Saturday, 29 September 2018

Weekend Update 29/09/2018. The Death of NAFTA? Recession Looms.

I have visited the cities and towns across America and seen the devastation caused by the trade policies of Bill and Hillary Clinton. Hillary Clinton supported Bill Clinton's disastrous NAFTA, just like she supported China's entrance into the World Trade Organization.

Donald Trump

This weekend or early next week, President Trump will likely file for the USA to formally exit NAFTA. The Great Trump Trade War on friend and foe alike, will likely claim its first victim, Canada. It will all too likely accelerate the arrival of the next great global recession, but not until after it plays well to President Trump’s core base in the November mid-term elections.

Our world seems turned upside down. Two years ago, Chancellor Merkel and EC President Juncker, in a classic misjudgement, refused to negotiate a new EU compact with GB Prime Minister Cameron, resulting in a Brexit vote for GB to leave the dying EU. Then came the election of outsider, President Trump, following the disastrous choice by the Democrats in selecting Hillary Clinton as candidate. Populist reactionary political parties are now becoming the norm across Europe.

President Trump immediately started tearing up international treaties, declared a trade war on friend and foe alike, and in less than two years turned America and US firms into unreliable business partners, forcing the EU, China, Russia, and others to look for ways to put together structures to work around American institutions. A process that is just beginning.

With the death of NAFTA, President Trump shoots both America and Canada in the feet. A global slowdown looms. And on November 4th, Trump’s economic war on Iran and Iran’s oil purchasers is due to start in earnest. A deeply troubling quarter lies directly ahead.

We know that trade, NAFTA, the free and open trade between Canada and the U.S. creates millions of good jobs on both sides of the border.

Justin Trudeau

Trump’s barbs send Canada-U.S. relations to new lows

Lawrence Herman is a former Canadian diplomat who practises international trade law at Herman & Associates. He is also a Senior Fellow of the C.D. Howe Institute in Toronto.

Donald Trump’s insulting statements about Canada in New York this week mark a new low in the Canada-U.S. relationship, with ramifications far beyond the North American free-trade agreement.

Never before has a U.S. president threatened to inflict direct harm on Canada. While there have been some rough spots over the course of our shared history, Mr. Trump’s apparent disdain for Canada and threats of economic warfare, seeming to relish in the prospect like some kind of neighbourhood bully, has taken the bilateral relationship into a state of political disrepair.

Even though the final episode hasn’t been written, it’s possible to predict that the NAFTA era may be coming to an ignominious end; 25 years of stability and mutual prosperity going down the drain, thanks to Mr. Trump. We expect he will notify the U.S. Congress this weekend of his decision to proceed with a trade deal with Mexico alone, using this in the coming midterm congressional elections to demonstrate his negotiating prowess in bringing jobs back to Americans.

----Recognizing that the sands are shifting and the many legal and political unknowns, here are scenarios that could unfold over the next number of days.

First, in spite of all the hurdles, miraculously a NAFTA 2.0 deal is struck with the Americans in the next 48 hours, both sides reaching accommodation on critical points, such as the Chapter 19 dispute-resolution mechanism, U.S. access to the Canadian dairy market and tariff surcharges. It could happen, although a settlement along these lines is almost impossible to foresee.

Second, Mr. Trump tables his U.S.-Mexico agreement on Monday – more detailed than the Aug. 27 preliminary document – with the intention of signing something with Mexico before its new president takes office on Dec. 1. At the same time (in spite of his insulting comments earlier in the week), Mr. Trump announces Canada-U.S. talks are continuing in the hope of settling a new bilateral agreement down the road, but he takes steps to begin the NAFTA withdrawal process.

Third, Mr. Trump proceeds bilaterally with Mexico, terminates further negotiations with Canada and starts the NAFTA withdrawal process, with repeated threats of auto tariffs. At the same time, he announces the United States intends to withdraw from the 1988 Free-Trade Agreement with Canada, which has remained in limbo under NAFTA.

----All of these possibilities, with dramatic variations too numerous to capture, will unfold over the next days or even weeks. The only known factor is that business uncertainty will continue for some time and that political and trade relations between the two countries have entered a dark and unsettling chapter.

Another Recession Is Looming

And unlike in the past, the Federal Reserve has little room to encourage growth by reducing rates.

Martin Feldstein Sept. 27, 2018 6:46 p.m. ET

Ten years after the Great Recession’s onset, another long, deep downturn may soon roil the U.S. economy. The high level of asset prices today mirrors the earlier trend in house prices that preceded the 2008 crash; both mispricings reflect long periods of very low real interest rates caused by Federal Reserve policy. Now that interest rates are rising, equity prices will fall, dragging down household wealth, consumer spending and economic activity.

During the five-year period before the last downturn, the Fed had decreased the federal-funds rate to as low as 1%. That drove down mortgage interest rates, causing home prices to rise faster than 10% a year. When the Fed raised rates after 2004, the housing-price bubble burst within two years.
As housing prices plummeted, homeowners with highly leveraged mortgages found themselves owing substantially more than their homes were worth. They defaulted in droves, causing lenders to foreclose on their properties. Sales of the foreclosed properties forced prices even lower, leading the national house-price index to decline 30% in three years.
Banks that held mortgages and mortgage-backed bonds saw their net worths decline sharply. A total of 140 U.S. banks failed in 2009, and those that survived were terrified by how much further the market might slide. To avoid risky bets, they shied away from lending to businesses and home buyers and refused to lend to other banks whose balance sheets were also declining.
----Fast forward to today. Homes aren’t as overvalued as they were in 2006, so there’s little chance of an exact replay of the 2008 crisis. The principal risk now is that a stock-market slowdown could shrink consumer spending enough to push the economy into recession. Share prices are high today because long-term interest rates are extremely low. Today the interest rate on 10-year Treasury notes is less than 3%, meaning the inflation-adjusted yield on those bonds is close to zero. The hunt for higher yields drives investors toward equities—driving up share prices in the process.
But long-term rates are beginning to rise and are likely to increase substantially in the near future. Though the 3% yield on 10-year Treasurys is still low, it’s still twice as high as it was two years ago. It will be pushed higher as the Fed raises the short-term rate from today’s 2% to its projected 3.4% in 2020. Rising inflation will further increase the long-term interest rate as investors demand compensation for their loss of purchasing power. And as annual federal spending deficits explode over the coming decade, it will take ever-higher long-term interest rates to get bond buyers to absorb the debt. It wouldn’t be surprising to see the yield on 10-year Treasurys exceed 5%, with the resulting real yield rising from zero today to more than 2%.

As short- and long-term interest rates normalize, equity prices are also likely to return to historic price-to-earnings ratios. If the P/E ratio of the S&P 500 regresses to its historical average, 40% below today’s level, $10 trillion of household wealth would be wiped out. The past relationship between household wealth and consumer spending suggests such a decline would reduce annual spending by about $400 billion, shrinking gross domestic product by 2%. Add in the effects on business investment, and this spending crunch would push the economy into recession.

Finally, Tesla. Did Elon Musk just decapitate Tesla with his August short squeeze tweet? Is the Tesla dream now a nightmare?

Why legal experts say the SEC has a strong case against Elon Musk

By Francine McKenna  Published: Sept 28, 2018 5:06 p.m. ET

Tesla CEO’s conduct was ‘egregious,’ says defense lawyer

Elon Musk’s biggest fans may think the Tesla chairman and CEO’s chronic casual indifference about legal and regulatory requirements is charming and even a sign of genius. But on Thursday the Securities and Exchange Commission warned Musk, and investors, that his “celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly.”

The SEC made swift work of its investigation of Musk’s series of allegedly false and misleading tweets starting on Aug. 7 about a potential transaction to take Tesla TSLA, -13.90%   private, filing charges in federal court late Thursday less than two months later.

David Chase, a former attorney with the SEC’s division of enforcement, who now represents white-collar defendants at his own firm, told MarketWatch, “The SEC could move fast because it was a straight-up, simple case. Either he had factual support for the tweet or he didn’t.”

In its complaint, the SEC’s lawyers methodically made a case for why Musk missed every step for a prudent go-private transaction when he made his go-private offer in a tweet on August 7.

“I was as surprised as anyone else when Musk tweeted the go-private proposal, that he chose that medium to communicate material information,” Chase said in an interview with MarketWatch. “But given his position as chairman, CEO and largest shareholder, I also assumed there was some factual basis for it.”

Beginning in January 2017, Musk had three or four in-person meetings with representatives of a Saudi Arabia sovereign investment fund. During these meetings, according to testimony Musk gave the SEC, the lead representative of the fund expressed a verbal desire to make a large investment in Tesla and establish a Tesla production facility in the Middle East.

Between July 31, 2018, when the SEC says Musk met again with representatives of the fund and the morning of Aug. 7 when he tweeted his go-private offer announcement, Musk did not have any further substantive communications with representatives of the fund or discuss a going-private transaction at a share price of $420 with any potential funding source, the SEC said.

He also did not contact any additional potential strategic investors to assess their interest in participating in a going-private transaction or retain any advisors to assist with a going-private transaction until after he made the tweet, according to the SEC.

The SEC says at the July 31 meeting with the fund, Musk did not discuss any dollar amount or specific ownership percentage for the fund’s investment in a going-private transaction, any specific acquisition price premium to be offered to current Tesla shareholders or his own process for board approvals of the transaction. He also did not inquire about the fund’s available liquid capital, whether the fund had any past experience participating in a going-private, and any potential restrictions on foreign ownership of a significant stake in Tesla or regulatory hurdles that would have to be overcome.

Musk, and Tesla, also did not notify Nasdaq, where the shares are listed, prior to publishing his Aug. 7 tweets. Nasdaq rules require that listed companies such as Tesla must notify Nasdaq at least ten minutes prior to publicly releasing material information about corporate events like a proposed going-private action.

----Bennett Lasko, an attorney in private practice who represents companies and executives in securities litigation, told MarketWatch, “It’s a pretty egregious case. Musk said he had funding secured and he didn’t. He hadn’t even discussed price with any funding source. Hundreds of millions of dollars changed hands within hours, and by the time the dust settled at the end of August, investors likely took more than a billion dollars in losses.”

Musk’s calculation resulted in a price of $419, and Musk told the SEC that he rounded the price up to $420 because he had recently learned about the relationship between “420” in marijuana culture and thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

Update Sunday September 30, 2019. Musk SEC reach a deal.

September 29, 2018 / 10:46 PM

Musk to resign as Tesla chairman, remain as CEO in SEC settlement

WASHINGTON/SAN FRANCISCO (Reuters) - Tesla Inc and Elon Musk have agreed to pay $20 million each to financial regulators and the billionaire will step down as the company’s chairman but remain as chief executive, under a settlement that caps a tumultuous two months for the carmaker.

The securities fraud agreement, disclosed by the U.S. Securities and Exchange Commission on Saturday, will come as a relief to investors, who had worried that a lengthy legal fight would only further hurt the loss-making electric car company.

The SEC on Thursday charged Musk, 47, with misleading investors with tweets on Aug. 7 that said he was considering taking Tesla private at $420 a share and had secured funding. The tweets had no basis in fact, and the ensuring market chaos hurt investors, it claimed. 

Investors and corporate governance experts said the agreement could strengthen Tesla, which has been bruised by Musk’s recent behavior, which included smoking marijuana and wielding a sword on a webcast, and attacking a British rescue diver via Twitter.

The settlement should place more oversight on Musk while not taking the “devastating” measure of forcing him out, said Steven Heim, a director at Boston Common Asset Management, which owns shares in Tesla battery maker Panasonic Corp.

Tesla must appoint an independent chairman, two independent directors, and a board committee to set controls over Musk’s communications under the proposed agreement.

“The prompt resolution of this matter on the agreed terms is in the best interests of our markets and our investors, including the shareholders of Tesla,” SEC Chairman Jay Clayton said in a statement.
Thursday’s charges shaved about $7 billion off high-flying Tesla, knocking its market value to $45.2 billion on Friday, below General Motors Co’s $47.5 billion.

In a way, NAFTA is like a scrambled egg. How do you unscramble an egg? The value chains are so interwoven that it would be very difficult to do that. But government policies force us to look for ways to unscramble it.

Shahid Khan

The monthly Coppock Indicators finished September.

DJIA: 26,458 +199 Down. NASDAQ: 8,046 +261 Down. SP500: 2,914 +166 Down.
All three slow indicators moved down in March, but the S&P and NASDAQ  turned up in August.  September will be critical for confirmation of this change. All 3 slow indicators failed to confirm August’s positive change making October very vulnerable to a sell off.