In the Wake of the Storm
…..Harvey moves on leaving a mess in its wake. Tax reform and deficit spending in Washington. Inflation, soft-flation, stagflation. Net neutrality, anybody? Anybody? Wells Fargo, again.
Financial Review by Sinclair Noe for 08-31-2017
DOW + 55 = 21,948
SPX + 14 = 2471
NAS + 60 = 6428
RUT + 13 = 1405
10 Y – .02 = 2.12%
OIL – .18 = 47.05
GOLD + 12.70 = 1320.80
For the month, the S&P edged up 0.05 percent while the Dow gained 0.28 percent and Nasdaq rose 1.27 percent. Even after a late-July Federal Reserve meeting made it clear that policy makers would begin reducing the bank’s $4.5 trillion balance sheet in short order, 10-year Treasury yields have dropped 16 basis points in August, the steepest monthly decline since June 2016.
Here’s the latest on Harvey: In Beaumont, about 70 miles east-northeast of Houston, flooding shut down the system that supplies running water to the entire city, prompting a hospital to evacuate. Most roads in and out of Beaumont are under water. In Houston, officials ordered mandatory evacuation of areas around the Barker Reservoir, as flooding from that overwhelmed basin, and the nearby Addicks Reservoir, continued to pour into neighborhoods on the city’s western edge. In other parts of the city, floodwaters receded. A series of small explosions shook the Arkema chemical plant in Crosby, northeast of Houston and more blasts were expected, after floodwaters shut down the cooling systems that kept the chemicals stable. An area of 1.5 miles was evacuated around the plant. More explosions are expected. Houston is known as the energy capital of the world; all that oil and gas passing through has spawned a second industry of petrochemicals. It should be no surprise that a storm of this magnitude is causing chemical accidents. There are also reports of damaged tanks at an Exxon Mobil facility and a Phillips 66 facility, with gas leaking out of tanks. In public statement after public statement, companies working with hazardous materials or processes in Houston declare that their engineers have anticipated every eventuality, that the public has nothing to fear. Go away, they say, nothing to see here. Yet since Hurricane Harvey struck, Houston area companies have filed 32 air emission event reports with the Texas Commission for Environmental Quality. The Coast Guard’s National Response Center has listed chemical or gas leaks in at least 20 locations in Greater Houston. Two million pounds of dangerous chemicals were released in Houston when they shut down refineries and petrochemical plants between Monday and Wednesday. More has been released since then, and millions more will be released when the plants restart. Harvey has revealed a lot in its wake.
Gasoline futures surged 10 percent today as almost a quarter of U.S. refining capacity remained offline and traders scrambled to reroute millions of barrels of fuel. Gasoline futures have rallied roughly 26 percent from the previous week to a two-year high. Hurricane Harvey has paralyzed at least 4.4 million barrels per day (bpd) of refining capacity. Analysts at Goldman Sachs and Stifel said they expected infrastructure outages to last several months but said it was difficult to estimate the exact damage.
The shutdowns led the U.S. government to tap its strategic oil reserves for the first time in five years on Thursday, releasing 1-million barrels of crude to a working refinery in Louisiana. Colonial Pipeline announced it would shut down because Harvey forced the closure of refineries. Colonial is one of the most critical pieces of energy infrastructure in the U.S., able to transport about 2.5 million barrels a day of products such as gasoline and distillate from the Gulf Coast to the East Coast, supplying big demand centers stretching from Atlanta to New York City. Gasoline shortages are expected up and down the East Coast.
In all, 53 Texas counties issued emergency declarations – an area that’s home to around 11.4 million people. It is going to take some time to sort out. Meanwhile, the remnants of Harvey are headed for Tennessee and should be dumping rain on Kentucky and Ohio tomorrow. Harvey makes landfall in Washington as soon as next week, when President Trump is expected to ask for what could be tens of billions of dollars in storm relief. And paying for storm recovery — probably with few offsetting spending cuts — will be but the first blow to fiscal discipline in what looks to be a particularly active, and calamitous, spending season. After Harvey comes the debt ceiling, and there are rumblings that the vote to raise the limit could actually be used to increase spending. (In the past, such votes were used by fiscal hawks to cut spending.) At the same time come negotiations to fund the government for fiscal year 2018, and indications are that lawmakers will try to avoid a shutdown with a short-term spending deal. Trump and Republicans have given clear signs they are moving away from tax reform (a simplification of the tax code that doesn’t necessarily reduce revenue) toward all-out tax cuts, financed by deficit spending.
Treasury Secretary Steven Mnuchin said today that Hurricane Harvey could bring forward the deadline by which the nation’s debt ceiling needs to be raised and that he is open to the borrowing cap being dealt with as part of a wider bill. Mnuchin also said the administration has a “very detailed” tax plan ready and “couldn’t be more excited” about its prospects. He said the plan has been presented to members of Congress and will be released to the public by the end of September. On Wednesday Trump reiterated his call for a corporate tax rate cut to 15 percent from 35 percent. Senate Majority Leader Mitch McConnell has indicated he plans to use the same “reconciliation” resolution he used on the failed attempt to repeal Obamacare to allow for a party-line vote on a tax cut. That process would balloon the deficit — but they could avoid such concerns by using the well-worn gimmick of having the tax cut expire before 10 years.
The core personal consumption expenditures (PCE) price index increased 1.4 percent in the 12 months through July, its smallest year-on-year increase since December 2015. For the month, core prices rose just less than 0.1%. The PCE is the Fed’s preferred inflation measure. Core PCE has undershot the Fed’s 2 percent target for the past five years. Chances of a rate hike in December have fallen to about 36 percent, from 43 percent a month ago, according to CME Group’s FedWatch tool. So, the new term to describe this pricing action is soft-flation. When we look at weak wage growth, combined with ongoing sluggish economic growth, we have an old term for that – stagflation.
Labor Department data showed the number of Americans filing for unemployment benefits rose slightly last week. The weekly data precedes the more comprehensive monthly jobs report on Friday. The median projection ahead of Friday’s jobs report is 180,000, that’s been about the average so far this year. Tomorrow’s report will not include jobs lost from Hurricane Harvey.
A congressional hearing on net neutrality that was slated for September 7 isn’t happening after several major tech companies did not accept invitations for their CEOs to testify. Executives from Amazon, Google, Facebook, Netflix, and Verizon were invited to address the House Energy and Commerce Committee, but—even after the committee extended the deadline to wait for their responses—apparently no one agreed to go. Many tech companies rallied in support of net neutrality during an internet-wide day of action last month, but executives were less thrilled about appearing before the committee. The Federal Communications Commission has been pushing for a rollback of Obama-era net neutrality protections that prevent internet service providers from selectively throttling data or creating fast lanes and slow lanes on the internet. But even though the FCC has been flooded with public comments in support of those protections, chairman Ajit Pai has remained steadfast in his stance that the rollback is necessary. Assuming the FCCs proceeds as expected and dismantles existing net neutrality rules, both sides of the debate are expected to lobby congress to establish new net neutrality laws—hence, the purpose of the September 7 hearing, to kickstart a public debate. But tech CEOs and the broader public clearly think the repeal of net neutrality is a non-starter.
The bogus bank account scandal at Wells Fargo appears to be a lot worse than originally known. Just how much worse? Newly reported figures show that the number of unauthorized accounts created by employees is up from 2.1 million to now close to 3.5 million. The expanded review also uncovered about 528,000 potentially unauthorized online bill-pay enrollments Repercussions for Wells Fargo since the scandal broke a year ago have been severe — it paid a $185 million fine to the federal government, and fired more than 5,000 employees for improperly creating accounts without customers’ consent. Bank insiders blamed the scandal on an internal high-pressure sales culture; it underwent Congressional hearings, its CEO quit and it has since been dogged by a dozen investigations and public backlash. But the new revelations brought the bank to new lows. And this is on top of other scandals, such as unauthorized auto insurance policies more than 800,000 customers didn’t need or agree to purchase. This is not the first scandal for Wells Fargo, it won’t be the last, and they are still dealing with other scandals, such as sexual harassment claims, wrongful termination claims, retaliation against whistleblowers, excessive charges for various fees – (that has been ongoing for about 10 years). Today’s report was not totally unexpected, the bank warned a couple of weeks ago that there would be more bad news. At some point, you would think all this criminal activity would result in jail time. After all, the United States incarcerates more people than any other nation on earth, but for some reason the banksters walk.