Category: Wall Street Journal


A Harvard University poll has found that nearly two-thirds of Americans believe the FBI’s Russia investigations are “hurting the country" and a majority believe it is time for Congress and the establishment media to "move on to other issues." The poll comes on the heels of an NBC News/Wall Street Journal survey that found that half of Americans believe the media’s Russia coverage has been “irresponsible/overdramatized.”
The Journal fired Jay Solomon, the paper’s chief foreign affairs correspondent, after being shown evidence of a possible business entanglement with a key source.
Jay Solomon, a longtime correspondent, was fired after evidence surfaced that he had become entangled in the business dealings of an aviation titan.

Authored by Arthur Berman via OilPrice.com,

The lead editorial in Friday’s Wall Street Journal was pure energy nonsense.

Lessons of the Energy Export Boomproclaimed that the United States is becoming the oil and gas superpower of the world. This despite the uncomfortable fact that it is also the world’s biggest importer of crude oil.

The Journal uses statistical sleight-of-hand to argue that the U.S. only imports 25% of its oil but the average is 47% for 2017. Saudi Arabia and Russia–the real oil superpowers–import no oil.

The piece includes the standard claptrap about how the fracking revolution has pushed break-even prices to absurdly low levels. But another article in the same newspaper on the same day described how producers are losing $0.33 on every dollar in the red hot Permian basin shale plays. Oops.

The main point of the editorial, however, is to celebrate a surge in U.S. oil exports to almost 1 million barrels per day in recent weeks. The Journal calls lifting the crude oil export ban that made this possible “a policy triumph.” What the editorial fails to mention is that exports actually fell after the ban was lifted, and only increased because of Nigerian production outages (Figure 1).

(Click to enlarge)

Figure 1. U.S. Oil Exports Have Increased As Nigerian Production Has Fallen. Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil is ultra-light and can only be used in special refineries, most of which are in the U.S. It must be deeply discounted in order to be processed overseas in the relatively few niche refineries designed for light oil. That’s why Brent price is higher than WTI.

It must also displace other light oil such as Nigerian Bonny Light. Civil unrest in the Niger Delta region interrupted oil output and provided a temporary opening for U.S. ultra-light to fill. Nigerian production is now increasing so look for U.S. crude exports to decline.

Backwardated oil futures prices are another factor that favored oil exports. Since the OPEC production cuts were finalized in late November 2016, the value of futures contracts has been lower than spot price. That encouraged selling at a discount to avoid even bigger losses in coming months (Figure 2).

(Click to enlarge)

Figure 2. WTI Futures Moved Into Contango in June, 2017. Source: CME and Labyrinth Consulting Services, Inc.

Since early June, however, oil futures have returned to contango. Longer-dated contracts have more value than spot prices---so the fire-sale incentive to sell is over.

Friday's editorial goes on to also rejoice in the rising tide of potential U.S. natural gas exports. This is taken by the editors as further evidence that free markets do the right thing. Perhaps they haven't noticed that international LNG prices crashed along with oil prices, and that U.S. gas prices have almost doubled in the last year.

Asian gas demand is saturated and the price for LNG in Europe is only $4.80/mmBtu. The Journal extolls Energy Secretary Rick Perry's approval of more U.S. LNG projects in April but a Wood Mackenzie analysis concluded that "the numbers proposed far exceed what the world realistically needs."

The newspaper has fallen into the trap of mistaking production volumes for profit.

Shale gas and tight oil companies have shown consistent negative cash flow since the shale revolution began. Investors continue to pour capital into them in their desperate search for short-term yield in a zero-interest rate world.

The Wall Street Journal believes that the expansion of U.S. oil and gas exports demonstrates the wisdom of free markets. I think it shows just the opposite.

The good news - thanks to the largest liquidity injection in almost six months, yields on China's sovereign bonds have fallen - the biggest drop since Dec. 29, to 3.50 percent, while the one-year dropped four basis points to 3.57 percent. .

“The People’s Bank of China’s liquidity injections are showing its intention to protect the market at this sensitive period of time,” said Sun Binbin, a Shanghai-based analyst at Tianfeng Securities Co.

Notably this is the largest liquidity injection for this time of year in Chinese history (noteworthy since spikes in liquidity occur at regular intervals around quarter-end and lunar new year).

The bad news - as yields have fallen, the curve has collapsed to its most inverted ever... flashing warning signals for growth as loud as they have ever been.

Of course, if Fed's Dudley is to be believed today, a flattening yield curve is not a negative signal for the economy... apart from the seven out of seven times it has occurred since the late 60s, perfectly predicting recession of course.

Furthermore, as RBC's Charlie McElligott notes China's tightening financial conditions (higher short-term rates in the chart below) have crushed not just the yield curve, but global commodities...

Lenders have become increasingly reliant on wholesale funding and central bank loans this year, analysts at China Minsheng Banking Corp.’s research institute wrote,“major banks don’t have much extra funds, as is shown by the excess reserve data,”

 

As The Wall Street Journal previously reported, an inverted yield curve defies common understanding that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.

“But the curve inversion we are seeing right now is one with Chinese characteristics and it’s different from the previous one in the U.S.,” said Deng Haiqing, chief economist at JZ Securities.

 

The current anomaly in the Chinese bond market is partly the result of mild inflation and expectations of a slowing economy, Mr. Deng said. “At the same time, short-term interest rates will likely stay elevated because the authorities will keep borrowing costs high so as to facilitate the deleveraging campaign,” he said.

Notably, it appears officials are concerned at the potential for fallout from this crisis situation.

In an article published Saturday, the central bank’s flagship newspaper, Financial News, said that the severe credit crunch four years ago won’t repeat itself this month because the central bank will keep liquidity conditions “not too loose but also not too tight.”

 

Chinese financial markets tend to be particularly jittery come June due to a seasonal surge of cash demand arising from corporate-tax payments and banks’ need to meet regulatory requirements on capital.

 

On Sunday, the official Xinhua News Agency ran a similar commentary that sought to stabilize markets expectations. “Don’t panic,” it urged investors.

Sounds like exactly the time to 'panic'.

Authored by Mike Krieger via Liberty Blitzkrieg blog,

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the new Google modular home

Every now and then a story appears in the national media that causes a lightbulb to start flashing incessantly in my head. For me, such a story came to my attention today and relates to how Google is manufacturing housing for some of its employees due to the ridiculous cost of housing in the San Francisco Bay Area.

Here’s a summary from The Verge:

Google’s employees can’t find affordable housing in Silicon Valley, so the company is investing in modular homes that’ll serve as short-term housing for them. The Wall Street Journal reports that Google has ordered 300 units from a startup called Factory OS, which specializes in modular homes. The deal reportedly costs between $25 and $30 million.

 

Modular homes are completely built in a factory and assembled like puzzle pieces onsite. This method of construction can reduce the cost of construction by 20 to 50 percent, the Journal reports. These apartments can also be put up more quickly to address dire housing needs. In one case the Journal cites, tenants saved $700 a month because of reduced construction costs.

 

Earlier this year, CNBC published a piece that detailed the difficulty tech companies have in trying to convince possible employees to move to San Francisco, especially when they live abroad. In response, some startups are establishing offices in other cities, like Chicago and Seattle. The other option is to out-tech the housing crisis, as Google appears to be doing with its modular home investment.

First, let’s get a couple of things out of the way. Yes, I understand that San Francisco is one of the most expensive places to live in the world, and yes, I get that nobody is forcing anyone to work for Google or live there. Yes, I understand that this is probably intended for entry level employees. Yes, I understand that revolutionary new ways of building homes using technology is the future, and the ability for such techniques to reduce costs is a positive thing. Yes, I understand all of that, yet I still think this development is a  sign we are getting closer to some sort of breaking point.

The middle class in America has been getting squeezed for a long time, and the societal, political and ethical ramifications of this development cannot be overstated. In fact, I’ve been so concerned about the U.S. transformation into a neo-feualism serf economy, I’ve dedicated much of the last decade to writing and warning about it. What’s going on will Google employees unable to afford housing is a sign that this corrupt, fraud economy is now starting to affect even the fortunate amongst us.

Google is one of the most successful companies the world has ever seen, and if its employees are struggling to find a place to live (I don’t care what city it is), something’s really not working. To me, this is a clear glitch in the matrix. A sign that some sort of reckoning is near. How that reckoning manifests I have no idea, but most companies don’t have the luxury of just buying homes to put their employees in. If this is happening to Google, consider it some sort of canary in the coal-mine.

The entire economic system is a rent-seeking, corrupt scam in which financial oligarchs and assorted other parasites suck more and more life out of the economy until it breaks completely. The fact that Google employees are now feeling the repercussions of this, tells you all you need to know. Even a terribly corrupt system can continue until it consumes itself. It is now consuming itself.

As expected by all 43 economists who estimate such things, the Bank of Japan left their policy mix unchanged and in a desperate bid to appear modestly positive about how things are going, maintained that "Japan's economy has been turning toward a moderate expansion," adding that that consumer spending "increased its resilience." Hardly a rousing evaluation of the state of the economy after who-knows-how-many-years of so-called 'stimulus'.

Following The Fed's 4th rate hike in 11 years, The Bank of Japan sat on its hands once again...

  • The BOJ maintained its short-term policy rate on some bank reserves at -0.1 percent and...
  • left its target for 10-year government bond yields at around 0 percent.
  • It kept the pace of its asset purchases unchanged at about 80 trillion yen ($700 billion) annually.

As Bloomberg's Enda Curran notes, looking through the statement, there's not much new in terms of signalling or a change to the narrative. This may suggest the BOJ is reasonably comfortable with where the economy is headed and policy makers are happy to tread water.

USDJPY chopped around a litle, but NKY futures were entirely unimpressed as Kuroda delivered the anticipated 'nothing-burger'.

 

The vote to do nothing was 7 to 2 with the two dissenters, Mr. Sato and Mr. Kiuchi, having one more policy meeting -- July 19-20 -- before their terms are up. Assuming they are sworn in by then, their replacements could change the 7-2 vote tallies that we've been seeing.

Kuroda's news conference today could be interesting. Will he stick to being evasive about the topic of an exit, or will he drop any hints that the BOJ is starting to think about it?

As we noted earlier, the central bank is "technically tapering," said Hiroshi Shiraishi, senior economist at BNP Paribas in Tokyo. This can be clearly seen in the following chart from Bank of America.

Aside from the a declining supply of bonds held by the private sector, one tactical reason why the BOJ may be buying fewer bonds is its "yield curve control" policy, which aims to keep the yield on 10-year government bonds at zero. This implies it can buy fewer bonds when the yield is close to that target. Wednesday, the yield was at 0.06%.

Previously, Kuroda has acknowledged this slowdown, but has been quick to declare that what effectively amounts to a 35% taper doesn't signal a retreat from easy-money policies. "At this stage, we are not exiting," Kuroda said at The Wall Street Journal's CEO Council meeting in Tokyo on May 16.

Authored by Jonathan Newman via The Mises Institute,

Students are running out of reasons to pursue higher education. Here are four trends documented in recent articles:

Graduates have little to no improvement in critical thinking skills

The Wall Street Journal reported on the troubling results of the College Learning Assessment Plus test (CLA+), administered in over 200 colleges across the US.

According to the WSJ, “At more than half of schools, at least a third of seniors were unable to make a cohesive argument, assess the quality of evidence in a document or interpret data in a table”. The outcomes were the worst in large, flagship schools: “At some of the most prestigious flagship universities, test results indicate the average graduate shows little or no improvement in critical thinking over four years.”

There is extensive literature on two mechanisms by which college graduates earn higher wages: actually learning new skills or by merely holding a degree for the world to see (signaling). The CLA+ results indicate that many students aren’t really learning valuable skills in college.

As these graduates enter the workforce and reveal that they do not have the required skills to excel in their jobs, employers are beginning to discount the degree signal as well. Google, for example, doesn’t care if potential hires have a college degree. They look past academic credentials for other characteristics that better predict job performance.

Shouting matches have invaded campuses across the country

It seems that developing critical thinking skills has taken a backseat to shouting matches in many US colleges. At Evergreen State College in Washington, student protests have hijacked classrooms and administration. Protesters took over the administration offices last month, and have disrupted classes as well. It has come to the point where enrollment has fallen so dramatically that government funding is now on the line.

The chaos at Evergreen resulted in “anonymous threats of mass murder, resulting in the campus being closed for three days.” One wonders if some of these students are just trying to get out of class work and studying by staging a campus takeover in the name of identity politics and thinly-veiled racism.

The shouting match epidemic hit Auburn University last semester when certain alt-right and Antifa groups (who are more similar than either side would admit) came from out of town to stir up trouble. Neither outside group offered anything of substance for discourse, just empty platitudes and shouting. I was happy to see that the general response from Auburn students was to mock both sides or to ignore the event altogether. Perhaps the Auburn Young Americans for Liberty group chose the best course of action: hosting a concert elsewhere on campus to pull attention and attendance away from both groups of loud but empty-headed out-of-towners. Of the students who chose not to ignore the event, my favorite Auburn student response was a guy dressed as a carrot holding a sign that read, “I Don’t CARROT ALL About Your Outrage.”

carrot.png

Source. 

Trade schools and self-study offer better outcomes for many

College dropouts are doing just fine, bucking the stereotype. Some determined young people are skipping college altogether to pursue their business ideas. Many are also choosing trade schools, which require less time and tuition money, but graduates end up with a specific set of skills. Trade school graduates leave school prepared for the industry they enter, where they can earn much higher wages than many four-year degree-holders.

Young men in particular are leaving colleges in droves. Over the past decade, 30% of male freshmen dropped out before starting a second year. The journalists, psychologists, and sociologists who comment on this trend can’t figure out how to fit it into a narrative [emphasis mine]:

“This is very concerning to me,” Hunter Reed said. Young men — like all students, she emphasized — need support from a variety of groups to thrive in higher education.

 

“The most successful have a sense of place in college,” she said.

 

Stark, 28, studied computer science for a year and a half before leaving Metro State University to study on his own.

 

Now a software engineer for a music company in Denver, Stark also DJs at some of the area’s most notable nightclubs. “What I was getting in the classroom just didn’t jibe with me. I felt I could teach myself on the Internet,” he said.

 

He worked a fast-food job and then took a corporate gig to support himself while he studied on his own. The alternative, he said, was to work four years to get a bachelor’s degree and then another year or two to earn a master’s degree, then “go to work for some huge company and go home at night and live my life with my family. And that just didn’t sound appealing to me at the time.”

Notice the call for helping these poor young men “thrive in higher education” that precedes a small anecdote about one man who dropped out and ended up just fine. Later in the same article, the author says that young men shouldn’t assume they will do well if they drop out, but then equivocates by turning it into a gender wage-gap problem to explain how some men do seem to turn out fine after dropping out:

Observers say many young men delude themselves into thinking they are one idea away from being the next Bill Gates or Steve Jobs. They think they can make a fortune without a college degree, said Riseman. “As a result, they enter college with little sense of purpose and end up failing out,” he said. “While these dropouts imagine they can succeed without a degree, successful start-ups are rare.”

 

While young men without degrees, in general, land higher-paying jobs than their female peers, many of the top-paying jobs are in high-risk industries like oil and gas or manufacturing.

Tuition is increasing, but future earnings are decreasing

In another recent WSJ article, we see the financial consequences of these trends. While tuition keeps climbing across the country, the prospective earnings of graduates aren’t keeping up. There is a lot of variation across colleges and majors, but the overall trend is that the returns to a four-year degree are decreasing.

Since students are just getting started in life, it means that they must borrow to pay for these expensive degrees that don’t guarantee higher earnings. Total student loans are at $1.3 trillion and climbing. These loans have no collateral and cannot be dissolved through bankruptcy.

newman2_2.png

The New York Fed tracks the delinquency rate for different types of loans. As of the first quarter of 2017, total student loan debt was increasing the most and had the highest delinquency rate.

These trends are unsustainable. The higher education system seems to be suffering from both economic and cultural issues, but these two types of problems often cause each other in a feedback loop. The ultimate cause for both of them is political.

 

As reported earlier this week, overnight Bloomberg confirmed that Wu Xiaohui, the chairman of China's insurance conglomerate which recently made headlines in the US for nearly reaching a deal with Jared Kushner over 666 Fifth Ave., was detained by a joint team of Central Commission for "Discipline Inspection" and police for questioning. It adds that that Chinese investigators who detained Wu are carrying out a wide probe that includes looking into the sources of funding for the firm’s acquisitions overseas, possible market manipulation by insurers, and “economic crimes."

The Wall Street Journal reported earlier that investigators were een checking whether Wu - whose fortune last year was calculated to be just over $1 billion - was involved in bribery and other economic crimes at Anbang and that Wu couldn't be contacted for comment. As noted on Wednesday, Anbang said Wu couldn’t perform his duties for personal reasons, a story which has since been disproved. 

The authorities are said to be examining Anbang transactions including acquisitions overseas and their funding. According to Bloomberg;s sources, the probe also fits into a broader investigation of possible market manipulation by insurers, although they didn’t specifically define the term “economic crimes.” The action is the result of the government’s crackdown on a sector that is "supposed to help families and companies cut their financial risks, but has recently become a hub for rampant financial speculation."

Yet while Wu's fate now appears sealed, swallowed by China and unlikely to reemerge any time soon if ever, questions have emerged about the viability of Anbang Insurance Group itself, which as the NYT reported overnight, has seen its growth come to a "screeching halt" as Chinese investors who helped fund its meteoric rise no longer want to have anything to do with the politically connected company which is "no longer in Beijing’s good graces."

Specifically, according to government data released on Thursday, Anbang’s sales of life insurance policies and investment products, an key source of cash, stopped almost completely in April after tumbling sharply in March. It wasn't just Anbang: across the insurance industry, where the (ab)use of Wealth Management Products is prevalent, sales slowed in April compared with earlier in the year.

More details:

From January through March of this year, Anbang raised three-fifths as much money as it raised all of last year, government data shows. It has maintained a large stockpile of cash after a series of big investments fell apart, including a $14 billion bid for Starwood Hotels and Resorts and a deal for a Manhattan office tower with Kushner Companies, the family real estate firm partly owned by Jared Kushner, the son-in-law of President Trump and an administration adviser.

 

But Anbang’s latest figures are eye-catching for the opposite reason. Including new kinds of policies and wealth management products, it took in only $218 million in April this year, down from $5.92 billion in the same month last year, the government data on Thursday showed.

That was the biggest Y/Y collapse in the company's premium income on record, and as a result Anbang is now under "acute" financial pressure. The NYT notes that "its revenue from existing life insurance policies and certain wealth management products was down 88 percent in April compared with the same month the previous year. The rest of the industry was up 4.5 percent in the same period."

While largely ignored on the list of potential Chinese risk factors, Anbang's troubles could soon become systemic.

In early May, Chinese insurance regulators ordered Anbang to stop selling two investment products. One, they said, was improperly marketed as long-term insurance while a crucial application for the other lacked an actuary’s signature. By that point, Anbang was already in trouble. Questions about Anbang’s financial strength had begun circulating on social media in China in March and April, as Chinese officials publicly raised questions about sales of wealth management products by some insurers.

If the drop in revenue is steep enough, Anbang could eventually be forced to liquidate assets. A big factor will be what happens with its existing policies and investment products, which comprise China's shadow banking system. As the NYT adds, Anbang’s annual report provides little information on the monthly tempo at which its previously issued investments are maturing. The company might need to pay them out if they are not rolled over into further investments with the company. The company’s policies do have very stiff penalties on early redemption to discourage holders from turning them in early for cash. Anbang could raise money by selling some of its investments, but that could take time.

Additionally, the conglomerate, which over the past 3 years was nothing short of the world's most aggressive "roll up" has been an active investor in Western hedge funds, in addition to making outright acquisitions of overseas companies. And those terms tend to impose severe limits on Anbang’s ability to ask for its money back quickly. That said, a firesale of Anbang assets, which include the Waldorf Astoria, should be a fascinating event.

The biggest risk from a potential unwind of Anbang, however, is the fate of its billions in  WMP "assets" and whether any troubles at the insurer lead to investor impairment, and a potential run on China's $8.5 billion "shadow bank" considered by many as the Achilles heel of China's massively overlevered financial system.

Authored by George Friedman and Jacob Shapiro via MauldinEconomics.com,

There’s no end in sight to slumping oil prices - good news for consumers but a dire development for major oil producers like Saudi Arabia and Russia. And now, rising US oil production and exports are contributing to the slump.

Last week, oil prices reached new lows for 2017, with Brent crude dipping below $48 per barrel and West Texas Intermediate dipping below $46. The drop has been attributed to an unexpected increase in US crude inventories, which rose by 3.3 million barrels last week (according to the US Energy Information Administration), despite expectations that it would drop by 3.5 million barrels.

The rise in production is compounded by rising US oil exports, since the US lifted a 40-year ban on these exports in 2015. This led to modest increases in oil exports in 2016 but substantial increases so far in 2017. This is a key reason prices will remain low in the long term.

Ebbs and Flows in US Exports

It is worth remembering why the United States banned oil exports in 1975 (exceptions were allowed at the discretion of the president). 1970 set a record for the highest crude oil production in the US, though this record will likely be broken in the next two years. The US was producing a lot, but it was also consuming a lot, forcing it to import more from OPEC states, which produced about 55% of the world’s oil in 1973.

This meant that OPEC could essentially control prices. And after the US backed Israel in the 1973 Yom Kippur War, OPEC retaliated by raising oil prices. This created a fourfold jump in prices and a global oil shock. One of the many ways the US responded was the 1975 Energy Policy and Conservation Act. This was designed to decrease its reliance on imports by banning oil exports, ensuring US-produced oil would only be consumed domestically.


Click to enlarge

Fast-forward to today, and supply is no longer as big a concern. The US has weaned itself off foreign oil, partly through technologies like hydraulic fracturing and horizontal drilling. In 2013, the US started producing more oil than it imported, and it hasn’t looked back. US crude oil production has almost doubled since 2010 and is already surpassing forecasts for 2017. In late 2016, the US Energy Information Administration estimated that the United States would produce 8.7 million barrels per day on average in 2017. New estimates suggest it will produce 9.2 million barrels per day in 2017 and up to 10 million barrels per day in 2018.


Click to enlarge

But it’s not just the US production numbers that are making waves: It’s the spike in US crude oil exports. The US exported 830,000 barrels of crude per day in March, a whopping 64.2% increase year over year. In February, it exported 1.1 million barrels per day, a nearly 200% increase year over year. According to The Wall Street Journal, the February numbers are closer to the new norm, as it expects the US to export, on average, roughly 1 million barrels per day in 2017.

A Disaster for Oil Producers

This is a huge challenge for major oil producers, especially Saudi Arabia and Russia. In December 2016, OPEC and its oil-producing partners agreed to cut production by about 1.8 million barrels per day, or roughly 1.5% of global crude production at the time. OPEC, led by the Saudis, has largely made good on this pledge, reducing production by 1.1 million barrels per day in the first quarter of 2017. The Russians have played with the numbers cutting production compared with December 2016 levels but not in year-over-year terms.

The OPEC deal managed to stabilize oil prices around $50 per barrel, and last month the cuts were extended for another nine months. If it were still 1973, that might have caused a jump in oil prices. But in 2017, OPEC produces only about 40% of the global supply, and the US is among the top three producers in the world. The price of Brent crude spiked to $54.15 per barrel after the cuts were extended but has since dropped almost 12% and may continue to fall.


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This means that even the combined forces of OPEC and non-OPEC producers can’t prop up oil prices unless they are willing to slash production more severely. It also means that there is enough oil on the market, partly from the US, to satisfy demand, even when major producers limit their supply. Maintaining prices at current levels is the best outcome these producers can hope for. But even this comes with the downside of losing market share to competitors, without getting oil prices back to the levels that Russia and Saudi Arabia would need to stabilize their economies.


Click to enlarge

When we discuss US power in the world, we often trot out a few key points: The US economy accounts for just under a quarter of global gross domestic product; it has a military force without peer in the world; and its economy is not dependent on exports.

We can now add the following points to this list: The US is the third-largest oil producer in the world; it is less dependent on oil imports than at any point in the last 40 years; and it is stealing customers from Russia and Saudi Arabia even with prices as low as $50 per barrel.

Even a few years ago, US shale producers would have found it hard to make a profit at that price, but they are succeeding at that now. Oil prices are going down, US oil exports are going up, and the ramifications will be global.

*  *  *

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The signing of a $350 billion arms deal between the Kingdom of Saudi Arabia and the US might not be enough to convince the Saudis to bring the Aramco IPO – expected to be the biggest public offering in markets history – to New York City. While the Saudi royal family, who hosted the president in May during his first-ever official visit to a foreign country, would like to see Aramco - the kingom's state-owned oil company - list on the New York Stock Exchange, the executives who are nominally in charge of the company apparently told the Wall Street Journal that they’d prefer to list on the London Stock Exchange, where there’s less risk of being hit with a shareholder lawsuit.

Here’s WSJ:

Executives at Saudi Arabian Oil Co., known as Saudi Aramco, are pushing Saudi Arabia’s king and his son, Deputy Crown Prince Mohammed bin Salman, on the merits of listing the state-owned oil company on the London Stock Exchange . Executives believe that listing in the U.S. would expose the company to greater legal risks, including from potential class-action shareholder lawsuits, according to these people.

 

But the Saudi Arabian royal court favors the New York Stock Exchange, according to the people familiar with the matter, in part because of the kingdom’s longstanding political ties to the U.S., and because the U.S. market represents the deepest pool of capital in the world.

A listing in New York, along with one on Saudi Arabia’s Tadawul exchange, has long been the favored listing option for Prince Mohammed, who is driving the IPO as part of a broader push to overhaul and diversify the country’s economy.

 

For months, the New York and London exchanges, along with other major global exchanges, have been pitching the merits of their trading venues, in some cases touting their existing crop of energy stocks and the breadth of their country’s energy sector to win the listing of what is likely to be the largest IPO in history.

 

The IPO could value Saudi Aramco as high as $2 trillion. In addition to fees generated, such a listing for an exchange promises to attract international investors looking for a piece of the giant oil producer, and that interest would generate greater trading volumes, the lifeblood of any stock market.

While WSJ neglected to elaborate on the executives’ reasoning – after all, plenty of foreign companies seem to have no issue listing their shares in the US, the world’s most vibrant IPO market – it’s likely that the Kingdom’s longstanding status as a financier of terror is one reason for their hesitation.

A few months back, Politico profiled a New York lawyer named Jim Kreindler who is representing more than 850 clients in a civil suit against the Saudi government seeking compensation for victims of the attacks.

Kreindler, who filed the lawsuit against the Saudis in a Manhattan court back in March, is the son of Lee Kriendler, who won a $3 billion judgment against Libya for the bomb that in 1988 destroyed Pan Am Flight 103 over Lockerbie, Scotland.

After the Supreme court ruled last year that nearly $2 billion in frozen Iranian assets must be turned over to the families of those killed in the 1983 bombing of the U.S. Marine Corps barracks in Beirut and other attacks for which Iran was found liable, it’s not out of question that a similar judgment could be made against Saudi Arabia. Especially since the release of the fabled “28 pages” that had been redacted from the 9/11 Commission’s official report on the Sept. 11 attacks appeared to support Kriendler’s argument that without financial and logistical support from members of the government of Saudi Arabia, the 9/11 attacks would never have taken place.

A decision on the venue is expected next month, WSJ reported, again citing one of its anonymous sources, though the timing could change. The paper’s sources tell it that a decision on the venue had originally been expected before the Islamic month of Ramadan, which started in late May.

Sources close to the royal family reportedly assured WSJ’s reporters that the listing would happen in New York – and it very well may. But what does it say that the people who are accountable for running Aramco view listing in the US as risky? The longstanding commercial ties between the US and Saudi Arabia – not to mention the praise of the Kingdom and its values offered by Trump during his visit – might be enough to satisfy the royals. But as WSJ reports, the planned sale of a 5% stake in Aramco - a stake worth between $1.5 and $2 trillion - could yield at least $75 billion in profits for the kingdom.

With that much at stake, it’s important to be realistic. And the fact remains that there are undeniable links between the Saudi government and the funding of terror. 

First it was Goldman succumbing to hedge funds and "due to popular demand" providing its first ever "technical" take on where Bitcoin will go from here. Now it's Morgan Stanley's turn.

In a report on the "Blockchain, Unchained" - in which it advocates for regulation of the blockchain as part of its evolution as well as providing a "master key" to a regulator, in effect killing the very premise behind such a decentralized infrastructure (more on that later) -  Morgan Stanley writes that "the rapid appreciation of cryptocurrencies has elicited many inbound phone calls to both our banks and tech teams."

It responds that possible explanations for the dramatic moves include investors in search of uncorrelated risk assets and technologists looking for incremental security. But, the bank writes, "governmental acceptance, would be required for this to further accelerate, the price of which is regulation." We doubt many supporters of cryptos will agree with this.

In any event, here are some further details from Morgan Stanley, but first, a quick primer: as MS explains, for many, Bitcoin and blockchain are often thought of synonymously. In reality, blockchain is primarily a messaging and bookkeeping method, whereas Bitcoin is a store of value that makes use of blockchain methodology to transfer value. Bitcoin and other cryptocurrencies have shown rapid appreciation, as shown in Exhibit 23 and Exhibit 24, with the pace of appreciation showing rapid acceleration since the beginning of 2017. While Bitcoin grabs the headlines, Ethereum, another cryptocurrency that attempts to address some of the echnical shortcomings of Bitcoin, has been gaining value at an even faster rate. The rapid appreciation of blockchain-based currencies and the proliferation of new cryptocurrencies is further raising blockchain’s technological profile.

MS then gives a detailed "explanation" on why Bitcoin and other cryptocurrencies have appreciated rapidly, saying "key possible drivers of cryptocurrency appreciation. It is not clear why cryptocurrencies are appreciating so rapidly (apart from the appreciation itself drawing in more speculation against a potentially inefficient ability to sell). But, in conjunction with our FX Strategy team we identify several key potential contributors:"

  • ICOs—initial currency offerings. Rapid appreciation of cryptocurrencies is encouraging speculative formation of new currencies (see Exhibit 25 ). Many of these new currencies don’t actually have use cases yet, but are intended to be exchange mediums for everything from virtual goods in games to banking mechanisms for products like marijuana where legal implications are not yet fully clear. ICOs are funded with existing cryptocurrencies, hence driving an appreciation circle—e.g., to support/invest in a new currency, one must buy and trade an existing cryptocurrency.

  • Moving funds in China. Up until the last few days, a disproportionate share of Bitcoin mining was taking place in China (where there is cheap access to servers and cheap electricity). First on this website in 2015, and subsequently on many other outlets such as the Wall Street Journal (November 5, 2016) and Fortune (January 5, 2017) have noted that Bitcoin was being used to help avoid monetary controls in China, which explains why the Chinese government has cracked down on Bitcoin mining recently.
  • Increased demand from Korea and Japan. Bitcoin appreciation seems to have been heavily driven in recent months by increased buying from Korea and Japan. In Japan, the recent legalization of Bitcoin has led to an increase in activity, including the recent opening of new Bitcoin exchanges. In Korea, however, there is not a clear explanation for the surge.

While there is no one specific explanation for the surge in cryptos, Morgan Stanley is surprised because the rapid appreciation it taking place despite clear hurdles, to wit:

The rapid appreciation of Bitcoin and others is somewhat surprising in light of some developments that seemingly would have put downward pressure on the currency, including plateauing trading volumes (see Exhibit 23 ), the SEC’s decision not to allow the listing of a Bitcoin ETF, and China's shutdown of several Bitcoin mining operations (without those miners, transaction time for Bitcoin could increase substantially)."

MS then notes that bitcoin, ethereum et al, are acting more like an asset than currency.

Most regulators and investors view cryptocurrencies more as assets than actual currencies. Their values are too volatile and too hard to actually use for payment for most to consider them currencies. Our conversations with some merchants indicate that, while cryptocurrencies might actually be attractive for them to operate their businesses, they find that the cryptocurrencies are far too volatile to be used.

MS slams Bitcoin which it reminds clients, scales poorly, helping alternatives (especially those based on Ethereum). The blockchain underpinnings of most cryptocurrencies scale too poorly for most currency-like uses. Scaling challenges includes increasing electricity consumption as shown in the chart below, and that time to clear single transactions can often be from 10 minutes to more than an hour, and even that with no guarantee. Ethereum and others have addressed those scaling challenges by centralizing more of the blockchain function, although such increased centralization leads to increased hacking risk, as Ethereum found out the hard way last almost exactly one year ago.

Finally, going back to the most controversial point in the report, according to Morgan Stanley further price gains in cryptos may not be possible unless there is further regulation over the crypto space, which includes giving up autonomy. Which is ironic because as Ryan Vlastelica writes, "proponents of the digital currencies frequently cite their decentralized nature as one of the primary attributes that excites them about the technology."

Morgan Stanely didn’t specify what types of regulation might be necessary to further push bitcoin higher, noting that the specific changes needed may be different for different cryptocurrencies, all of which use blockchain technology. For blockchain overall, “regulators are involved and watching closely,” Morgan Stanley writes.

“Some have suggested privacy could be improved. Regulators are looking to have a master key so all transactions are visible to them.”

And while handing a master key may indeed streamline costs, it would likely also sacrifice Satoshi Nakamoto’s original intention of blockchain technology, which was to put banking inside the hands of the individual.

In the White Paper, Satoshi said, “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

This is what Satoshi’s envisioned, but it remains to be seen whether Morgan Stanley’s idea of the master key in blockchain technology will trump the idea of bypassing third parties. Some in the ecosystem still hope Satoshi’s original vision will prevail in the end. Others, those who hope for further gains in the price of bitcoin, ethereum and others, may be willing to sacrifice decentralization if it means further gains. For now, the jury is out even as both bitcoin and ethereum continue to trade just shy of their all time highs of $3,000 and $410, respectively.

Nearly a decade after the collapse of the subprime mortgage market wrecked the US economy and ushered in one of the worst financial crises in modern history, lenders are once again courting borrows with less-than-ideal credit, the Wall Street Journal reports. And while post-crisis regulations have generally prevented the largest banks from reentering this market, smaller mortgage brokers who work to connect non-bank lenders with borrowers are leveraging their experience in writing these incredibly risky loans – a practice WSJ glibly describes as “a lost art" - to help revive their dying industry.

Fundloans, a mortgage broker that specializes in subprime lending, is building a team of twenty-somethings who were in high school when the crisis struck – a team that includes 25-year-old Brandon Boyd, who left his job as a salesman at a Calvin Klein outlet to join the firm after its founder, Jon Maddux, recruited him off the store’s showroom floor. Here’s WSJ:

Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans.

 

Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of effort to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.

 

"I knew a mortgage was a loan for a house,” said Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. “I came in just a blank slate.”

Mortgage brokers were vilified during the crisis for their shoddy lending practices, which included falsify loan applications. Today, most banks won't work with brokers because they're too difficult to monitor.

Instead of banks, it's small and midsize independent lenders who are helping to revive the once-moribund mortgage broker industry. Nonbank lenders that typically cater to riskier borrowers say they need brokers to fan out across the country and arrange mortgages to people with lower credit scores, or who can’t prove their income through a typical tax return.

These lenders, a cohort that includes hedge funds and private equity firms that are more lightly regulated, are helping to fill a void left by traditional banks that will only lend to borrowers with stellar credit.

Subprime mortgages are typically made to borrowers with a credit score of around 660 or lower, at interest rates ranging from 6% to 10%. Alternative documentation loans, or Alt-A loans, are made to borrowers with higher credit scores but who use bank statements or other less conventional ways to prove their income, as WSJ dutifully explains. But subprime isn’t the only avenue for growth that mortgage brokerages see: As nonbank lenders comprise a growing share of the market, they’re relying once again on brokers to bring them business of all kinds. During the first quarter, nonbank lenders accounted for about half the mortgages originated in the U.S., according to data from industry publication Inside Mortgage Finance cited by WSJ.

To be sure, the subprime market is still nowhere near its 2005 peak, when lenders underwrote $1 trillion in subprime mortgages. In the first quarter, lenders originated just $6 billion in loans to borrowers with subprime credit or "nonprime" credit. The latter category includes borrowers who must use alternative means - like bank statements - to verify their income, according to Inside Mortgage Finance.  During 2016 as a whole, mortgage brokers originated just $22 billion in subprime loans.

During the first quarter of 2017, the total loan volume to borrowers with both good and subprime credit dropped to $37 billion, down about 34% from the last three months of 2016. But even though the the mortgage broker industry is still well below well its 2003 peak of around $1.1 trillion in loans generated, insiders see the rise in subprime lending as a harbinger of boom times ahead.

Here’s WSJ:

Lenders say there is an untapped market among borrowers with good credit scores like self-employed workers who don’t have proper income documentation, or for responsibly made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth.

 

If they are successful in recruiting brokers, lenders believe the market potential for both types of loans could reach $200 billion annually.

 

Steve Arnold, an account executive at Angel Oak Mortgage Solutions, one of the largest nonprime lenders, told WSJ that he is on the phone almost nonstop from 8:30 a.m. to 6 p.m. every day except Sunday coaching brokers on how to make nonprime loans.

 

“A lot of [the brokers] are timid and scared and don’t know where to start with the nonprime type loans,” said Arnold, who is based in West Palm Beach, Fla.

US real estate prices have continued to climb since the crash. But while housing valuations in certain urban markets appear to have spiraled out of control, real-estate in the US isn't nearly as dangerously overvalued as Canada and Australia, where valuations have soared thanks in large part to an influx of wealthy Chinese buyers looking to stash their wealth abroad.

Today, subprime auto lending has eclipsed the subprime mortgage market in terms of size, largely thanks to lenders' aggressive sales tactics. These loans, many of which are made to consumers with subprime credit, have been accounting for an increasingly large percentage of car saes across the US.

As of April, approximately $200 billion has been loaned out by auto lenders to consumers with subprime credit. Meanwhile, Morgan Stanley is projecting that used-car prices could crash by up to 50% over the next four to five years.

And with more than one million Americans already behind on their car loans, it’s easy to see the writing on the wall. The subprime debt problem in the US is rearing its ugly head once again.

Uber no longer has a COO, CBO, CFO, CMO, or Head of Engineering; and is now temporarily without a CEO after the release of today's 'official' investigation into workplace scandals (by former U.S. Attorney General Eric Holder). 

As The Wall Street Journal reports, over the past several weeks, Uber workers have been summoned to the nearby San Francisco office of Mr. Holder’s firm, Covington & Burling LLP, to describe their experiences, according to employees who have been interviewed or were requested to be. On Sunday, Mr. Holder’s firm presented its report to company directors, which unanimously approved all of the recommendations following a marathon board meeting in Los Angeles, according to people familiar with the matter. The fallout of that report was evident Monday, when Uber’s chief business officer, Emil Michael, resigned from the company. His exit, which people familiar with the matter say was recommended by the report, was surprising given his close relationship with Mr. Kalanick.

And now we have the results (and the findings)... Bloomberg reports that Uber Chief Executive Officer Travis Kalanicktold staff he plans to take a leave of absence, without disclosing a return date.

Kalanick decided to take a leave while also coping with the death of his mother, whose funeral he attended Friday.

 

The company will strip him of some duties and appoint an independent chair to limit his influence after a slew of scandals, according to an advance copy of a report prepared for the board.

 

At a staff meeting Tuesday, the company began conveying the results of a probe conducted by Eric Holder, the former U.S. attorney general who Uber hired to look into allegations of harassment, discrimination and an aggressive culture.

 

The 47 recommendations include creating a board oversight committee, rewriting Uber’s cultural values, reducing alcohol use at work events, and prohibiting intimate relationships between employees and their bosses.

 

Several of Uber’s planned changes are symbolic. For example, a conference room known as the War Room will be renamed the Peace Room.

 

The company also plans to scrap many of its cultural values, notably “Let Builders Build, Always Be Hustlin’, Meritocracy and Toe-Stepping, and Principled Confrontation,” which the Holder report described as being “used to justify poor behavior.”

 

“Many of Uber’s 14 cultural values, while well-intended, had been allowed to be weaponized,” Huffington said in her statement. “That’s completely unacceptable.”

Of course this is just the latest in a string of PR disasters for the 'unicorn' of 'unicorns'. As noted recently, here is a snapshot of some of the most notable scandals that have emerged, involving the world's most valuable private company:

  1. Another tale of sexism and unacceptable workplace behavior in Silicon Valley company has emerged. This time it's at Uber, according to an explosive blog post published on Sunday by a former company engineer named Susan Fowler Riggetti.
  2. Uber's newly-hired VP of engineering Amit Singhal was asked to, and did, resign on Monday after the company learned from Recode that he was accused of sexual harassment shortly before leaving Google a year ago. Here's more on the difficult position of former employers in this case.
  3. A video showing Uber CEO Travis Kalanick rudely arguing with a long-time driver at the end of his ride was published by Bloomberg. "I need leadership help," Kalanick said in an apology he issued shortly after.
  4. Susan Fowler Rigetti, the former Uber engineer who wrote of discrimination, said she's hired attorneys after a new law firm began to investigate her claims. Uber confirmed it has hired Perkins Coie, which reports to former A.G. Eric Holder, who's leading the investigation.
  5. Uber said on Thursday that it will finally apply for a DMV permit to test self-driving cars in California after its cars' registrations were revoked in December because it refused to get the permit.
  6. Charlie Miller, one of the two famous car hackers who joined Uber's Advanced Technology Center in August 2015, announced he's leaving the company.
  7. The New York Times uncovered a secret Uber program called Greyball, through which the company uses software and data to evade law enforcement in cities.
  8. Keala Lusk, a former Uber engineer, published a blog post detailing how her female manager mistreated her, signaling that the company's problematic culture isn't limited to the men who work there.
  9. Ed Baker, Uber's head of product and growth, resigned. Though the reason is unclear, he was allegedly seen kissing another employee three years ago, which was anonymously communicated to board member Arianna Huffington, according to Recode.
  10. A report outlines a trip by a group of Uber employees to a Seoul karaoke-escort bar in 2014, which included company CEO Travis Kalanick and his girlfriend, Gabi Holzwarth. After arriving, several male employees picked escorts to sit with, and went to sing karaoke. Uncomfortable, a female marketing manager, who was part of the group, left after a couple of minutes, while Holzwarth and Kalanick left after an hour.
  11. California regulators have recommended that Uber be fined $1.13 million for failing to investigate and/or suspend drivers who are reported by a passenger to be intoxicated. The state requires ride-hailing companies to have a zero-tolerance policy for driving under the influence of alcohol or drugs.
  12. A new report says Uber used a secret program dubbed "Hell' to track Lyft drivers to see if they were driving for both ride-hailing services and otherwise stifle competition. Only a small group of Uber employees, including CEO Travis Kalanick, knew about the program, according to a story in The Information, which was based on an anonymous source who was not authorized to speak publicly.
  13. Waymo sued Uber in civil court, claiming that Uber was using trade secrets stolen from Google to develop Uber’s self-driving vehicles.
  14. Uber fires Anthony Levandowski, a star engineer brought in to lead the company’s self-driving automobile efforts who was accused of stealing trade secrets when he left a job at Google.
  15. Uber said Tuesday that it had made a mistake in the way it calculated its commissions, at a cost of tens of millions of dollars to its New York drivers, and the company vowed to correct the practice and make the drivers whole for the lost earnings.
  16. Uber fires over 20 staff following the release of a report about sexual harrassment in the workplace.
  17. Reports emerge that Uber CEO Travis Kalanick fired off a bizarre email in 2013 to hundreds of employees where he listed the conditions under which they could have sex with each other at a company outing in Miami
  18. Uber’s chief business officer, Emil Michael, resigned from the company.

This list is by no means comprehensive.

And then there is the biggest problem of all: Uber's chronic cash burn.

Uber lost $708 million in the first quarter, despite another rise in revenues. Last year, Uber managed to burn through almost as much cash as NASA’s $4.8 billion budget last quarter. Previously, Bloomberg reported that Uber has burned through at least $8 billion in its lifetime through the end of 2016. While the company had $7 billion of cash on hand as of March 31, along with an untapped $2.3 billion credit facility, inevitably questions will emerge if and when the world's most previous "unicorn" will ever turn a profit. The company was most recently valued at $68 billion, although in light of the recent turmoil in the C-suite that number will likely be revised significantlly lower.


J.P. Morgan Chase has removed its television and digital ads from NBC News following controversy sparked by anchor Megyn Kelly's upcoming interview with InfoWars founder and radio host Alex Jones, according to a report.

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