An Angry Freedom Caucus Responds To Trump’s 2018 Threat

After Trump drew ‘first blood’ this morning with a tweet threatening to fight Freedom Caucus members in the 2018 mid-term elections, a pair of House representatives have fired back with aggressive tweets of their own implying that Trump’s healthcare plan was evidence that he had “succumb to the D.C. Establishment.”

“It didn’t take long for the swamp to drain @realDonaldTrump. No shame, Mr. President. Almost everyone succumbs to the D.C. Establishment.”


“.@realDonaldTrump it’s a swamp not a hot tub. We both came here to drain it. #SwampCare polls 17%. Sad!”

It didn’t take long for the swamp to drain @realDonaldTrump. No shame, Mr. President. Almost everyone succumbs to the D.C. Establishment.

— Justin Amash (@justinamash) March 30, 2017

.@realDonaldTrump it’s a swamp not a hot tub. We both came here to drain it. #SwampCare polls 17%. Sad!

— Thomas Massie (@RepThomasMassie) March 30, 2017


Ohio Representative Jim Jordan, the former chairman of the House Freedom Caucus, also defended conservative lawmakers earlier today on Fox News.  Per The Hill:

“The Freedom Caucus is trying to change Washington, this bill keeps Washington the same, plain and simple,” Jordan said Thursday on Fox News’ “America’s Newsroom.”


“We appreciate the president, we are trying to help the president. But the fact is, you have to look at the legislation. It doesn’t do what we told the voters we were going to do, and the American people understand that. That’s why only 17 percent of the population supports this legislation.”


Jordan wouldn’t comment on the threat regarding the 2018 midterms, instead characterizing the scuttled healthcare vote as just a “postponement” and arguing that Republicans will succeed if they deliver on their promises to voters.


“Lets forget the blame and what may happen in the future, lets just do what we said. That’s what the Freedom Caucus and what Republicans are committed to,” he said.

Of course these latest tweets come after Trump took to twitter earlier this morning, saying “The Freedom Caucus will hurt the entire Republican agenda if they don’t get on the team, & fast. We must fight them, & Dems, in 2018!

The Freedom Caucus will hurt the entire Republican agenda if they don’t get on the team, & fast. We must fight them, & Dems, in 2018!

— Donald J. Trump (@realDonaldTrump) March 30, 2017


So, Republican civil war it is…Ultimate winner:  Democrats.

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Energy Sector; Two Thirds chance they rally here

Below looks at the performance of the S&P 500 Sectors, looking back 5-years. The winner for the lowest performance is the Energy Sector (-1.42%). XLE is lagging the S&P 500 by almost 70%, in just 5-years. “Time for them to rally?



Below looks at the Energy ETF (XLE)/S&P 500 ratio over the past 17-years and why we find this pattern worth looking closer into.


XLE chart



The pattern above presents a nice entry point, with a stop below the support test at (2).  Another test of support in this space is taking place in the UGA chart below.

UGA Gasoline chart


From a long-term trend perspective, no doubt the trend in both of the charts above is down (lower highs and lower lows and below long-term moving averages). If one is a trend follower, we doubt these ideas are of interest to you.

If one likes to buy low in hard hit sectors with tight stop loss parameters, we find both of these charts very interesting at this time, due to being out of favor and testing key support levels.


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Venezuela Eyes Investment In Sudan’s Ailing Oil & Gas Sector

Venezuelan and Sudanese government officials are discussing possible investments in the oil and gas industry of Sudan. Both countries are experiencing serious economic woes, Venezuela reeling from the severe blow from low oil prices and mismanagement of the state oil company that plunged it into a recession, and Sudan trying to recover from the loss of 75 percent of its crude oil revenues after South Sudan seceded. Currently, Sudan produces approximately 100,000 barrels of oil daily, with its remaining reserves estimated at 3.5 billion barrels.…

Did The EPA Just Go Rogue Again

In late January, days after Donald Trump became president, various government workers employed by the EPA “defied” the president with what at the time appeared to be rogue twitter accounts emerging from the environemntal agency, most notably the Badlands National Park which slammed Trump’s climate change proposal.

  • “Today, the amount of carbon dioxide in the atmosphere is higher than at any time in the last 650,000 years. #climate”
  • “Flipside of the atmosphere; ocean acidity has increased 30% since the Industrial  Revolution. ‘Ocean Acidification” #climate #carboncycle’”
  • “Burning one gallon of gasoline puts nearly 20lbs of carbon dioxide into our atmosphere. #climate”

It now appears that a new “rogue” employee may have emerged at the EPA’s pres office.

This morning, in a press release summarizing “What They Are Saying About President Trump’s Executive Order On Energy Independence”, as the first quote picked by an unknown staffer at the agency, the EPA decided to showcase the thoughts of Dem. Senator Shelly Moore Capito whose quote was not exactly on message, as Bloomberg’s Patrick Ambrosio pointed out.

This is what she said:

With this Executive Order, President Trump has chosen to recklessly bury his head in the sand. Walking away from the Clean Power Plan and other climate initiatives, including critical resiliency projects is not just irresponsible — it’s irrational. Today’s executive order calls into question America’s credibility and our commitment to tackling the greatest environmental challenge of our lifetime. With the world watching, President Trump and Administrator Pruitt have chosen to shirk our responsibility, disregard clear science and undo the significant progress our country has made to ensure we leave a better, more sustainable planet for generations to come.

This morning @EPA sent out a press release highlighting reaction to Trump’s climate Executive Order…this first quote seems off message:

— Patrick Ambrosio (@Pat_Ambrosio) March 30, 2017

Today’s release comes after The House voted Wednesday to restrict the kind of scientific studies and data that the Environmental Protection Agency (EPA) can use to justify new regulations.The Honest and Open New EPA Science Treatment Act, or HONEST Act, passed 228-194. It would prohibit the EPA from writing any regulation that uses science that is not publicly available.

The bill would also require that any scientific studies be replicable, and allow anyone who signs a confidentiality agreement to view redacted personal or trade information in data.

It’s the latest push by House Republicans to clamp down on what they say has turned into an out-of-control administrative state that enforces expensive, unworkable regulations that are not scientifically sound.

But Democrats, environmentalists and health advocates say the HONEST Act is intended to handcuff the EPA. They say it would irresponsibly leave the EPA unable to write important regulatory protections, since the agency might not have the ability to release some parts of the scientific data underpinning them.

The HONEST Act is similar to the Secret Science Act, which leaders in the House Science Committee sponsored in previous congresses and got passed. “This legislation ensures that sound science is the basis for EPA decisions and regulatory actions,” Rep. Lamar Smith (R-Texas), chairman of the Science Committee, said on the House floor Wednesday.

“The days of ‘trust-me’ science are over. In our modern information age, federal regulations should be based only on data that is available for every American to see and that can be subjected to independent review,” he said. “That’s called the scientific method.”

Rep. Eddie Bernice Johnson (D-Texas), the Science Committee’s top Democrat, slammed her GOP colleagues for what she called a “misguided” effort to stop sensible EPA regulations. She denied that the EPA is overly secretive with its science, saying it often doesn’t own the information and has no right to release it.

At least one EPA employee this morning seems to agree.

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Are Markets Overlooking A Clear & Present Danger?

Authored by Lance Roberts via Real Investment Advice,

There is in interesting dichotomy currently occurring within the economy. While consumer confidence, as reported by the Census Bureau, soared to some of the highest levels seen since the turn of the century, the hard economic data continues to remain quite weak. As noted by Morgan Stanley just recently:

“Compare the New York Federal Reserve Bank’s current 1Q GDP tracking vs ours – FRBNY is currently tracking 1Q GDP at 3.0% versus us around 1%. The difference is larger than usual and is being driven by the fact that the New York Fed incorporates soft data into its tracking (attempting to tie it econometrically to GDP, a very hard thing to do especially in real-time). Our method translates the incoming hard data into its GDP equivalent. Note that the Atlanta Fed’s GDPNow tracking also focuses on hard data and is currently tracking 1% for 1Q GDP.”



The stunning divergence can be seen in the chart attached to that same article which shows the difference between the “hard” and “soft” data specifically.



What is currently expected by those with a more “bullish bias” is the hard data will soon play catch up with the soft data. Importantly, as I discussed in “Fade To Black”, this is the basis of the markets continued optimism that tax reforms, repatriations and infrastructure spending create the “reflationary” dynamics necessary to spur economic growth of 3-4%.

However, there may be a problem.

Economic cycles do not last indefinitely. While fiscal and monetary policies can extend cycles by “pulling forward” future consumption, such actions create an eventual “void” that cannot be filled. In fact, there is mounting evidence the “event horizon” may have been reached as seen through the lens of auto sales.

Following the financial crisis the average age of vehicles on the road had gotten fairly extended so a replacement cycle became more likely. This replacement cycle was accelerated when the Obama Administration launched the “cash for clunkers” program which reduced the number of “used” vehicles for sale pushing individuals into new cars. Combine replacement needs with low interest rates, easy financing, and extended terms and you get a sales cycle as shown below.



The issue is, of course, there are only a finite number of people to sell new cars too.


What the chart above shows is the number of cars sold currently now exceeds both the total increase in population and replacement needs of the existing population. In other words, the pool of available buyers is rapidly being depleted.

But more importantly, while the media touts “record auto sales,” it is a far different story when compared to the increase in the population. With total sales only slightly eclipsing the previous record, given the increase in the population this is not the victory the media wishes to make it sound. In fact, the current level of auto sales on a per capita basis is only back to where near the bottom of recessions with the exception of the “financial crisis.”


Furthermore, the annual rate of auto sales has slowed dramatically and is approaching levels normally associated with more severe economic weakness.


But slowing auto sales is only one-half of the problem. The problem for automakers is, as always, they continue to produce inventory even though demand is slowing. The cars are then shifted to dealers which have to resort to increasing levels of incentives to get the inventory sold. However, eventually, this is a losing game. The chart below shows the current level of swelling inventories relative to sales.


There is a limit to the level of incentives that dealers can provide to move inventory. Wolf Richter recently penned a really good report on this issue:

“J.D. Power and LMC Automotive pegged incentives at $3,768 per new vehicle sold – the highest ever for any March. The prior record for March was achieved in 2009 as the industry was collapsing. In June 2009, GM filed for bankruptcy.”

The Subprime Problem Resurfaces

Given the lack of wage growth, consumers are needing to get payments down to levels where they can afford them. Furthermore, about 1/3rd of the loans are going to individuals with credit scores averaging 550 which carry much higher rates up to 20%. In fact, since 2010, the share of sub-prime Auto ABS origination has come from deep subprime deals which have increased from just 5.1% in 2010 to 32.5% currently. That growth has been augmented by the emergence of new deep sub-prime lenders which are lenders who did not issue loans prior to 2012.


While there has been much touting of the strength of the consumer in recent years, it has been a credit driven mirage. With income growth weak, debt levels elevated and rent and health care costs chipping away at disposable incomes, in order to make payments even remotely possible, terms are often stretched to 84 months.

The eventual issue is that since cars are typically turned over every 3-5 years on average, borrowers are typically upside down in their vehicle when it comes time to trade it in. Between the negative equity of their trade-in, along with title, taxes, and license fees, and a hefty dealer profit rolled into the original loan, there is going to be a substantial problem down the road. As noted by Reuters:

“Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers’ next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time.


Over the course of multiple trade-ins, negative equity accumulates. Moody’s calls this the ‘trade-in treadmill,’ the result of which is ‘increasing lender risk, with larger and larger loss-severity exposure.’


To ease consumers’ monthly payments, auto manufacturers could subsidize lenders or increase incentives to reduce purchase prices, though either action would reduce their profits, the report said.”

Auto loans, in general, have been in a huge boom that reached $1.11 trillion in the fourth quarter 2016. As noted above, 33.5% of those loans are sub-prime, or $371.85 billion.


With more sub-prime auto loans outstanding currently than prior to the financial crisis, defaults rising rapidly and a large majority with negative equity in their vehicles, swapping out to a new car is becoming a near impossible option. Recently, Matt Turner cobbled together some interesting data from several sources on this issue.

The 60-day delinquency rate for subprime auto loans is at the highest level in at least seven years according to Fitch. The jump in losses on sub-prime auto loans moved to 9.1% in January, up from 7.9% a year earlier. The data suggests there is notable deterioration in the performance of these loans and given there are roughly 6-million individuals at least 90-days late on payments suggests rising stress levels of the consumer.


While the “cash for clunkers” program by the Obama Administration caused a massive surge in used vehicle prices due to the rapid depletion of inventory at the time, much of that inventory has now been rebuilt. Now, used vehicle prices are dropping sharply, as the market is flooded with off-lease vehicles and consumer demand is weakening.


As noted above, the issue of the trade-in treadmill” is a major issue for auto lenders as default risk continues to increase. Per Moody’s:

“The percentage of trade-ins with negative equity is at an all-time high, as is the average dollar amount of that negative equity. Lenders are increasingly faced with the choice of taking on greater risk by rolling negative equity at trade-in into the next vehicle loan. We believe they are increasingly taking this choice, resulting in mounting negative equity with successive new-car purchases.”


Asset-backed securities based on auto loans are showing signs of stress, with the subprime auto ABS delinquency rate closing in on crisis-era peak levels. Per Morgan Stanley:

“Across prime and subprime ABS, 60+ delinquencies are currently printing at 0.54% and 4.51%, respectively, with the latter approaching crisis-era peak levels (4.69%). Default rates are also picking up in similar fashion (prime: 1.52%; subprime: 11.96%), printing close to crisis levels. While prime severities slowly crept past 50% recently, subprime severities have breached 60%, a level we haven’t seen since late 2009. With both default rates and loss severities trending up, it is no surprise to see annualized net loss rates moving in the same direction.”


Given the importance of automobiles to the domestic manufacturing sector of the economy, the extent to which the sale of autos to consumers has likely reached an important inflection point. As shown in the last chart below, the previous recessionary warnings from autos was dismissed until far too late, it is likely not a good idea to dismiss it this time.


Why does this matter? Because it isn’t just auto loans. As Edward Harrison at Credit Writedowns noted:

“The big three areas of credit expansion this cycle – energy, auto and student loans.”

In the fall 2016 survey ahead of the latest borrowing reassessment this past October, Haynes and Boone said that respondents on average expected 41 percent of the borrowers to see a decrease. This decrease was expected at an average of 20 percent, in which lenders were expecting a 16-percent decrease and borrowers a 29-percent decrease.

While energy prices recovered enough to allow drillers to start back operations, primarily in the Permian Basin, the surge in supply is leading to another potential glut by 2018 and another downturn in oil prices. Such an event will put further strain on lenders as default risk rise in the sector. 

Currently, 42.4 million Americans owe $1.3 trillion in federal student loans. More than 4.2 million borrowers were in default as of the end of 2016, up from 3.6 million in 2015. In all, 1.1 million more borrowers went into or re-entered default last year.

And then there is also the problem of commercial real estate (CRE) where rapid loan growth over the past year, combined with recent underwriting reviews, raise many concerns over the quality of CRE risk management, particularly managing concentrations. Add to that weak underwriting and erosion of covenant protections in leveraged lending and you have real problems.

So, if you are wondering where the next “economic shock” may come from...there is a “clear and present danger” lurking below the headlines.

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CBO Warns Of Fiscal Catastrophe As A Result Of Exponential Debt Growth In The U.S.

In a just released report from the CBO looking at the long-term US budget outlook, the budget office forecasts that both government debt and deficits are expected to soar in the coming 30 years, with debt/GDP expected to hit 150% by 2047 if the current government spending picture remains unchanged.

The CBO’s revision from the last, 2016 projection, shows a marked deterioration in both total debt and budget deficits, with the former increasing by 5% to 146%, while the latter rising by almost 1% from 8.8% of GDP to 9.6% by 2017.

According to the CBO, “at 77 percent of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II. If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would reach 150 percent of GDP in 2047.

In addition to the booming debts, the office expects the deficit to more than triple from the projected 2.9% of GDP in 2017 to 9.8% in 2047. The deficit at the end of fiscal year 2016 stood at $587 billion.

A comaprison of government spending and revenues in 2017 vs 2047 shows the following picture:

The CBO also mentions rising rates as another key reason for the increasing debt burden. The Federal Reserve has kept rates low since the financial crisis but is on track to gradually hike rates in the coming year.

On the growth side, the CBO expects 2% or less GDP growth over the next three decades, far below the number proposed by the Trump administration.

The budget office breaks down the primary causes of projected growth in US spending as follows: not surprisingly, it is all about unsustainable social security and health care program outlays.

The CBO’s troubling conclusion:

Greater Chance of a Fiscal Crisis. A large and continuously growing federal debt would increase the chance of a fiscal crisis in the United States. Specifically, investors might become less willing to finance federal borrowing unless they were compensated with high returns. If so, interest rates on federal debt would rise abruptly, dramatically increasing the cost of government borrowing. That increase would reduce the market value of outstanding government securities, and investors could lose money. The resulting losses for mutual funds, pension funds, insurance companies, banks, and other holders of government debt might be large enough to cause some financial institutions to fail, creating a fiscal crisis. An additional result would be a higher cost for private-sector borrowing because uncertainty about the government’s responses could reduce confidence in the viability of private-sector enterprises.


It is impossible for anyone to accurately predict whether or when such a fiscal crisis might occur in the United States. In particular, the debt-to-GDP ratio has no identifiable tipping point to indicate that a crisis is likely or imminent. All else being equal, however, the larger a government’s debt, the greater the risk of a fiscal crisis.


The likelihood of such a crisis also depends on conditions in the economy. If investors expect continued growth, they are generally less concerned about the government’s debt burden. Conversely, substantial debt can reinforce more generalized concern about an economy. Thus, fiscal crises around the world often have begun during recessions and, in turn, have exacerbated them.


If a fiscal crisis occurred in the United States, policymakers would have only limited—and unattractive—options for responding. The government would need to undertake some combination of three approaches: restructure the debt (that is, seek to modify the contractual terms of existing obligations), use monetary policy to raise inflation above expectations, or adopt large and abrupt spending cuts or tax increases.

Then again, as the past 8 years have shown, only debt cures more debt, so expect nothing to change.

Also, we find it just a little confusing why the CBO never warned of an imminent “fiscal crisis” over the past 8 years when total US debt doubled, increasing by $10 trillion under the previous administration.

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