions disagrees. He has spent the last decade leading Senate opposition to bipartisan immigration reform bills, arguing that illegal immigration depresses wages and takes jobs from out-of-work Americans. On legal migration, he is a sceptic of the H1-B visa scheme that helps companies recruit highly skilled foreigners, such as scientists or engineers, accusing wealthy business bosses, the government, the national press and the “cosmopolitan set” of mocking the anxieties and needs of “everyday Americans.”

On the campaign trail Mr Sessions has echoed Mr Trump’s focus on immigration as a menace to national security. On the eve of the election he called for a president willing to enforce immigration laws, saying that “without a commitment to deport aliens who violate our immigration laws, we lose our ability to protect our communities from criminal aliens, terrorism, and cartel-related crime and violence.” As attorney-general it is safe to assume he will put intense pressure on so-called “sanctuary cities”—mostly Democratic-run cities, including some of the country’s largest, which typically instruct police officers or city officials not to ask people about their immigration status, and in some cases limit co-operation with federal immigration authorities. Such cities call it vital for immigrants to feel able to report crimes to police or interact with social services and schools without fear, and will resist federal pressure to turn their municipal officers into de facto immigration agents.

Expect Democrats to highlight the attorney-general’s role overseeing civil rights, and to bring up Mr Sessions’s history of allegedly racist comments as a federal prosecutor in Alabama—comments which saw him denied confirmation as a federal judge in the 1980s. The nomination sent news outlets scrambling to their archives to dig out transcripts of those fateful Senate judiciary committee hearings from 1986. Senators heard a Justice Department official testify that Mr Sessions, then US Attorney for the Southern district of Alabama, had suggested that a prominent white civil rights lawyer might justly be called “a disgrace to his race” for representing black clients. Under questioning Mr Sessions said that he did not recall making that comment, and could not understand why he would have made it, but did not deny his colleague’s account. Asked whether he had called the National Association for the Advancement of Colored People, a civil rights group, a “pinko” organisation that hates white people, Mr Sessions told his Senate inquisitors:  “I am loose with my tongue on occasion, and I may have said something similar to that.” He did deny the account of a black federal prosecutor who testified that Mr Sessions called him “boy” and chided him to be careful how he spoke to “white folks”. Twenty years later Mr Sessions is in a position to avenge that humiliation. 

Expect, too, much talk of the attorney-general’s role overseeing voting rights, even after federal monitoring of state and local election rules has been sharply reduced by the Supreme Court. During his confirmation hearing back in 1986 Mr Sessions agreed that he had called the Voting Rights Act of 1965 (VRA) a “piece of intrusive legislation.” By the time he became a senator his tone had greatly changed. He voted to reauthorise the VRA and sponsored legislation to honour with the Congressional Gold Medal the black civil rights marchers in Selma, Alabama, who endured racist violence at the hands of local police to promote the cause of voting. In Senate hearings Mr Sessions frequently said that there had been serious racial discrimination against blacks in the South. But he also sided with those conservatives who argued that the South had changed, making it unnecessary to maintain Section Five of the VRA which obliged a long list of jurisdictions with a history of racism to seek federal “preclearance” for any change to electoral laws, down to the location of polling places. In time the Supreme Court would come to agree with Mr Sessions and colleagues, striking down Section Five.

Democrats and civil-rights groups charge that Republican-run state governments across the South responded with a spate of laws making it harder to vote, including in ways that triggered federal lawsuits accusing states of unlawfully targeting the voting rights of blacks and other minorities. As a senator Mr Sessions has opposed calls for Congress to step in and restore federal powers over voting laws, saying in 2014: “To pass a law in the U.S. Congress that provides penalties only to some states and not to others can only be justified for the most extraordinary circumstances. And the justification no longer exists." Mr Sessions is certain to have those views scrutinised in his Senate confirmation hearings.

Yet Mr Trump’s triumphant takeover of the conservative movement makes it perilous for any Republican senator to oppose one of his earliest cabinet nominations. That will require a lot of painful swallowing for such colleagues as Senator John McCain of Arizona. Mr Sessions is one of handful of senators to vote against Mr McCain when that veteran foreign policy hawk—who as a young navy pilot was shot down, imprisoned and tortured in Vietnam—sought to outlaw harsh interrogation techniques. In 2005 Mr McCain proposed a ban on the use of "cruel, inhuman or degrading treatment or punishment" against anyone in American military custody, following reports of abuses in Iraq. Mr Sessions was one of nine senators to vote against the ban. In 2015 Mr McCain proposed a ban on the CIA, FBI and other government agencies using any interrogation techniques not permitted by the Army Field Manual on Human Intelligence Collector Operations, which sets rules for questioning prisoners of war and detainees. Mr Sessions told reporters at the time that: "One of the problems with the field manual is it tells enemy combatants what they can do and how they can conduct themselves to avoid effective interrogation, so we don't need to spell out everything that's permitted.”

In 2009 Mr Sessions called Eric Holder, attorney-general under Mr Obama, “’too soft” in his handling of terrorism, and accused him of helping America’s enemies by releasing Bush-era legal memos about the use of harsh interrogation techniques. In 2011 he wrote in the Washington Post that the Department of Justice was making a “dangerous” mistake by treating alleged terrorists as candidates for criminal prosecution, with the same legal rights to remain silent and be represented by a lawyer as any suspect. Instead, he wrote, the CIA should be given access to high-value detainees, and allowed to extract as much information as possible.

“This administration has lost sight of the reality that actionable intelligence—not criminal prosecution—is the only way our country can detect and foil the next al-Qa’eda plot,” wrote Mr Sessions.

In 2015 he urged colleagues, unsuccessfully, to block Mr Holder’s successor as attorney-general, Loretta Lynch, on the grounds that she had defended the legality of Mr Obama’s executive actions on immigration, such as DACA. Now he is likely to be Ms Lynch’s successor.


Weekend Edition: Get Ready for the Greatest Financial Mania the World Has Ever Seen, Part 2

Editor’s note: Today, we're sharing Part 2 of a special essay from longtime friend and founder of Stansberry Research, Porter Stansberry. In case you missed Part 1, you can read it here.

The full essay was originally published on September 9, 2016, in The Stansberry Digest.
________________________________________

Today, around the world, something around $15 trillion in fixed income is trading at a price that guarantees investors will lose money if they buy the bond and hold it until maturity.

I want to make sure you understand what’s happening because the bond market and bonds are a mystery to a lot of individual investors.

A bond can trade at a negative yield to maturity (guaranteeing a future loss) while still paying a current coupon. How can that happen? It happens when investors bid the current price of a bond so far above par that the remaining coupons to be paid won’t cover the loss when the bond matures.

So, for example, you might see a bond trading at $130 when it only has $29 worth of interest left to be paid before it matures at $100. An investor buying a bond like this has to believe he’ll be able to sell it at an even higher price, to an even bigger fool… or else he’s guaranteed to lose money.

Of course, all investors believe that they will be nimble enough to sell before that happens. And all investors believe that governments will continue to buy these bonds… or maybe even stocks… and do whatever it takes to keep the bubble growing.

This situation is the definition of an investment mania. Everyone knows that, someday, these bonds will reach maturity. And, at some point before they do, just as surely as the sun rises, these bonds are going to cause huge losses. And yet, despite these obvious facts… investors have begun to price even “junk” bonds – that is, noninvestment-grade debt – at prices that guarantee investors will take losses.

Just like Templeton back in 2000, I know for certain that this mania is running out of steam.

How can I know for sure?

There are three big “tells”:

First, total U.S. corporate debt is now 45% of GDP. That’s where the two previous credit cycles peaked (’02 and ’08). It’s simply not possible that the amount of credit outstanding to corporations can grow much from here because, even at very low rates of interest, there are not enough willing borrowers. Think about yourself. Does it really matter if someone offers you a 2% rate on a credit card? Are you going to go into debt for any reason? Nope.

Second, and far more important when it comes to timing, the number of banks in the U.S. that are tightening lending standards is rising and has just passed a critical threshold (10%). Banks tend to tighten lending standards at the same time, at the end of a credit cycle and beginning of a default cycle.

Third, we know for sure that a new default cycle has begun because not only are banks tightening, but credit downgrades (by the ratings agencies) have bottomed (in 2014) and continue to grow substantially. Likewise, outright default rates have bottomed and continue to grow rapidly. Morgan Stanley’s top high-yield bond analyst (Meghan Robson) believes the default rate in high-yield bonds will hit 14% by the end of 2017 (it was basically zero in 2014). She also says the total default rate will peak at 25% annually within five years.

The “fuel” that’s behind this mania and the reason it continues to grow (for now) is the fact that most professional investors, aka “Wall Street,” believe that without higher interest rates, there simply won’t be a trigger for a panic. But these guys are forgetting something that’s very, very important…

There are two ways to trigger a panic in the bond markets, not just one.

Yes, the first trigger is higher interest rates. (If new bonds are being issued that pay higher rates of interest, it makes the older bonds – which pay lower coupons – worth less in comparison.)

But the second trigger for panic, the one they’re forgetting, is simply rising defaults. Cheaper credit, by itself, won’t fix a failing business. Cheaper credit, by itself, can’t fix falling profit margins where there’s tremendous overcapacity, as there is in energy, manufacturing, retail, real estate, etc. In these sectors, defaults can and surely will cause massive losses for bond investors.

This panic will begin in the next 12 months. And because the numbers are so large and global, the coming bear market in junk bonds will influence fixed-income markets and equity markets around the world.

Since 2012, junk-bond issuance has totaled $1.4 trillion in the U.S. alone. That’s as much capital in four years as was issued in the decade between 2002 and 2012.

And for the first time ever, global junk-bond issuance has equaled America’s. It is this cheap and seemingly endless supply of capital that has lowered profit margins, which is why corporate earnings continue to decrease (four quarters in a row…) and industrial production is falling. It explains the glut in energy and materials, too.

I’ve been warning about this coming massive bear market in corporate debt. I’ve called it “the greatest legal transfer of wealth in history.”

This is a period when wise investors (like Templeton) will take massive amounts of wealth from fools. To help position our subscribers on the right side of this trend, I’ve invested a lot of time and money in building a huge analytical engine to study every corporate bond that trades in the U.S. We examine around 40,000 individual bonds every month. We build our own credit ratings for every issuer and we compare our estimate of creditworthiness to the ratings agencies. We look at discrepancies between our view, the ratings agencies’ views, and the market’s pricing. In short, we’re using computers and databases to find the “needle in the haystack.”

This analysis has, so far, led to 11 recommendations in our Stansberry’s Credit Opportunities service.

Three of those recommendations never traded below our buy-up-to prices. Even so, the eight recommendations that have traded inside our buy-up-to windows (so far) have led to annualized returns of nearly 50% – with zero losses. The yield of this recommended portfolio is 7.5%.

Huge amounts of capital have flooded into the junk bond markets this year, making it virtually impossible to buy bonds at a proper discount. But we know… our real opportunity is coming.

But what about regular investors? What about folks without the capital or the sophistication or the patience to deal in the bond market, where getting a position filled can take months and dozens of phone calls? And… why only trade this mania from the long side? Why bother with finding the needles in the haystack? Why not simply do what Templeton did and sell short the bonds you know will fail?

That’s a great question. And I’ve spent a year thinking about the right and safe way to make gains that are big enough to cover the risks involved. The answer isn’t trying to short individual bonds. Or even bond exchange-traded funds. The right way is a wholly different kind of strategy.

It’s something you’ve never seen me recommend before.

It’s a strategy that, like Templeton’s, will take a year or more to reach a substantial profit. It’s a strategy, like Templeton’s, that is extremely contrarian. It’s a strategy that I plan to invest several million dollars into personally… and that I believe will make me between 10 and 100 times my investment. It’s a strategy that will take discipline and patience – so most investors won’t follow it.

And that’s the primary reason I believe it will work. I’ll tell you all about it next week…

Good investing,

Porter Stansberry