Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

BEARNOBULL’S WEEKENDER

Michael Pettis: Here Is Why Kyle Bass Is Mistaken On China
Virtual reality and the weekly roundup in tech and retail by Leah Grace
THE DONALD

Donald Trump is broadly unpopular with national adults, more so than any other major candidate of either party. Over the past week (Feb. 26-March 3), Trump was seen favorably by 30% of the country, while twice as many U.S. adults saw the GOP front-runner unfavorably (63%). But none of the other major presidential candidates have very positive images either, although no one’s image is as negative as Trump’s. Ted Cruz holds a favorable/unfavorable rating of 29%/50%, Hillary Clinton is at 41%/53% and Marco Rubio is liked by almost as many Americans as dislike him (34%/38%).

trump_blog_1

Confused smile Two other candidates, Democrat Bernie Sanders and Republican John Kasich, enjoy positive images with the American public, but both are clearly behind the front-runners in their respective parties in terms of winning primary delegates.

Unsurprisingly, Trump is more popular with his Republican base than among U.S. adults in general. In the last week (Feb. 26-March 3), Trump was seen favorably by 54% of self-identified Republicans or independents who lean Republican. His unfavorable rating was 42%, meaning his “net favorable” tilts positively, by a +12-point margin.

Trump is more popular than the Republican candidate who currently holds the second-highest number of delegates won through the voting process — Cruz. Cruz has a favorable rating among Republicans of 48%, while his unfavorable rating is 41%, for a net favorable of +7. Cruz’s image among Republicans has been sharply more negative in the last few days; as recently as the seven-day average ending Feb. 24, he had a net favorable rating of +21.

Rubio, by contrast, is more popular among Republicans, with a 53% favorable rating and 31% unfavorable rating. Obviously, Rubio’s likability has not thus far translated into sweeping success at the ballot box.

The larger point is that none of these candidates is doing particularly well among their party base, and that Trump’s image is positive and better than his rival Cruz’s image.

trump_2

Trump is, at this point, more unpopular than 2008 nominee John McCain was (a person, incidentally, whom Trump has attacked over the course of his campaign). In March 2008, when McCain had effectively already won the nomination, he had a favorable rating of 87% with Republicans compared with an 8% unfavorable rating. A month earlier, when the competition for the nomination was still heated, McCain was slightly less liked by Republicans — in February 2008, he had a favorable rating of 67% compared with a 27% unfavorable rating.

Still, McCain’s image among his party identifiers at this stage in the 2008 election cycle was obviously much better than Trump’s is now.

What about 2012 and Mitt Romney — the former candidate who Thursday lambasted Trump’s viability as the GOP nominee during a speech in Utah?

In February 2012, 59% of Republicans saw Romney favorably while 31% saw him unfavorably, for a net favorable of +28. This is clearly better than Trump’s image has been at any point in February or March so far. But if we go back to earlier in January, Trump’s net favorable rating among Republicans was actually at or slightly higher than the +28 level. Just to emphasize the point, Trump’s image among Republicans earlier in 2016 was very similar to Romney’s in the early months of 2012.

Trump’s image has suffered in recent weeks, perhaps reflecting the continuing — and heated — campaign. All of this could change if Trump were to move to the point where his nomination becomes a sure thing. In 2012, as was the case for McCain in 2008, Romney became nearly universally popular with Republicans after he had sewn up the nomination — in May 2012, he had a favorable rating of 82% and an unfavorable rating of 13%.

Using these past two elections as a guide, it’s possible that Trump could see an uptick in his image among Republicans should he win the party’s nomination.

This is not to say that a sizable portion of the Republican Party would prefer their party nominate another candidate than Trump, or that efforts to mobilize against Trump are doomed to fail (they are hampered, however, by the party’s inability to settle on which candidate anti-Trump Republicans should support). But the evidence from 2012, in particular, shows that Trump’s unpopularity among Republicans, at this point, is not necessarily a fatal flaw for his candidacy. Plus, Trump is not the most unpopular candidate in the GOP field currently — that distinction belongs to Cruz.

It is perhaps more important to note that Trump remains a disliked figure nationally, more so than, as an example, the likely Democratic nominee Hillary Clinton. And it is important to note that Trump has a particularly bad image among Hispanics and blacks nationally (much worse than Cruz’s or Rubio’s), two potentially key voting groups in specific swing states this fall.

Republicans who want to see Donald Trump win their party’s nomination are most likely to say it is Trump’s status as a nonpolitician and an outsider that drives their support, followed by his experience as a businessman. A number of Trump supporters also prefer him because he is outspoken.

Most Important Reasons for Supporting Donald Trump for Republican Nomination, February 2016

These findings are based on Gallup’s Feb. 26-28 poll in which Republicans and Republican-leaning independents were asked whether they would prefer to see Trump, Ted Cruz or Marco Rubio win their party’s nomination, and then to indicate in their own words what lies behind their preference. Responses to the latter question were coded into major categories as displayed in the accompanying table.

According to Trump supporters, his unconventional résumé and style have helped attract their support for his candidacy, more so than his positions on issues or specific policies. In fact, other than his signature issue of immigration, mentioned by 8% of his supporters, no other issue is named by more than half that many — with between 2% and 4% mentioning his ability to deal with terrorists, his financial planning and budget expertise, and his handling of the economy and employment.

This is not to say Trump supporters don’t think he has strengths on specific issues. In the same poll, Trump gets substantially more credit than his major competitors for being able to handle the economy and the deficit, as well as immigration. But it is his nonpolitician background that comes to mind first, not his positions on issues, when supporters are asked to explain why they want him as their party’s nominee.

In addition to the perception that Trump is an outsider and a businessman, Republicans who support Trump also frequently mention that he would accomplish what he sets out to do, that his campaign has so far been self-funded, that he is honest and that his election as president would improve the stature of the U.S. around the world. (…)

Implications

If Trump wins the Republican nomination, his opponent in the general election — who right now is most probably Hillary Clinton — will likely seek to attack him for his idiosyncratic temperament and bombastic ways. Previewing this possible line of attack, a member of his own party, 2012 Republican presidential nominee Mitt Romney, heavily criticized Trump on Thursday in a speech in Utah, using words like “bullying … showing off … absurd third-grade theatrics … ridiculous.”

The insight from the new poll — conducted before Trump engaged in additional nonconventional references and personal attacks in the March 3 GOP debate — is that rank-and-file Republicans may be willing to look beyond these qualities and, by extension, that general-election swing voters could do the same. Republicans who support Trump’s candidacy like him for being an anti-politician, and Trump’s willingness to say things that flout conventional norms governing political speech may only strengthen his authenticity as an outsider.

More generally, the responses given by Republicans who want to see Trump prevail show that Trump’s outsider message is clearly reaching its target through the free media on which he relies. His supporters’ discussion of his outsider status, his business background, that he says what he thinks, his position on immigration, that he would get things done, and his being self-funded are all centerpieces of Trump’s debate and numerous off-the-cuff comments.

Edward Luce

Mr Trump shares traits with many historic figures — Huey Long, George Wallace, Charles Lindbergh, Ross Perot and Father Coughlin, to name a few. But it is impossible to imagine Mr Trump without Rupert Murdoch. Through Fox News, Mr Murdoch has abolished the limits of acceptable politics in the past 20 years. If it sells it is good, no matter what the consequences. That is all you need know about Mr Trump’s politics.

Last July Mr Murdoch tweeted: “When is Trump going to stop embarrassing his friends let alone the whole country?” Eight months later, he tweeted: “If he [Trump] becomes inevitable the party would be mad not to unify”. Mr Trump was once pro-immigration. Then he turned against it. Mr Murdoch was once anti-Trump. Now he appears to support him. They are peas in an amoral pod.

Martin Wolf

Donald Trump might, at best, be considered an American Silvio Berlusconi, albeit without the latter’s charm or business acumen. Mr Berlusconi, unlike Mr Trump, made his billions from scratch. He also never threatened to round up and expel millions of people. Mr Berlusconi promoted fantasies, too, but they were of his own innocence, and his rhetorical assaults were more on the judiciary that pursued him than on the weak and vulnerable.

He was a bad prime minister who failed to reform Italy but he lacked the brutality and aggression of Mr Trump, who is grossly unqualified for the world’s most important political office. Maybe Mr Trump is more like another politician he admires: Vladimir Putin, the Russian strong man. Mr Trump might see himself as America’s Putin.

Gideon Rachman

Who is Trump like? Comparing anyone to Hitler is generally a bad idea — since it’s more a term of abuse than analysis. I don’t think Trump is Hitler but some of his political platform does carry echoes of fascist and Nazi rhetoric: the denigration of the democratic system as incurably corrupt, the promotion of conspiracy theories, the racism, the promise to reverse national decline and the way in which he is capitalising on themes already developed by an extremist press.

That said, I think it is probably more useful to look at parallels that are more contemporary or American. In the US he seems similar to George Wallace in the 1960s, Joe McCarthy in the 1950s or some of the fascist sympathisers of the 1930s, such as Lindbergh or Coughlin. In the contemporary world, he is similar to Silvio Berlusconi of Italy, a showman-tycoon who revels in his own virility and political incorrectness.

The election of Trump would also mean that the US had followed other large nations by opting for a nationalist strong man as its leader — the American equivalent of Xi in China, Putin in Russia, Erdogan in Turkey and Modi in India.

Alan Beattie

Inveterate self-publicists; bombastic but addictively watchable speakers; declared enemies of politics as usual. Donald Trump’s closest UK equivalent is George Galloway, who twice ousted Labour MPs from safe seats by stoking local discontent with the political establishment.

Trump scornfully demolished his Republican rivals for being hopeless captives of the political system; Galloway did the same during a famous appearance in front of the US Senate in 2005. Both projecting a strong man image themselves, they also seem to have a soft spot for real-life autocrats like Vladimir Putin.

They are natural showmen, quick with the florid personal attack but thin-skinned when on the receiving end. Galloway is a sideshow; Trump the main act. But their shtick is remarkably similar.

Sebastian Payne

We have yet to see a British Donald Trump but the nearest political figure is Nigel Farage, leader of the UK Independence party. Both are unashamedly populist, appealing to voters “left behind” by the established political parties. Their insurgencies have shaken up the traditional conservative movements in their respective countries.

The similarities are numerous. Messrs Trump and Farage have made controversial comments on Islamic issues — the latter that there are some Muslims who want to form a “fifth column and kill us” — as well as campaigning for tighter borders and greater sovereignty. Both also enjoy the unwavering support of Breitbart, the stridently rightwing website.

Mr Farage addressed the Conservative Political Action Conference in Maryland last year, where he criticised the west’s military interventions, saying: “We’ve actually inflamed and stoked the fires of militant Islamism by doing what we have done.” Those words could have come straight out of Mr Trump’s mouth.

NEW$ & VIEW$ (4 MARCH 2016): Retail Sails!

EUROZONE RETAIL SALES EXPLODE

I have not seen this in any mainstream media. Yet it could be the most important economic news this year given that it comes along the same strong trend in U.S. retail sales between November and January. The volume of retail sales in the Euro Area rose 0.4% MoM in January following a 0.6% jump in December. Last 2 months annualized: +6.2% in real terms, during the two most important months of the year (Eurostat).

image

Core retail sales were even stronger rising 0.5% and 0.7% MoM in December and January respectively, a 7.4% annualized rate, in volume.

image

It seems that consumers are finally reacting to the oil windfall. If this continues, we’re in for many surprises…

U.S. Productivity Fell in Fourth Quarter of 2015 The U.S. economy experienced one of its worst productivity declines in more than two decades at the end of last year, extending a sluggish trend that threatens to constrain worker pay and economic growth in the coming years.

(…) The productivity of nonfarm workers, measured as output per hour worked, decreased at a 2.2% seasonally adjusted annual rate in the fourth quarter, the Labor Department said Thursday. Output rose at a 1% pace and hours worked rose at a 3.2% pace.

That was an upgrade from the agency’s initial estimate last month that productivitydeclined at a 3% annual rate in the final three months of the year. (…)

Still, it was the weakest productivity reading since the first quarter of 2014. Since the end of 1994, only four quarters have seen a larger decline. (…)

Unit labor costs at nonfarm businesses rose at a 3.3% pace in the fourth quarter, the agency said, revised down from an earlier estimate of 4.5% growth. (…)

Productivity in the fourth quarter rose a mere 0.5% from a year earlier. For all of 2015, productivity growth averaged 0.7% compared with 0.8% in 2014. Since 2007, productivity growth has averaged 1.2%.

Quarterly productivity data are volatile and undergo frequent revisions. Still, a broad and persistent slowdown in productivity gains has haunted the U.S. and other advanced economies for years. (…) (Charts from Haver Analytics)

 large image large image

 large image large image

Moody’s:

The narrowing of margins stems from the more rapid climb of labor costs relative to labor productivity. This is important because recessions occurred each time unit labor costs outpaced corporate gross value added over a yearlong span.

image

In 2015’s third quarter, unit labor costs accelerated to a 2.7% yearly increase that outran the accompanying 2.4% rise by net revenues, or corporate gross value added. Whether or not unit labor costs grew more rapidly than net revenues in 2015’s final quarter is problematic.

Mostly because the yearly increase of hourly compensation slowed from the 3.4% of the previous two quarters to Q4-2015’s 2.6%, the annual increase of unit labor costs slowed from the 2.6% of 2015’s middle two quarters to the 2.1% of 2015’s final quarter. Though it may now be easier for Q4-2015’s net revenues to at least match the growth of unit labor costs, the yearly increase of core revenues (which exclude energy product sales) slowed from Q3-2015’s 2.5% to Q4-2015’s 1.4%.

Thus, the unexpected slowing of Q4-2015’s unit labor costs offers no assurance that unit labor costs did not outpace net revenues for a second straight quarter.
However, an incomplete and preliminary estimate suggests that the yearly increase of core revenues may have improved to 2.5% in January. But, even that may not be enough to offset the possibly relentless acceleration of labor costs in a tightening labor market.

RECESSION WATCH

(…) Nerves have calmed considerably since. Blue chip indexes are up nicely from their Feb. 11 low. Junk bond yield spreads have narrowed. Oil has stopped going down and the dollar has stopped going up, so expected inflation has risen. Especially important for everyone’s blood pressure, volatility has receded. Vix, the options price-based stock market fear gauge, is back down to December levels. A model developed by Cornerstone Macro put the odds of recession, as signaled by the markets, at 64% on Feb. 11. That has since fallen to 47%.

But no one, including the Fed, should take much comfort from this.  The risk of recession hasn’t declined. In fact, it may have edged up. (…)

However, unlike the odds based on financial indicators, those macro probabilities have not since declined. Some indicators, such as surveys of factory purchasing managers, remain in recession territory. (…)

The dollar is still much stronger, stock prices lower and corporate bond yields higher than just a few months ago. Indeed, over the last year and a half, these have collectively tightened financial conditions by the equivalent of 0.75 to one percentage point in the federal-funds rate, notes Lael Brainard, a Fed governor, on top of the actual 0.25 point increase the Fed delivered in December.

Tighter financial conditions always operate with a lag, so it could be a few more months before it’s clear what toll the latest tightening in financial conditions has had on growth. It may turn out to be zero, as with last August’s bout of turmoil.

While a recession is still not the economy’s base case, it’s too soon to sound the all clear.

  • Recovery by Base Metals Price Index improves outlook

Moody’s industrial metals price index has been recovering since bottoming on January 12, 2016. Since year-end 2015, the +5.6% climb by the base metals price index differs considerably from the accompanying -6.4% slide by the price of oil.

image

The latest firming of base metals prices is important because it hints of an improving world economy despite the still relatively depressed price of crude oil. In fact, compared to the price of oil, the base metals price index has been a more powerful coincident indicator of world economic activity.

Regarding the annual percent changes of calendar-year averages, the IMF’s measure of the world economy shows a much stronger correlation of 0.74 with Moody’s industrial metals price index than to the world economy’s 0.40 correlation with the price of crude oil. The correlations were obtained from a 37-year sample that began with 1979 and ended in 2015. For a 30-year sample that begins in 1986 and ends in 2015, world economic growth generates correlations of 0.82 with the industrial metals price index and 0.59 with the price of crude oil.

By the way, the correlations between world growth and US real GDP growth are 0.59 and 0.52 for the 37- and 30-years-ended 2015, respectively. Thus, in terms of calendar-year percent changes, the correlation between the industrial metals price index and world economic growth is stronger than the correlation between US real GDP growth and world economic growth.

RecessionALERT WLI

  • Credit: Aging Business Cycle to Limit Rally

Since peaking at February 11’s 10.17%, the composite speculative-grade bond yield plunged by a stunning -129 bp to a recent 8.88%, where the latter was its lowest reading since the 8.88% of December 31, 2015. Coincidentally, March 2’s close for the market value of US common equity was the highest since January 6. If spec-grade yields ease further, the market value of common stock may recover all of its 2016-to-date losses.

The combination of a sharply lower spec-grade bond yield and a significantly higher benchmark Treasury yield slashed the high-yield bond spread by -150 bp from February 11’s six and a half-year high of 899 bp to a recent 749 bp. The latter was its narrowest band since the 744 bp of January 11.

A further narrowing by the high-yield spread is possible according to recent readings on the average high-yield EDFTM (Expected Default Frequency) metric, the Chicago Fed’s national activity index, and the VIX index. In fact, these three variables now suggest a range of 625 bp to 650 bp for the high-yield spread. Apparently, high-yield bonds have priced in both a deterioration of the economy and another frightening sell-off of equities.

(…) if business activity firms and equities stabilize, a -100 bp narrowing of the high-yield bond spread is well within reach.

image

Why Markets Shrug Off Prospect of a President Trump

(…) The reasons traders are unruffled about a possible President Trump tell us a lot about how markets assess political risk.

Start with the odds of Mr. Trump upgrading from what rival Marco Rubio has called “Hair Force One” to the real presidential jet: According to online bookies Betfair, Mr. Trump has a 24% chance of securing the White House. That is close to the 27% likelihood punters put on Britain voting to leave the European Union in June, so-called Brexit.

While the U.K. referendum has electrified markets and hammered sterling, similar odds of a Trump victory have had no effect at all.

Why not? A simplistic answer is that few big fund managers—international types who mainly live in coastal cities or abroad—believe Mr. Trump has any chance. The problem is these are the same type of people who play on political-betting sites in their spare time, while Betfair’s odds come exclusively from people outside America because of U.S. gambling rules.

A better answer is that the U.S. election isn’t until November, while Britain’s vote is in June. Traders tend to focus on the next thing in the calendar, and there is plenty else to worry about before American voters head to the polls. This may sound like a cynical comment about short-termism in markets, but hard-to-assess political risks are frequently ignored entirely by traders until they become so obvious they can no longer be avoided. (…)

The risk itself is also hard to assess. While many both in the Republican party and the wider world are horrified at the idea of a president who promises to wall off Mexico and ban foreign Muslims from visiting the U.S., Mr. Trump has committed to few economic policies.

Stephen Jen, founder of hedge fund SLJ Macro Partners LLP, says the market has reacted to Brexit and not Mr. Trump in part because they are the “difference between personalities and institutions.” Brexit is about changing the legal and governmental framework for the U.K. Mr. Trump has put personality way above policies, but would sit in the same Oval Office as any other president, and like them be limited by Congress and the Supreme Court.

“In developed markets you have very strong institutions and the personalities matter less,” he said. “In emerging markets it’s the other way round.” (…)