Trading in Trump’s Lies
J. Bradford DeLong
The Fool And His Money
by: Lawrence Fuller
- A subsequent rise in investor sentiment has lifted the stock market to new all-time highs.
- Yet there is a massive disconnect between expectations and the fiscal reality, which will have significant ramifications for the economy and markets.
Yemen Is the First Battleground in Trump’s Confrontation With Iran
The administration has its sights set on checkmating Tehran’s ambitions across the region. Iran’s proxies in Yemen are in the crosshairs.
By Dan De Luce
On Thursday, the United States diverted a destroyer to the Yemeni coast to protect shipping from Iranian-backed rebels, and is weighing tougher steps including drone strikes and deploying military advisers to assist local forces, according to officials familiar with the discussions.
“There’s a desire to look at a very aggressive pushback” against Iran in Yemen within the administration, a source advising the Trump national security team said. Given the public rhetoric and private deliberations in the White House, the United States could “become more directly involved in trying to fight the Houthis” alongside Saudi and Emirati allies, said the source, who asked not to be named as he had not been authorized by the White House to comment.
President Donald Trump’s aides see Yemen as an important battleground to signal U.S. resolve against Iran and to break with what they consider the previous administration’s failure to confront Tehran’s growing power in the region. But the tough approach carries the risk of triggering Iranian retaliation against the United States in Iraq and Syria, or even a full-blown war with Iran.
On Friday, national security advisor Michael Flynn released a statement accusing the international community of having been “too tolerant of Iran’s bad behavior,” adding “the Trump Administration will no longer tolerate Iran’s provocations that threaten our interests.”
In the first visible response to Monday’s attack on a Saudi frigate by Houthi suicide boats, the USS Cole, a guided missile destroyer, was ordered away from a “routine mission” in the Persian Gulf late Thursday and sent to the Bab al-Mandab Strait, a Pentagon official told FP.
The Cole is the same warship hit by a lethal Qaeda suicide bombing in 2000 in the Yemen port of Aden, which left 17 sailors dead.
The U.S. destroyer will escort vessels passing the Yemeni coastline and into the Red Sea said the official, who asked for anonymity to speak about the movement of the ship. The area saw Houthi missile attacks on a U.S. destroyer in January that fell short, and a direct hit on a United Arab Emirates vessel in October.
Additionally, on Friday, the administration slapped a new round of sanctions on Iranian businesses, backing up a stream of threats and condemnations it issued in response to Iran’s recent ballistic missile test.
To counter Iran’s proxies in Yemen, the administration is considering ramping up drone strikes, deploying more military advisors and carrying out more commando raids, the administration advisor and Republican congressional staffers said. The review also includes possibly expediting approval for military strikes against militants in Yemen — which required high level deliberations under the Obama administration — and expanding efforts to block Iranian arms deliveries to the Houthi forces.
Having campaigned on a get-tough policy toward Iran, Trump’s first test came over the weekend, when Iran conducted a ballistic missile test, followed by the Houthi boat attack.
Those moves are reinforcing Flynn’s already-hawkish instincts toward Iran, the adviser said.
“Flynn wants to very strongly counter Iranian efforts” throughout the Middle East, but questions remain over the timing and the details of any stepped up U.S. role in Yemen or elsewhere, the advisor said.
The new round of sanctions target Iranian individuals and companies involved in Tehran’s missile program, some of whom are based in the United Arab Emirates, Lebanon and China.
The sanctions handed down Friday would not violate the nuclear agreement between Iran and major powers, but were widely viewed as a first step in a series of measures by the Treasury Department designed to squeeze Iran and discourage foreign investment. The 2015 nuclear agreement imposed limits on Tehran’s nuclear program in exchange for lifting international sanctions.
Washington has already played a role in the Yemeni civil war, supporting the Saudi-led bombing campaign against Houthi rebels for the past two years, providing hundreds of aerial refueling flights and drone surveillance missions to identify targets. The Pentagon curtailed some of its intelligence assistance last year, after Saudi Arabia drew international condemnation for the killing of scores of civilians during poorly planned airstrikes.
Former president Barack Obama’s administration long played down the scale of Iran’s assistance to the rebels in Yemen and did not portray Tehran’s activity as a major security threat. Instead, the previous administration placed a higher priority on targeting al Qaeda’s affiliate in Yemen, which intelligence agencies have long described as the most capable in the terror network.
In a series of stern warnings to Iran that continued through Friday, Trump and Flynn — with backing from congressional Republicans — vowed a tougher stance to counter Iranian missile programs and Tehran’s continued support for the Houthis.
On Wednesday, Flynn strode into the White House briefing room to deliver the warning that the administration is “officially putting Iran on notice,” but refused to elaborate what might be under consideration.
After meeting with Flynn on Friday, Sen. Bob Corker (R-Tenn.), chairman of the Senate Foreign Relations Committee, said there needed to be “a coordinated, multi-faceted effort to pushback against a range of illicit Iranian behavior” in Yemen and the Middle East.
One worry inside the administration is that Iran will expand its support for the Houthi rebels if Yemen’s civil war continues to grind on without resolution, threatening neighboring Saudi Arabia and international shipping passing along the coast — one of the world’s key maritime choke points.
But deeper military involvement in Yemen is risky. An assault by U.S. Navy SEALs and Emirati commandos on Saturday in central Yemen — meant to attack al Qaeda terrorists unaffiliated with Tehran — was the first known U.S.-led ground operation in Yemen since December 2014, and it underscored the dangers of sending in American forces in the chaotic country. One Navy SEAL died, as did an unknown number of civilians.
“The raid may signal a growing U.S. interest in getting more involved clandestinely in Yemen,” though most likely in an advisory role, said Seth Jones, a former adviser to special operations forces and an expert on counter-terrorism.
“There will be limited boots on the ground for direct action or drone strikes,” said Jones, a fellow at the RAND Corp. “I expect that most of it will be working with local partner forces on the ground.”
But ramping up pressure against the Houthis could backfire, pouring more fuel on the civil war and pushing the rebels even deeper into Tehran’s orbit, said Katherine Zimmerman, an analyst at the American Enterprise Institute.
The U.S. is “siding with the government that is seen as illegitimate to a majority of the population in northern Yemen,” Zimmerman said.
Is Capitalism Broken?
We haven’t been completely honest with you.
For the past few months, we’ve been saying Corporate America is in a profits “recession.” We even showed you proof.
Just look at the chart below. You can clearly see that corporate profits stopped growing in 2014.
So what’s the problem?
• It turns out, the situation is much worse than we thought...
The chart above uses earnings per share (EPS) for companies in the S&P 500.
This metric divides a company’s net income by its total number of shares. It’s an easy way to measure a company’s profitability. But it’s not perfect.
You see, this chart uses earnings for the past 12 months. It’s rearward-looking. It doesn’t show where profits are headed.
The good news is that there are other ways to measure the health of a company. We’ll show you how in today’s Dispatch.
By the end of this issue, you’ll know how to forecast corporate profits better than 99% of investors. You’ll also see why the corporate profits recession is actually much worse than it appears.
• Corporate profit margins peaked six years ago…
Corporate profit margins measure how much money a company keeps after it pays its employees, lenders, and Uncle Sam. Unlike EPS, profit margins are usually expressed as a percentage.
The higher the profit margin, the better.
You can see in the chart below that corporate profit margins hit an all-time high in 2011.
They’ve been falling ever since.
That’s not a good sign…
• Profit margins are cyclical…
They go through ups and downs. You can clearly see this in the chart above.
Profit margins usually increase when the economy is growing. When the economy slows, they shrink.
Right now, profit margins aren’t just shrinking...they’re in a clear downtrend. This tells us that they should keep falling.
But that’s not the only reason investors should be nervous about corporate profits.
• Jeremy Grantham thinks profit margins always revert to their mean…
Grantham is one of the world’s most respected value investors. He’s the co-founder and chief investment strategist at Grantham, Mayo, Van Otterloo & Co., an investment firm that manages about $80 billion.
In 2014, Grantham explained why it’s so important to watch profit margins:
Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.
If you’ve never heard of mean reversion, don’t worry. It’s simple. It basically means “what goes up, must come down,” and vice versa.
• If corporate profits keep falling, we could have big problems on our hands…
Below you’ll find the same chart we showed you earlier. The only difference is that we’ve shaded the periods where the U.S. was in an economic recession.
You can see that corporate profit margins have fallen before almost every U.S. recession since the 1940s.
But that’s not all.
Right now, corporate profit margins are still well above their historical average. In order for them to revert to their mean, they would have to fall to 9%.
You can see what happened the last time profit margins sunk that low. The U.S. economy entered its worst economic downturn since the Great Depression.
• To be clear, we aren’t saying profit margins will crash this quarter or even the next…
But history tells us they’re heading lower.
It may take a year or longer, but a recession is coming.
The good news is that we still have time to prepare. The easiest way to protect your wealth from a recession or financial crisis is to own gold.
As we often point out, gold is real money. It’s preserved wealth for centuries. It’s survived every financial crisis known to man. You can’t say the same thing about paper money.
This is why we encourage every investor to put 10% to 15% of their wealth in physical gold.
Once you own enough gold for safety, you can think about speculating on gold for profit.
• Gold stocks are the best way to cash in on higher gold prices…
Gold stocks are leveraged to the price of gold.
The problem is that most investors don’t know anything about gold miners. They analyze them like any other blue-chip stock. But gold miners aren’t like other companies.
Many aren’t profitable. Some haven’t made their first sale yet. Others haven’t even found any gold.
To make big money in gold stocks, you have to know what to look for.
And Louis James does. Louis, as you may know, is our top gold analyst and a true industry insider.
He understands the geology. He knows the smartest gold CEOs in the game. And he’s visited mines around the world.
He recently got back from the richest gold deposit he’s ever seen. There, he saw gold veins as thick as his thigh. That’s unheard of.
Chart of the Day
One of Louis’ top gold stocks just doubled overnight.
Today’s chart shows the performance of Aurion Resources (AU.V) since July. Louis recommended it in November. At the time, the stock was trading for C$0.35.
On Wednesday, that stock surged all the way up to C$1.30. That’s 271% higher than when Louis recommended it. On Wednesday, Louis told his readers to take profits.
If you made a huge profit on Aurion, we'd love to hear from you. If you missed the boat, don’t worry.
Louis has several stocks in his portfolio that could soon deliver even bigger gains.
Emerging markets’ Trump tantrum abates, except in Turkey
Turkey’s policymakers have not learnt the lessons of past emerging-market crises
THE Syrian consulate in Istanbul’s elegant Nisantasi quarter is a busy spot. Men huddle outside in the cold, waiting for their turn to slip through the building’s ornate doors. The rest of the neighbourhood is, however, unusually subdued. A string of terrorist attacks in the city and an attempted coup in July, followed by a purge of suspected sympathisers, has dampened spirits. “After a bomb goes off, no one goes out. A week is lost,” says one shopkeeper.
Besides war next door and terror at home, Turkey’s economy has been rocked by political upheaval farther afield: the lira has plummeted by over 15% against the dollar since America’s election on November 8th. Many tenants cannot now afford Nisantasi’s rents, often priced in foreign currency.
Even the childhood home of Orhan Pamuk, Turkey’s best-known novelist (pictured), has a “for rent” sign on the door.
Back in November, Turkey had a lot of company in its economic misery. Other emerging markets also reacted badly to America’s election result, prompting talk of a “Trump tantrum” to match the “taper tantrum” after May 2013, when America’s Federal Reserve began musing about reducing its pace of asset purchases.
In recent weeks, however, the fortunes of emerging markets have parted ways. South Africa’s rand has recouped most of its post-election losses against the dollar. India’s and Indonesia’s currencies are both within 2% of their pre-Trump parities. Brazil’s real, which weakened by 8% against the greenback in the first few days after the election, is now stronger than it was before it. Only Mexico’s peso, still down by about 10%, has rivalled the lira’s decline.
The markets may have concluded that Mr Trump’s policies, intended to put America first, will set some emerging economies further back than others. Consider four potential dangers: a stronger dollar; trade wars; immigration curbs; and a tax holiday that prompts American firms to repatriate foreign profits. Russia is greatly vulnerable to none of these risks, according to Nomura, a bank.
Mexico is highly exposed to all of them. Other economies fall somewhere between the two (see table).
What about Turkey? At first glance, it would seem to have little to fear. It is not highly vulnerable to a trade war, the repatriation of profits or curbs on migrant workers. After a fiscal and financial crisis in 2001, Turkey has also repaired its public finances, reformed the banking system, tamed inflation and floated the lira.
But although Turkey has learnt a lot from its past, it has learnt rather less from its peers. The experience of other emerging economies over the past 20 years shows that current-account deficits can be as treacherous as fiscal deficits. It also shows that financing such a gap with long-term foreign direct investment is better than relying on “hot money”. The record also suggests that if the money has to be hot, it is better that it take the form of equity, rather than debt. And if it has to be debt, better that it is denominated in the country’s own currency, not someone else’s.
For all its strengths, Turkey has not abided by these rules of thumb. Its persistent current-account deficit (estimated to exceed 4% of GDP in 2016) has left it with short-term external debt amounting to over $100bn at the end of November (84% of which is denominated in foreign currencies). That is roughly equal to its entire stock of foreign-currency reserves (worth less than $98bn at the end of November). Mexico’s reserves, in contrast, are roughly twice its short-term external debt, according to the IMF.
These external debts and deficits leave Turkey vulnerable to the withdrawal of foreign capital.
To prevent it may require higher interest rates, but the central bank has so far tightened only tentatively. Instead of simply raising its “benchmark” rate—the one-week repo rate—it has stopped offering repo auctions altogether. That has forced banks to borrow at its higher overnight lending rate (which it raised by 0.75 percentage points on January 24th) or the even higher rates offered at its “late” liquidity window.
To some economists, the lack of simplicity in the central bank’s policy suggests a lack of conviction. They worry that, despite its statutory independence, it is reluctant to antagonise Turkey’s increasingly powerful president, Recep Tayyip Erdogan, who has fulminated against the “interest-rate lobby” and demanded lower borrowing costs. Mr Erdogan would rather defend the currency by drawing on Turkey’s deep reserves of patriotism, urging Turks to convert their dollars into lira “if you love this country”. One barber told a local television station he would offer a free cut to anyone who converted $300.
If neither central bankers nor barbers stop the lira’s fall, it may be Turkey’s creditors in line for a haircut. On January 27th Fitch, a ratings agency, cut Turkey’s foreign-currency credit rating to junk, citing the country’s exposure to foreign debt and the erosion of checks and balances on its president. The agency thinks more loans (especially to tourism and energy companies) may require restructuring, but it believes Turkey’s banks have enough capital to withstand “moderate shocks”.
The other risk posed by a falling currency is rising prices. Turkey has a long history of high inflation, forcing Mr Erdogan to remove six zeroes from the currency in 2005. (Some Turks still say “billion” when they mean “thousand”.) Historically, a 10% fall in the lira translates into a 1.5% rise in prices, which would further jeopardise the central bank’s efforts to bring inflation down from 8.5% to its target of 5%. Its own economists argue that the inflationary impact of a weak currency may be offset by the weak economy.
They could be right. Next to the Syrian consulate is a brightly painted store (the “Pop-Up Shop”), offering nothing but consumer imports, from cereals to cosmetics, so the neighbourhood’s well-heeled residents may satisfy esoteric tastes acquired abroad. Its eclectic range includes Brut aftershave, Jack Daniel’s barbecue sauce, Tide detergent and peach-flavoured amino acids. The falling lira has pushed their costs up, but they have still been forced to cut their prices for the benefit of their financially straitened customers. The shop manager has written off 2017 as a lost year.
“We’ve had enough,” his father complains, tugging the collar of his coat, a Turkish gesture roughly akin to throwing up your hands in exasperation. But at least their rent, which the father quotes in billions not thousands, is priced in lira.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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