As the weekend draws near, we find ourselves apprehensive about what’s happening in Washington. But not for the reasons you might think.
No, we’re not wringing our hands about the Drudge-bait headline from Politico today: “Obama to Senate Dems: ‘I’m Going to Play Offense.'”
Rather, we’re chewing on this curious Friday factoid: Going back to the earliest days of the republic, a majority of presidential vetoes have come when the White House and Congress are controlled by the same party.
The American Presidency Project analyzed more than 2,500 vetoes going back to George Washington’s presidency. The Washington Post sums up: “A little over 500 vetoes have been of legislation that came from a House and Senate hostile to the president. More than 1,200 have been of legislation from friendly Congresses.”
The obvious takeaway, if you’re like us and you think gridlock is a good thing: Don’t worry about what Obama might try to do to steamroll a Republican Congress. Worry instead about where they’ll get along. Worry when cats lie down with dogs.
It was Bill Clinton and a Republican Congress who teamed up on the legislation that helped set us up for the Panic of 2008.
The Financial Services Modernization Act of 1999 tore down the wall separating commercial banking and investment banking. And the Commodity Futures Modernization Act of 2000 allowed for an explosion in complex derivatives trades.
Nothing wrong with deregulation, of course… unless it allows bankers to gamble with a taxpayer backstop. Ron Paul — one of the few Congress members of recent times who knew the difference between being “pro-business” and “pro-free market” — voted against both measures.
Which brings us to a trade treaty on which President Obama and Senate Majority Leader Mitch McConnell are best buds.
We’ve written periodically about the Trans-Pacific Partnership as long ago as mid-2012. It involves the United States and 11 other Pacific Rim nations. Much of the negotiating has gone on in secret. The text of the treaty is classified. Members of Congress have restricted access to it, although more than 600 corporate advisers have full access on their computers.
Only five of the TPP’s 29 chapters deal with trade. The rest cover everything from draconian copyright enforcement to draconian capital controls. Every so often, WikiLeaks manages to get its hands on a chapter and we learn about some new bizarre provision: Imagine a neighborhood coffee shop offering free Wi-Fi being made liable to some multinational entertainment giant if a customer downloads a pirated movie.
And McConnell is keen to give Obama “fast track” negotiating authority. That means Congress punts on its constitutional obligations, delegating its authority to the executive branch: Congress could only vote yea or nay on the treaty, no amendments allowed.
As an investor or small-business owner, there’s not much you can do other than watch and wait to see what shakes out. We’ll keep it on our radar as 2015 unfolds.
To the markets… where traders are still assessing the fallout from the Swiss National Bank’s big surprise yesterday.
The standout performer once again is gold. At last check, it’s up nearly 1%, to $1,274. That’s impressive in light of continued strength in the greenback — the dollar index is also up nearly 1%, at 93 on the nose.
“Investors looking to protect themselves from a start-of-the-year volatility storm in other asset classes” are turning to precious metals, says Roland Khounlivong from GoldMoney. “Further cheer should be taken from the fact that precious metals are finding support even against a deflationary landscape and weak global growth forecasts.”
While gold is shining, silver is sparkling — up more than 4% as we write, to $17.71. “In a good year for gold, silver can do much, much better,” says our Byron King.
“According to preliminary data from The Silver Institute, global silver production from mines continued to grow through 2014, the 12th year in a row. But thanks to declining silver prices, recycling of scrap silver declined by more than 20%, and producers hedged a significant amount of silver, effectively removing it from the market.
“And demand for physical silver has never been higher! Just over half of demand comes from industrial manufacturing, half of which now goes to the production of electronics, one of the fastest growing markets in the world.
“The fundamentals are clear: Silver can tread water for only so long, especially if supply begins to decline on the falling prices of the last few years. But that price drop is no harbinger of ever-declining prices.
“If gold holds steady or heads higher,” Byron concludes, “silver could do very well indeed.”
The Swiss surrender in the currency wars was too much for the United States’ biggest foreign exchange broker, FXCM.
FXCM clients betting against the Swiss franc and trading on margin piled up $225 million in losses yesterday… losses owed to the company that it may or may not recover. The firm is traded on the New York Stock Exchange, and its shares cratered as much as 90% in pre-market action this morning before trading was halted. Bloomberg reports the investment bank Jefferies might step in with a $200 million rescue.
[Ed. note: This news only reaffirms our thinking that the forex markets are for pros only. But we still think it’s possible for retail investors to profit from the currency wars without resorting to the forex casino.
That’s our thinking behind a new service we’re launching with the help of Jim Rickards, who literally wrote the book on Currency Wars. Watch this space for an announcement soon.]
Major U.S. stock indexes might end the week on an up note: At last check, the S&P 500 is up nearly two-thirds of a percent, to 2,005.
After a rocky start to earnings season, Goldman Sachs and Intel both came in ahead of analyst estimates.
The big economic number of the day is the consumer price index — down 0.4% in December. The year-over-year change works out to a 0.7% increase. Throw out food and energy and the increase is 1.6% — still shy of the Federal Reserve’s 2% target.
In the real world, inflation measured the way it was during the Carter administration — the way John Williams at ShadowStats.com still measures it — works out to 8.4%.
That’s the lowest year-over-year increase since June 2010. Yay?
Another step by Russia and China away from a dollar-dominated world, even if it’s taking seemingly forever…
“The new Universal Credit Rating Group (UCRG) is being set up to rival the existing agencies Moody’s, S&P and Fitch,” according to the Kremlin-funded TV network RT, “and its first rating will be issued this year.”
The RT story goes to remind readers of the foul-ups committed by the American Big Three: “Many securities and bonds in the U.S. that had triple-A ratings in 2008 and were considered ‘safe’ turned out to be a bubble, revealed by the subprime mortgage crisis.”
It’s been a long time coming: We first chronicled this effort in October 2012 — a joint venture based in Hong Kong among China’s Dagong, Russia’s RusRating and the United States’ Egan-Jones.
Egan-Jones, as a reminder, is the lone U.S. rating agency that’s paid by the buyers of the securities it rates. The Big Three are paid by the issuers, a conflict of interest that bothers few on Wall Street.
Then again, Egan-Jones might have to bow out. After all, there are the U.S. sanctions imposed against Russia for the conflict over Ukraine.
“As a result of military actions undertaken by Russia, it’s made it more difficult for [our] organization to work with Russian counterparties,” Egan-Jones founder Sean Egan tells Russia’s Sputnik Radio. “There is some concern in the various governments that there’re partial sanctions, and companies are concerned about running afoul of those sanctions.”
We’re guessing the last thing Mr. Egan wants to do is anger American regulators yet again. We documented the feds’ serial harassment of Egan-Jones from 2011-13. And while we couldn’t prove it was a consequence of the firm continually downgrading a debt-laden Uncle Sam, it was surely a curious coincidence.
“Your emails about the cause of the drop in oil prices are irresponsible,” a reader writes.
[Oh good, we needed a little excitement in the mailbag. It was getting a little slow…]
“You failed to share with your subscribers information present in both the American Free Press out of Washington, D.C., and the Pulitzer Prize-winning Guardian newspaper out of London. They document the alleged secret deal that Secretary of State John Kerry made with King Abdullah of Saudi Arabia to drive down the price of oil to hurt Russia and Iran.
“I do really enjoy The 5, but I would appreciate your efforts to provide more accurate information.”
The 5: Really?
More than once as oil fell toward year-end 2014, we raised the possibility of either the United States, or Saudi Arabia, or both, deliberately dragging down the price to put a hurt on Russia and Iran.
And we’re indeed aware that Kerry paid a call on King Abdullah last September. The official story was the talks were about fighting ISIS. But as Patrick L. Smith wrote at Salon last November, “the other half of the visit had to do with Washington’s unabated desire to ruin the Russian economy. To do this, Kerry told the Saudis 1) to raise production and 2) to cut its crude price.”
But is that the whole story? “It’s probably a contributing factor, but definitely doesn’t explain the whole epic price move,” says hedge fund manager Erik Townsend — who follows the oil futures market as closely as anyone.
“Mr. Kerry was spending a lot of time in the Middle East when this sell-off began,” Erik writes, “and I wouldn’t be at all surprised if he pressured the Kingdom of Saudi Arabia to allow at least a moderate sell-off to begin. But it’s hard to believe that even the Obama administration would intentionally engineer a sell-off to levels that threaten the viability of the U.S. energy renaissance.”
A bigger factor, Mr. Townsend suggests, is that “Saudi Arabia has realized that the OPEC cartel has effectively lost its monopoly. Their rationale may be that the other producers aren’t realistically going to honor and respect any cut that OPEC approves, and KSA will therefore suffer the entire burden. Why should they take the hit when they know their fellow producing nations will probably cheat?”
Too, there are plain old economic fundamentals in the mix: “Very small changes in the supply-demand balance can result in really big price moves.” With suppressed demand and growing supply courtesy of the U.S. shale revolution, “basic supply-demand economics kicked in, and the result is lower prices.”
We’d love to think there’s one simple catchall explanation. But the reality is more complex. And more interesting.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. We’re back tomorrow as usual with 5 Things You Need to Know, our weekly wrap-up in case you got busy and missed an issue or two. U.S. markets are closed Monday for Martin Luther King Jr. Day. The weekday edition of The 5 returns on Tuesday.
