Up and Down Wall Street

Will Yellen’s Rate Plans Produce Unexpected Outcomes?

If the surprises of 2016 teach us anything, any number of unforeseen events can upend the best-laid plans.

By Randall W. Forsyth

Federal Reserve Board Chairwoman Janet Yellen Getty Images
“Man plans and God laughs.” So says the sage Yiddish proverb. Despite our experience, we still think we can actually map out plans for the future with a degree of accuracy greater than a coin flip.
In that vein, the Federal Open Market Committee Wednesday projected it would raise its key federal funds interest-rate target by a quarter percentage point three times in 2017, which was one more hike than in its previous forecast announced in late September.
That followed an actual quarter-point boost to its fed funds target, to a range of 0.5%-0.75%, which was totally expected—largely because it was only the first move by the Fed during all of 2016.
Recall that at last December’s FOMC confab the panel had projected four quarter-point hikes after the initial liftoff in the funds rate from near zero, where it had been held for seven years during the financial crisis.
That forecast was given increased credibility the following month when Fed Vice Chairman Stanley Fischer allowed that four increases for 2016 were “in the ballpark.”
Those plans went somewhat awry, however. A March hike was shelved after the steep slide in global markets at the beginning of the year over concerns about China and the plunge in oil and other commodity prices and its effect on the high-yield market. By June, concerns about the U.K. referendum whether to leave the European Union kept the Fed on hold. In September, uncertainty following tepid first-half data and the looming U.S. election kept policy on hold.
With the election out of the way, U.S. economic data coming on the strong side and major stock indexes setting records, there were no more reasons to avoid rate hikes by the Fed. That was especially the case with the unemployment rate falling to a cycle low of 4.6% in November, which appeared to have played a significant role in the shift in the Fed’s future stance, Goldman Sachs economists Zach Pandl and Jan Hatzius write in a research note.
At her post-meeting press conference, Fed Chair Janet Yellen backpedaled from the notion of running a “high-pressure” economy, which she raised in a recent speech. The idea would be to coax some workforce dropouts back into the market. The decline in the headline jobless rate last month largely was the result of a renewed decline in the labor force participation rate back to a cyclical low of 62.7%.
Be that as it may, the 4.6% unemployment rate is below the 4.9% rate Fed economists see as full employment. Yellen compared the current jobless rate to that of 2007, when the job market was at full employment at the peak of the previous economic cycle later that year. But the more inclusive U6 unemployment rate, which takes into account workers working part-time for economic reasons and “marginally attached” people, then was almost a full percentage point lower than the current 9.3%.
That said, the anticipated changes in fiscal and regulatory policies by the incoming Trump administration did not play a role in the FOMC’s shift in its expected rate hikes for 2018.
“We’re operating under a cloud of uncertainty at the moment,” Yellen said. “We have time to wait to see what changes occur and factor those into our decision making as we gain greater clarity.”
For their part, the markets haven’t waited until those clouds disperse. They have pushed stock prices, bond yields and the dollar sharply higher in anticipation of fiscal stimulus in the form of tax cuts and infrastructure spending along with an easing of growth-hindering regulatory constraints.
Much of the latter can be accomplished by Donald Trump’s signature as soon as he is inaugurated as president on Jan. 20. Tax and spending changes have to be enacted by Congress, which Horizon Investments’ chief global strategist Greg Valliere thinks could happen more quickly than most expect.
Surely the Republicans who now control both the Senate and House of Representatives would want nothing more than to deliver sweeping tax cuts and reforms to the desk of President Trump as early as possible.
But if the surprises of 2016 teach us anything, any number of unforeseen events may intercede. And even if those best-laid plans do come to fruition, there are likely to be long and variable lags as to when their effects may be felt.
The same goes for the Fed. According to the CME ’s FedWatch tool, the fed funds futures market is only putting a 51% probability of funds-rate target of 1.25%-1.50% (or higher) by next December. In other words, chances of a third quarter-point hike next year are as good as a coin flip.
Given those odds and the events of the past year, God may be in for lots of laughs in 2017.

The Manchurian Cabinet

Nina L. Khrushcheva

ALexei Nikolsky_Putin in the Kremlin

MOSCOW – Donald Trump 's transition from US President-elect to taking power recalls nothing so much as a forgotten Hollywood genre: the paranoid melodrama. Perhaps the greatest film of this type, The Manchurian Candidate, concerns a communist plot to use the brainwashed son of a leading right-wing family to upend the American political system. Given the fondness that Trump and so many of his appointees seem to have for Russian President Vladimir Putin, life may be about to imitate – if not exceed – art.
To be sure, the attraction for Putin that Trump, Secretary of State-designate Rex Tillerson, and National Security Adviser General Michael Flynn share is not the result of brainwashing, unless you consider the love of money (and of the people who can funnel it to you) a form of brainwashing. Nonetheless, such Kremlinophilia is – to resurrect a word redolent of Cold War paranoia – decidedly un-American.
Consider the derision shown by Trump and his posse for CIA reports that Kremlin-directed hackers intervened in last month’s election to benefit Trump. In typical fashion, Trump let loose a barrage of tweets blasting the CIA as somehow under the thumb of his defeated opponent, Hillary Clinton. His nominee for Deputy Secretary of State, John Bolton, went even further, suggesting that the hacking of the Democratic National Committee and Clinton’s campaign chairman, John Podesta, was a “false flag” operation designed to smear an innocent Kremlin.
The idea that a US president-elect would take the word of the Kremlin over that of CIA officials and even the most senior members of his own party is already bizarre and dangerous.

But the simultaneous nomination of Tillerson – the long-time CEO of ExxonMobil, America’s most powerful energy company, which has tens of billions of dollars invested in Russia – to be America’s top diplomat takes this love affair with a major adversary to a level unprecedented in US history.
For Tillerson, taking Russia’s side against the US is nothing new. Consider the sanctions that the US and Europe imposed on Russia in response to the country’s annexation of Crimea – a blatantly illegal act – in 2014. Instead of supporting US policy, Tillerson belittled it. Instead of fully honoring President Barack Obama’s call for ExxonMobil not to send a representative to the annual Saint Petersburg International Economic Forum after the annexation, Tillerson cynically sent the head of one of ExxonMobil’s international operations. And instead of returning the Order of Friendship that he received from Putin months before the invasion of Crimea, Tillerson continues to celebrate his status as a “friend of Vladimir.”
Flynn, like Tillerson, has also been feasting at the Kremlin trough. After being fired by Obama for his incompetent management of the Defense Intelligence Agency, Flynn immediately began to cultivate Russian business contacts. And Putin seems to have been more than happy to see that commercial doors were opened to Flynn. There is a now-infamous photograph of Flynn seated next to Putin at a banquet for RT (Russia Today), the Kremlin-backed cable news network that was a prime source of the slanted, and even fake, news that inundated the US during the recent election campaign.
As for Trump, statements made by his sons suggest that, if the American public ever got a look at his tax returns and business loans, they would find that he has also been feathering his nest with Kremlin gold for some time. He has undoubtedly taken money from countless Russian oligarchs. In 2008, he unloaded one of his Palm Beach mansions on Dmitry Rybolovlev, a fertilizer oligarch, for $95 million. Sergei Millian, who heads the Russian-American Chamber of Commerce, is said to have facilitated countless investments from Russians into Trump projects. For Trump, no money is too tainted to pocket.
Trump’s adoration of Russia – or, more accurately, Russian riches – was apparent well before Americans went to the polls, as was his habit of surrounding himself with likeminded advisers.

For months, Trump’s presidential campaign was run by Paul Manafort, a political operative who had worked to secure the disgraced President Viktor Yanukovych’s victory in Ukraine’s 2010 presidential election. Trump severed public ties with Manafort only after Ukraine’s current democratic government revealed documents that hinted at the millions of dollars that Yanukovych had paid Manafort, in cash.
As Trump’s inauguration draws near, Americans must confront three big questions. One, in a sense, is a take on a question that Trump raised about Clinton during the campaign: what happens if the FBI finds evidence of criminal conduct by the president? Or, perhaps more likely in Trump’s case, what happens if the president tries to shut down FBI investigations into his commercial activities involving Russia, or into the actions of cronies like Manafort?
The second question, which the US Senate should ask before confirming Tillerson as Secretary of State, concerns the extent of his and ExxonMobil’s financial interests in Russia. The Senate should also probe how closely Tillerson has cooperated with Igor Sechin, the chairman of Rosneft and a notorious ex-KGB operative, particularly in renationalizing much of the Russian oil industry and placing it under Sechin’s personal control. (Similar questions should be asked about Flynn, though, because the National Security Adviser doesn’t need to be confirmed by the Senate, little can be done about his appointment.)
The biggest question of all concerns the American people. Are they really willing to accept a president who denounces men and women who risk their lives to defend the US, and who is equally quick to praise and defend Putin and his cronies when their reckless, even criminal, conduct is exposed?
At the end of The Manchurian Candidate, another brainwashed character – Frank Sinatra’s Marco – escapes his programming to foil the communist plot. But that was Cold War Hollywood: of course the good guys won. Trump the Movie is unlikely to end so well.

domingo, diciembre 25, 2016



A small act of national suicide in Peru

Viva la ignorancia!

FOR most of this century, Peru’s economy has shone: income per person has doubled in the past dozen years. But education failed to keep up. In 2012 Peru ranked last among the 65 countries that took part in the Programme for International Student Assessment (PISA), which tests the reading, maths and science proficiency of 15-year-olds.
Fortunately, Peru then found an outstanding education minister. Jaime Saavedra, an economist whose mother was a teacher, spent ten years at the World Bank, rising to be vice-president for poverty reduction. Appointed three years ago to the education portfolio, he was the only minister to keep his job when Pedro Pablo Kuczynski replaced Ollanta Humala as Peru’s president in July. He has generalised a previous pilot plan to link teachers’ pay to performance, overhauled teacher training and school management and begun a crash programme of repairing dilapidated school buildings. He has also championed a law passed in 2014, which for the first time subjected universities to minimum standards for probity and educational outcomes.  
Mr Saavedra’s stewardship has brought results. Performance in national tests has risen sharply. The latest PISA figures, which were released on December 6th, confirmed this trend: Peru was the fastest improver in Latin America and the fourth-fastest in the world. Far from celebrating this achievement, the following day the opposition majority in Peru’s Congress subjected Mr Saavedra to an 11-hour interrogation, conducted with the manners of a playground bully. On December 15th it was due to vote to sack him.
The ostensible reasons were a delay in preparations for the Pan-American games to be held in Lima in 2019 (the education ministry handles sport) and alleged corruption in the purchase of computers by the ministry. Mr Saavedra convincingly denied knowledge of these problems and responsibility for them. So why is Popular Force, the main opposition party, so hostile to him? Many commentators ascribe this to the links several of its legislators have to universities that are lucrative businesses but offer poor value to students and face new scrutiny under the law regulating them (though that also applies to some pro-government lawmakers).
The congressional hearing was remarkable for its mixture of ignorance and bad faith. One legislator claimed that the PISA tests, which are organised by the OECD, a club of mainly rich countries, were a “smokescreen” and a “business” paid for by Mr Saavedra’s ministry. Others said the PISA tests were “adulterated” or an exercise in psychological warfare. This is bosh: even the harshest serious critics of PISA accept that it is properly conducted.
The censure of his best minister on such spurious grounds is a frontal challenge to Mr Kuczynski, less than five months after he took office. It lays bare the weakness of his mandate. He beat Keiko Fujimori, Popular Force’s leader, by just 50,000 votes out of 18m, after her campaign was hit by a last-minute scandal. Her surprise defeat stung; she has not talked to Mr Kuczynski since the election. He only reached the run-off after two other candidates were disqualified on questionable grounds. His party has just 17 of the 130 seats in Congress, while Popular Force has 72.
Mr Kuczynski could have turned Mr Saavedra’s future into an issue of confidence in the cabinet as a whole. Lose two such votes, and Peru’s constitution gives the president the right to dissolve Congress and call a fresh legislative election. But this has never been tested, and Popular Force hinted that it would hit back by declaring the presidency vacant. On December 13th Mr Kuczynski announced that he had rejected this course, calling for dialogue with the opposition. He could seek a coalition with Popular Force, inviting them to take cabinet posts. But that would appal many of his own supporters, who voted for him purely to stop Ms Fujimori, whose father controversially ruled Peru as an autocrat in the 1990s and is serving jail sentences for corruption. The alternative may be to submit to years of harassment from Congress by an opposition intent on showing its power.
As for Mr Saavedra, his likely departure illustrates the vicious circle that makes sustaining good policies so difficult in Latin American democracies. Popular Force has too many chancers who see a state that long failed to provide proper public services as a vein to be mined for private profit. That the party represents so many Peruvians is in part an indictment of the country’s educational backwardness. Better education is no guarantee of a better-quality democracy, but it certainly helps. And it is essential if Peru is ever to grow truly prosperous.

How a Monte dei Paschi Rescue Is Unlikely to Solve Italy’s Banking Problems

The industry is hamstrung by a sluggish economy and an ultratraditional business model

By Giovanni Legorano

Italy's troubled Monte dei Paschi di Siena is getting closer to a rescue by the government. A statue of priest Sallustio Bandini at Piazza Salimbeni is seen at the bank’s headquarters in Siena, Tuscany. Photo: giuseppe cacace/Agence France-Presse/Getty Images 

ROME—A nationalization of troubled Banca Monte dei Paschi di Siena SpA appears increasingly likely. But a rescue of the Tuscan lender—expected as soon as next week—will do little to resolve broader woes of Italian banks.

Some are urging Rome to seize the moment to initiate a broader cleanup of a banking system that has €360 billion in bad loans and is among Europe’s least-profitable. “The problems of certain specific banks may be solved,” said Giovanni Bossi, chief executive of Banca Ifis SpA.

“But a complete overhaul of Italian banks’ business model is needed.”

But with the exception of some possible support for a clutch of small, critically ill lenders, broad sector-wide intervention is unlikely. To stay afloat, Monte dei Paschi is making a last-ditch attempt to raise €5 billion by the end of the year. To this end, it plans to launch a debt-to-equity swap and a share sale this week. according to people familiar with the situation. Both transactions are likely to last no more than a few days, the people said.

If the bank fails to raise the money it needs from private investors, the Italian government will step in and bail out the bank, a Treasury official said earlier this week.

But according to European rules, this rescue or any broader such effort to shore up the local banking system can’t happen without imposing losses on shareholders and some bondholders.

This choice is unpalatable for any government in Italy, where around €30 billion of banks’ junior, or riskier bonds, are in the hands of mom-and-pop investors.

The prospect of elections in Italy next year and a surge in populist parties ready to oppose any government attempt to help the banks leaves little chance of bold action beyond Monte dei Paschi at this stage, including by Italy’s new caretaker government. It took over after a failed constitutional referendum backed by the prime minister.

Meanwhile, a raft of policies promulgated by the last Italian government to bolster the sector have yet to gain much traction.

Italian banks face troubles on multiple fronts. An economy that is at a near standstill—Italy’s economy isn’t expected to grow by more than 1% in the coming years—and Italian banks’ ultratraditional business model offers little escape from the pain inflicted by low rates on much of Europe’s financial sector.

In Italy, most rates have remained fairly stable despite the recent rise in U.S. rates.

That stasis has squeezed the banks’ net interest margin, or the difference between what they pay on deposits and receive on loans. Fierce competition for healthy borrowers is pushing down lending rates. Meanwhile, moribund business investment is sapping an overall weak demand for loans, totals of which haven’t budged in more than two years. Italian banks have seen revenue from lending activity fall by a third from 2008, according to consultancy Prometeia SpA.

At the same time, deposit rates in Italy don’t change much, with banks paying a full percentage point on top of the one-year benchmark rate, according to Barclays.

Last year, customers at Banco Popolare SpA began receiving letters from other banks offering them loans at as little as 1% interest—effectively cutting in half the spread the banks charged to lend. Meanwhile, other rivals were offering to pay as much as 2% on deposits, a rich return for depositors who had been receiving nothing on their accounts. As a result, Banco Popolare’s net interest margin declined to 1.6%, from 1.92% over the last two years.

Banco Popolare tried to offset declining revenue from lending by pushing asset management and insurance products to customers, tapping the country’s private wealth. But while such a strategy has worked for a select few healthy lenders, it didn’t for most. Banco Popolare’s fees and commissions revenue have dropped 7% in the last two years.

“The market has been hit by a landslide,” Banco Popolare Chief Executive Pier Francesco Saviotti said this summer.

Meanwhile, costs remain high. Italian banks—which employ 350,000 people—spend 64% of their revenue on operational expenses, compared with 50% for Spanish banks and 60% for Greek banks. Costly severance packages and rigid employment contracts slow efforts to reduce banks’ costs, which are down 2% in the past year.

The result: Italian banks’ return on equity, a measure of profitability of banks, was 4.8% last year, compared with 14% for Irish banks and 8.3% for French banks.

Meanwhile, bad loans have continued to pile up, as Italy’s protracted economic problems send more companies to default. But the banks’ paper-thin profits are too little to cover the losses that write-downs would create.

That has meant that banks have been reluctant to unload the loans to investors willing to buy them at cut-rate prices. While €20 billion in sales of bad loans have occurred this year, that represented just 6% of all problematic loans.

According to the European Banking Authority, more than 16% of all loans in Italy are nonperforming, triple the EU average.

Efforts by UniCredit SpA, Italy’s largest bank and holder of more bad loans than any bank in Europe, to draw a line under its problems expose the capital shortfall Italian banks are suffering. On Tuesday, the bank—which has €77 billion in bad loans—said it would write down its worst loans by 75% and those classified as “unlikely to pay” by 40%. The bank now must raise €13 billion in part to cover the losses created by the write-downs.