Week in Review

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Week in Review

02/10/2018

For the week 2/5-2/9

[Posted 11:30 PM ET, Friday]

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Edition 983

Trump World...a new budget, deficits and market volatility....

In a rare show of bipartisanship, Republican Senate leader Mitch McConnell (Ky.) and Democratic counterpart Sen. Chuck Schumer (N.Y.) agreed on a two-year budget pact.  That guaranteed passage in the Senate, and it came, 71-28, despite the procedural maneuverings of Kentucky Republican Sen. Rand Paul, who tried to block a vote for as long as he could, which was successful in so far as it caused a technical shutdown at midnight.

Paul blasted his own party – comparing fellow Republicans to President Obama.

“I ran for office because I was very critical of President Obama’s trillion-dollar deficits,” he said. “Now we have Republicans hand in hand with Democrats offering us trillion-dollar deficits. I can’t, in all honesty, look the other way.”  [Paul did vote for President Trump’s tax reform bill that increased the deficit by at least $1 trillion.]

Paul’s fellow Republicans then ripped him for wasting time and threatening the shutdown.

Sen. Thom Tillis (R-N.C.): “You can make a point all you want, but points are forgotten.  There aren’t a whole lot of history books about great points in the U.S. Senate.”

So it was on to the House where there was fierce opposition from fiscal conservatives.

But around 5:00 a.m. Friday morning, the House passed it, 240-186.  President Trump then signed it.

“Just signed Bill.  Our Military will now be stronger than ever before. We love and need our Military and gave them everything – and more. First time this has happened in a long time. Also means JOBS, JOBS, JOBS!”

The package would increase spending by at least $300 billion ($400 billion including new interest on the added debt), this on top of the $1.5 trillion tax-cut plan.

Rep. Mo Brooks (R-Ala.), one of many members of the Tea Party-aligned Freedom Caucus who voted ‘no,’ slammed it as a “debt junkie’s dream.”

“I am baffled why the Republican Party has turned into such a big spending party. It is one thing to spend money, it is another thing to spend money you don’t have. No American family can operate that way; no American business can operate that way; and it is folly to believe that the United States of American can operate that way.”

Another Freedom Caucus leader, Rep. Dave Brat (R-Va.), described the bill as a “Christmas tree on steroids.”

“This spending proposal is disgusting and reckless – the biggest spending increase since 2009,” conservative Justin Amash (R-Mich.) tweeted.

Republican Senator Bob Corker (Tenn.) noted the deal would deliver more military funding than Trump requested in his 2018 budget proposal. “I’m all for supporting our military, and I want to make sure they’re funded properly,” he said. “But it’s very difficult to have that big of an increase in one year and then be able to use it wisely.”  [The biggest winners, by the way, are Lockheed Martin, Boeing and General Dynamics, who spend millions of dollars each year lobbying Congress.  The bill also grants U.S. troops a 2.4 percent pay raise.]

There are tax breaks for Hollywood; live theater productions in New York; a three-year tax depreciation for racehorses, allowing owners to depreciate the value of their investment over the most productive span of their racing careers instead of the old seven-year schedule, which benefits the National Thoroughbred Racing Association, based in McConnell’s home state of Kentucky.

NASCAR track owners get a tax benefit.  Yippee!  [Daytona 500 next weekend!]

Oh, the bill is larded up with all manner of breaks. Every senator is getting something it seems.

But Democrats were happy.  Minority Leader Schumer said: “This budget agreement shows that the Better Deal agenda is more than a set of ideas; now, it’s going to be real policies.  It delivers on exactly what we laid out last year: rural broadband, child care and assistance with college tuition.”

It also provides $70 billion for disaster relief for Texas, Florida and Puerto Rico, which are still recovering from Hurricanes Harvey, Irma and Maria, respectively.

Democrats believe some of the credit for what they got passed will redound to the 10 Democrats facing reelection this year in states carried by Trump in 2016.

But the spending bill did not address the fate of Dreamers, who were protected from deportation by President Obama’s Deferred Action for Childhood Arrivals program, which now faces a deadline of March 5 after President Trump rescinded the program last year.

Editorial / Wall Street Journal

“Congress announced the outline of a two-year bipartisan budget deal on Wednesday, and no doubt Members want to avoid another pointless government shutdown. The deal has the virtue of starting to fix a weakening military. But the delusion is that the U.S. can continue to deny the trade-off between guns and butter, or defense and the entitlement state.

“First, the good news: The budget outline would lift defense spending by $80 billion in fiscal 2018 and $85 billion in 2019, honoring a central GOP campaign promise. This busts the ‘sequester caps’ that forced useful restraint on domestic accounts for a few years but damaged the military and did nothing on entitlements....

“This renovation (of the military) is sorely needed, though it comes at a high price.  Democrats backed up the truck for funding on everything from community health centers to billions on child-care grants to $20 billion for infrastructure. The tally comes to $131 billion more in discretionary spending over the next two years.  Democrats wanted dollar for dollar parity with defense spending. So in the silver-lining department the GOP at least managed to get more for the Pentagon, where cuts have been harsher....

“The deal also includes $6 billion for the opioid crisis, though it’s hardly clear that communities or the health-care system are prepared to absorb more cash. Congress allocated $1 billion for state grants in a 2016 law, and little is understood about what this funding has accomplished. For now this spending is a bipartisan hall pass for not having to think about tougher problems like why so many Americans are declining treatment and overdosing multiple times....

“The larger fiscal reality is the continuing failure to reform entitlements, which absorb an ever-rising share of GDP and federal budget and present the true threat to national defense.  President Obama blocked reform, and then the GOP missed the best chance in a generation to fix Medicaid by replacing the Affordable Care Act. The politics of reforming that entitlement is easy compared with Medicare and Social Security.

“The annual budget deficit is cruising toward a cool $1 trillion, yet some Republicans are flirting with adding another new entitlement called paid family leave. The GOP’s best hope is that tax reform can deliver at least 3% growth and delay the fiscal reckoning. Republicans have to handle the urgent task of rebuilding the military in a dangerous world, but one certainty: Entitlement reform must happen, or we’ll be defending ourselves against Kim Jong Un’s nuclear missiles with Medicare checks.”

Trumpets....

--Trump tweet: “Wow! Senator Mark Warner got caught having extensive contact with a lobbyist for a Russian oligarch. Warner did not want a ‘paper trail’ on a ‘private’ meeting (in London) he requested with Steele of fraudulent Dossier fame. All tied into Crooked Hillary.”

Republican Sen. Marco Rubio (Fla.) was among those from his own party who said the above was nothing, and that Warner had told the Senate Intelligence Committee of the above four months earlier.

Trump: “NEW FBI TEXTS ARE BOMBSHELLS!”

No they aren’t.  Sen. Ron Johnson (R-Wis.) released a text message between two FBI employees (Peter Strzok and Lisa Page) from September 2016 that then-President Obama “wants to know everything we’re doing,” Sen. Johnson saying it raises questions about meddling by Obama in the federal Hillary Clinton email investigation, which wasn’t an active probe at that time.

A Wall Street Journal look at all the recently released text messages “showed no overall conspiracy against Mr. Trump.”

But then you have the work of GOP Senators Chuck Grassley (Iowa) and Lindsey Graham (S.C.) that supports the recent House Intelligence Committee claims of surveillance abuse and offers new evidence that the Clinton campaign may have been more involved than previously known.

Editorial / Wall Street Journal

“The Grassley-Graham referral also drops the stunning news that (Christopher) Steele received at least some of the information for his dossier from the Obama State Department. The letter redacts the names involved. Bu the press is now reporting, and our sources confirm, that one of the generators of this information was none other than Sidney Blumenthal. GOP Rep. Trey Gowdy, who has seen the documents, told Fox News ‘that would be really warm’ when asked if Mr. Blumenthal is one of the redacted names.

“Mr. Blumenthal has declined comment to several media outlets. But our readers will recall that he is a long-time Hillary Clinton operative whom President Obama barred from an official role at State but was later discovered to have sent her policy and political advice via her private email server. This revelation raises questions about the degree to which the Clinton team was involved in the Steele-Fusion effort from the beginning.

“Some of our media friends are so invested in the Steele dossier, or in protecting their Fusion pals, or in Donald Trump’s perfidy, that they want to ignore all this. But journalists ought to tell the complete story.

“The best way to learn what’s true and false in the Russian influence story is radical transparency, and the Trump Administration should declassify all four FISA applications on Mr. Page and all of the documents behind them. Meanwhile, thanks to the two Senators for helping get closer to the truth.”

Regarding the Devin Nunes (R-Calif.) memo out of the House Intelligence Committee that was supposed to be such a bombshell, Rep. Will Hurd (R-Tex.) said last Sunday on ABC’s “This week” that he does not believe the controversial memo “vindicates” President Trump in the Russia probe.

“I don’t agree with some of my colleagues that say, you know, it was always using the word ‘explosive.’”

Hurd sits on the House Intelligence Committee.  He did emphasize his concerns over the Foreign Intelligence Surveillance Act warrant.

Rep. Trey Gowdy (R-S.C.) said on CBS’ “Face The Nation” that the Nunes memo has no impact on the ongoing Russia probe.

“I’m sure the president is frustrated. You know, (Rep.) Adam Schiff (D-Calif.) prejudged the investigation before we interviewed the first witness,” Gowdy, a former prosecutor, said during the interview.

“So I’m sure that that instructs some of what he said. I actually don’t think it has any impact on the Russia probe for this reason.”

Gowdy added: “There is a Russia investigation without a dossier. So to the extent the memo deals with the dossier and the (Foreign Intelligence Surveillance Act) process, the dossier has nothing to do with the meeting at Trump Tower. The dossier has nothing to do with an email sent by Cambridge Analytica.”

He added that the dossier has “nothing to do with George Papadopoulos’ meeting in Great Britain.”

“It also doesn’t haven’t anything to do with obstruction of justice. So there’s going to be a Russia probe, even without a dossier,” he said.

Lastly, as I wrote last week, I’m waiting for the conclusion of the Mueller investigation, and the IG report from the Justice Department, that of inspector general Michael Horowitz, who with zero fanfare has been conducting a sprawling probe of the FBI’s handling of the 2016 investigation into Hillary Clinton’s use of a private server.

The report is expected by early spring and will no doubt set off shockwaves, providing ammunition for both Democrats and Republicans.

Horowitz’s yearlong investigation already reportedly contributed to the early resignation of Deputy FBI Director Andrew McCabe.

Separately, late tonight, President Trump said he was “unable” to declassify a memo drafted by Democrats that counters GOP allegations about abuse of government surveillance powers.

In a letter to the House Intelligence Committee, White House counsel Don McGahn says the memo contains “numerous properly classified and especially sensitive passages.” He is asking the Democrats to revise the memo with the help of the Justice Department.

McGahn says Trump is still “inclined” to release the memo in the interest of transparency if revisions are made.

And the No. 3 ranking official at the Justice Department, Rachel Brand, is stepping down for unknown reasons as I go to post.

--The White House faced major questions on its handling of the dismissal of Staff Secretary Rob Porter, who was let go after allegations of spousal abuse surfaced, including a sickening photo of one of his two wives involved in the story, though the scandal was also in what did certain Trump staff members know and when did they know it, namely Chief of Staff John Kelly.

One of the wives, Jennifer Willougby, told NBC Nightly News that during an interview with the FBI about her former husband’s security clearance, she brought proof of his abuse.

“I shared with the FBI all of the details that I have shared in previous articles including access to a protective order from June of 2010 and police calls that I had made to our home,” she said.

When asked by the FBI about whether Porter could potentially be blackmailed, she told NBC she told agents “maybe.”

“I actually had difficulty answering that question because I believed that the people who had the power to blackmail him would be women who had been in personal relationships with him, so in short the answer could be maybe,” she said.

Porter was operating on an interim security clearance at the time of his resignation on Wednesday, not having gained full clearance in the year he was in the position, which spoke volumes about his story.

Porter came under fire after Willoughby and Colbie Holderness, another of Porter’s exes, shared their stories of domestic abuse with the FBI, among others. A photo of Holderness with a black eye also came to light, leaving many wondering how Porter could have been able to keep his high-profile post, who knew about the accusations and when were they made aware.

In his resignation statement, Porter himself said “these outrageous allegations are simply false.”

Porter acknowledged taking 15-year-old photos of the ex-wife with a black eye, but “the reality behind them is nowhere close to what is being described.” He did not explain how.

It then broke on Thursday that Chief of Staff Kelly learned this fall about the allegations of spousal abuse and that they were delaying Porter’s security clearance amid an ongoing FBI investigation.

White House Counsel Donald McGahn knew one year ago that Porter’s ex-wives were prepared to make damaging accusations about him but allowed him to serve as an influential gatekeeper and key Trump aide all this time, without investigating the accusations, sources told the Washington Post.

Porter not only stayed in a role in which he had access to classified information, but he helped determine which articles and policy proposals made it to the president’s desk.

Deputy press secretary Raj Shah said on Thursday, “We should not short-circuit an investigation just because allegations are made, unless they could compromise national security, or interfere with operations at the White House.”

Friday, President Trump told reporters that Porter had maintained his innocence, and he wished him well. “He says he’s innocent. I think you have to remember that. He said very strongly yesterday that he’s innocent.  We certainly wish him well. It’s obviously a tough time for him, and he did a very good job in the White House. We hope he has a wonderful career ahead of him,” Trump added.

Trump said nothing about the women.  In Trump World, the men are always the victims.

Meanwhile, White House communications director Hope Hicks, the longest-serving Trump associate and one of his closest aides, was reported to be dating Porter (both single).

And then tonight, we learned a second White House official abruptly resigned following allegations of past domestic abuse by his former wife, speechwriter David Sorensen.   Sorenson has denied the allegations, according to the Washington Post.

--I watched President Trump at the National Prayer Breakfast and forgive me for being underwhelmed when he utters anything in the area of religion.

--Lastly, on the idea of Trump asking the Pentagon to stage a military parade, similar to the one he witnessed last summer in Paris with French President Macron, an idea I loathe....

Peggy Noonan / Wall Street Journal

“It is a ridiculous and embarrassing idea. If you want to show respect for the military make the Veterans Affairs Department work. A big, pointless, militarist display with gleaming weapons and shining tanks is so...Soviet. What do you gain from showing off your weaponry? What are we celebrating – that we have nukes? That we have to have them is a tragedy.

“ ‘The abuse of greatness is when it disjoins remorse from power.’

“I see a line of thinking among those normally critical of the president that the idea’s a ten-strike: The people will love it, what’s wrong with it, who doesn’t like a parade?

“But I think people will see right through it.

“If there’s a parade that purports to honor our military men and women, they will go. But they’re not stupid, they’ll know what it is. It is Trump being Trump, and obsessing the nation. It’s bread and circuses.

“And it is not like us, at least the old and honored us.”

Ralph Peters / New York Post

“Early in his presidency, Richard Nixon was impressed by the elaborate uniforms of ceremonial guards he encountered in Europe. So he ordered special outfits for the Secret Service guards protecting the White House.  The result was a farce: comic-opera tunics and goofy helmets that belonged on stage at the Met.

“Thoroughly un-American, the uniforms didn’t last.

“Now, impressed by a French Bastille Day spectacle, President Trump wants a massive military parade of his own.  It’s an idea as bad as Nixon’s but far more costly.

“I don’t know a single veteran who thinks this big parade is a good idea. It doesn’t pay tribute to our troops but places yet another burden on them.  And it’s as wrongheaded as those Nixon get-ups.

“Displays of military might have great appeal to those who’ve never served. And parades with miles of tanks, artillery pieces and missiles, along with massive formations of robotically drilled soldiers, produce impressive images. But the strength’s an illusion.

“Whenever our adversaries, be they in Moscow, Beijing or Pyongyang, stage extravagant military parades, it makes me smile: I know that those perfect ranks smashing down their boots aren’t prepared to fight: If your priority is big parades, you’re not prepared for big wars.

“As for honoring the troops, as a former private I assure you soldiers don’t take any special joy in standing in the sun for hours while the VIPs suck mimosas in the shade.

“If we want to honor our troops, pass the damned defense budget.

“And don’t take our already over-scheduled troops away from critical training or their families for frivolity. Not only would the sort of grand parade Trump envisions tie up tens of thousands of troops, it would paralyze staffs and logistics commands for months, play havoc with vital training and grossly misuse assets.

“Of course, we’ve had big parades in the past – and worthy ones. But they weren’t displays of power but rather put our troops front and center.

“Our largest parades occurred at the close of the Civil War, when the Union’s battered-but-victorious Army of the Potomac marched through the streets of Washington, followed a bit later by Sherman’s legions – whose soldiers took special pride in their ragged uniforms.

“Those were hard-earned celebrations, as were the parades at the end of the World Wars and after Desert Storm.  In every case, though, the primary focus was on the heroes; the hardware was secondary.

“Our military – active duty, Reserves and National Guard – already contributes contingents to many events, from honor guards to hometown parades on Memorial Day. But those appearances are about those who serve us, our neighbors in uniform, not their armaments....

“We even have aerobatic teams that stage overflights on holidays or at major sporting events – they’re recruiting tools. And New York City gets Fleet Week.

“How much pomp and circumstance do we need?

“The purpose of our military is to fight. Not to engage in social experiments, Obama-style, and not to stage Las Vegas-meets-Moscow spectaculars....

“And if, having served in uniform for over two decades, I may be allowed a personal note, I just don’t like the image of tanks in our streets, no matter the reason. Our military exists to keep tanks out of our streets.

“If the president wants a big parade, I suggest he invite high-school bands from around the country. They’d love to march down Pennsylvania Avenue. And it wouldn’t take a single soldier away from preparing for war.”

Wall Street

Trump tweet, Feb. 7, his first and basically only real reaction to the market turmoil of the past two weeks as I go to post:

“In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down.  Big mistake, and we have so much good (great) news about the economy!”

What the president doesn’t seem to understand is that the mother’s milk of the great bull market since the financial crisis, free money, both here and abroad, is ending.  Our Federal Reserve has begun tightening interest rates, and that will be the case in Europe, and possibly Japan by year end. The expectation of such moves and growing nervousness is what roiled overseas markets.

Here in the U.S., we were still suffering from the big jump in wage growth that was part of last Friday’s employment report, and the potential for more rate hikes this year than the Fed itself is projecting (three in 2018), and now, with massive amounts of debt to service, including as a result of the new budget agreement, Wall Street is wondering how all this debt is going to be serviced, namely, at what level?  Supply at some point could totally swamp demand. It may be a story more for next year, not today, as the yield on the 10-year barely moved this week despite the market turmoil, but finally, after years of false alarms, the consensus is building that the day of reckoning is approaching. And as rates rise, stocks become less attractive.

Yes, rising rates is normally a sign of a strong economy that is leading to higher wage growth, which should be good for consumption and thus Corporate America.

But the market’s sickening slide this week on Monday and Thursday, spurred on by computer-driven programs and derivatives that, as Warren Buffett and others have long warned, blew up in investors’ faces, you also had uncertainty as to just how effectual the tax cuts and jobs act will be after we get through the initial euphoria. The benefits are front-loaded, and while incentives to expense capital equipment equate to economic activity, jobs and such, will “demand” be there, especially if investors, and consumers, are increasingly uncertain about the markets and their future?

We hope that economic growth helps pay for a large share of the tax act, but the word “deficit” is now back, front and center.

With the market swoon of the past two weeks, and the first market “correction” in years, what investors and the Street need is simply a period of relative stability and reduced volatility to allow everyone to regain their footing and get their bearings. For much of this week instead, it was, “Stop the world...I want to get off!”

The only problem is we’re not likely to see a tremendous reduction in the volatility for a while, and every economic data point, particularly the inflation metrics, is going to be picked over and chewed on for clues as to what the Federal Reserve’s next move will be.  None of this is good for business.  Corporate CEOs are hardly a brave lot.  If the stimulus from the tax act, and now the spending bill, is deemed to be relatively short-lived, some of the capital spending plans touted by President Trump could be put on the shelf for a quarter or two just to see how things shake out.

Again, it’s not just about here, but it’s about Europe and Asia. It’s about the “great unwind.”  And right after the Olympics, North Korea is bound to be front and center again as well.

As for the elephant in the room from this week, the computers and their algorithms, they’ve been lying in the weeds.  Last year, after all, was the calmest on Wall Street in terms of lack of volatility in decades.  That’s not the case in 2018.

This week light was thrown on an increasingly popular strategy among investors – shorting volatility.  As the Wall Street Journal’s Mike Bird noted in a column: “Shorting volatility means betting that the measure will remain low or fall further, often by buying an exchange-traded product that rises in value when gauges of volatility decline.” 

Some have been warning that the rapid growth of such strategies “creates risks that may trigger the next serious market crash,” as Vineer Bhansali, founder of investment advisory firm LongTail Alpha, and Professor Larry Harris of USC, explained in a prescient research paper last fall, per Mike Bird’s Journal piece.

It’s complicated.  You’re talking about “risk parity” and “volatility target funds.”  A discussion that makes your head spin, at least mine.

Everyone on Wall Street has a different estimate of just how much of this stuff, these strategies, are out there. Barclays strategists say that as of this week, there was $350 billion invested in target funds, which would need to sell $225 billion in equities over the coming days. When the positions unwind, they unwind quickly, as we saw nonstop this week.

A few others saw this coming, including Barclays CEO Jes Staley, who just weeks ago told a panel at the World Economic Forum in Davos, Switzerland, that when it came to short-volatility exchange-traded products, “If this thing turns, hold on to your hat.”

Even one of the inventors of the VIX, the most popular and best-known of the vehicles, Devesh Shah, is perplexed why these products exist in the first place.

“Everybody knew that this was a huge problem,” he said, in an interview with Bloomberg.  “Everybody knows that Inverse VIX is going to go to zero at some point, and all these inverse and leveraged products, not just in the VIX but elsewhere too, at the end of the day cost people a lot of money.”

Wall Street created the product to collect fees and as it always does it got greedy. And now no one seems to know just how big the market is.  Nor does anyone know if Wall Street firms and banks are at risk themselves.  You have to hedge the products.   Not everyone is an expert on doing so...in all market environments.

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As for the numbers, Monday and Thursday saw the two worst point losses in the history of the Dow Jones Industrial Average; 1,175 on Monday, 1,032 on Thursday.  In percentage terms they were nowhere near record levels, but the bottom line is that even after bouncebacks Tuesday and Friday, all three major averages lost more than 5% on the week and the Dow Jones and S&P 500 hit the correction mark, a 10% decline off the all-time highs of just a few weeks ago on a closing basis, Thursday, with Nasdaq’s decline off its high being 9.7%.

Goldman Sachs estimates that higher stock prices added 0.6 percentage points to U.S. growth last year via the wealth effect – households spending their stock gains. By Goldman’s calculation, a 20% hit to prices this year could knock 1.1 percentage points off growth, which would more than wipe out the stimulative effect of the tax cut.  [Greg Ip / Wall Street Journal]

Meanwhile, there was little economic news on the week, with the ISM services reading for January at a 12 ½-year high, 59.9 (50 being the dividing line between growth and contraction), with the new orders component the best since Jan. 2011.

The Atlanta Fed’s GDPNow barometer for the first quarter is now at 4.0%, down from last week’s 5.4%.  It’s always this volatile at the beginning of a quarter in terms of the initial reports.

Wall Street has been frantically revising its 2018 earnings forecasts upward after the passage of the tax act, and as corporations issue bullish comments, with the Thomson Reuters estimate for S&P 500 earnings in the first quarter up 17.7 percent vs. an 11.7 percent forecast last December 20, while the forecast for all of 2018 is now 18.2 percent, up from December’s 11.5 percent estimate.

But then what about 2019?  This is why I think what Corporate America is saying after the current quarter, and after consumers have seen the actual increase in their paychecks and acted accordingly, will be more important than what we’ve heard this go ‘round in the initial blush from tax reform’s impact.

Europe and Asia

It was a rough week in the European equity markets, with London’s FTSE (-4.7%), Frankfurt’s DAX  (-5.3%) and Paris’ CAC 40 (-5.3%) having declines virtually identical to Wall Street’s.

On the economic data front, the Composite PMI for the eurozone, EA19, was 58.8 in January vs. 58.1 in December, a 12-year high.

As for the service sector (manufacturing numbers having been published last WIR), following are some readings for last month:

Germany 57.3 in Jan. vs. 55.8 in Dec., an 82-month high; France 59.2 vs. 59.1, with new orders at the best level in 6 ½ years; Italy 57.7 vs. 55.4, the best since July 2007; Spain 56.9 vs. 54.6; and Ireland 59.8 vs. 60.4.

Chris Williamson, chief economist, IHS Markit:

“At 58.8, the final Eurozone PMI for January came in even higher than the earlier flash estimate, registering the strongest monthly expansion since June 2006.

“If this level is maintained over February and March, the PMI is indicating that first quarter GDP would rise by approximately 1.0% quarter-on-quarter.

“The official initial estimate of GDP is likely to come out weaker than this, however, following the trend of recent GDP releases which show early growth estimates to be subsequently revised higher (and more in line with the PMI).

“For the same reason, the 0.6% GDP rise signaled by Eurostat’s preliminary flash estimate for the fourth quarter of 2017 is likely to be revised higher to approach the 0.8% indicated by the PMI.

“The strong upturn is also broad-based, which adds to the potential for the growth to become more self-sustaining as demand rises across the single currency area, feeding through to higher job creation as spare capacity is increasingly eroded.

“The survey data are therefore indicating that the eurozone has started 2018 with very good growth momentum, and that price pressures are building commensurately. If such impressive numbers continue to be seen in coming months, expect policymakers to sound increasingly hawkish.”

[In non-euro U.K. the service sector PMI was a disappointing 53.0, down from December’s 54.2, and another sign of the impact of Brexit and the looming uncertainty created by it.]

Meanwhile, the Bank of England has signaled the need for interest rate rises earlier and potentially larger than previously predicted, an attempt to prepare markets for higher borrowing costs in the near future.

In its first meeting of 2018, the Bank’s Monetary Policy Committee judged that if the economy moves in line with its projections, “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period,” than anticipated last November with its last report.  That said, the BoE left interest rates unchanged on Thursday.

European Central Bank head Mario Draghi says it’s too soon to declare victory over weak inflation, indicating it’s too early to set a definite end date for the bank’s money-printing stimulus despite the strengthening economy.

Germany: Chancellor Angela Merkel finally secured a fourth term, as her Christian Democrats (CDU) reached a coalition deal with the Social Democrats (SPD), albeit it is already being called a “loveless coalition,” one that shows the chancellor’s time could be coming to an end, “the incredible shrinking chancellor,” as some are saying.

The deal that ended months of political paralysis after Merkel had failed to form a coalition with two smaller parties, faces its first test when the SPD’s membership votes on Feb. 20 to ratify the deal.  Merkel’s camp is forced to defend a deal that sees the conservatives cede the crucial finance minister post (as well as the foreign and labor ministries) in exchange for a fourth term, but both camps had to make sacrifices to secure a deal.  The pact also promises an unusual half-time review after two years – already being seen as a possible opportunity for Merkel to step down.

One result of the coalition arrangement is it leaves the far-right Alternative for Germany as the country’s leading opposition party.

But others in Europe, such as French finance commissioner of the European Union, Pierre Moscovici, offered: “Good news also for Europe!”

The director of the European Council on Foreign Relations, Mark Leonard, said: “A slightly weakened Germany could be one of the things that helps create a sense of a more balanced Europe.  Certainly, the fact that Wolfgang Schauble is not finance minister will be greeted with enormous relief,” he added, referring to anger in parts of Europe over painful austerity measures after the eurozone crisis.

SPD leader Martin Schulz said his party had ensured that an agreement with the conservatives would put an end to “forced austerity” and set up an investment budget for the eurozone.

Following the accord, an Insa poll had support for the SPD dropping to 17 percent, below its election result of 20.5 percent. The conservatives slipped to 30.5 percent, meaning there would be no majority for a grand coalition if an election were held now.

Brexit: Prime Minister Theresa May has told her cabinet not to compromise when it comes to Brexit and demands for an ambitious trade deal.  May has said she wants an agreement with the EU that will allow cross-border trade without tariffs on goods and easy access to the single market for services such as banking and insurance.

But she also wants the U.K. to have control over immigration, law-making, and British taxpayers’ money...in other words, she wants to have her cake and eat it too.  Of course the EU won’t be so compliant.

The details of a transitional period – due to be agreed upon by March 22 – are necessary before the nitty gritty is worked out on trade.

While Mrs. May’s team seems pretty united today, the hard part is yet to come and when the EU’s remaining 27 member states use their leverage to push back, many believe the prime minister’s cabinet will fracture, which could lead to her removal.

One worrisome note for the U.K. was expressed by Japan’s ambassador on Thursday, who told Mrs. May in a meeting that if Japan’s companies are not able to operate profitably post-Brexit due to trade barriers, “not only Japanese, (but) no private company can continue operations. So it is as simple as that.”  Business will go elsewhere.

And then there is the Irish border question, which is still far from settled.

As for the EU, its chief Brexit negotiator, Michel Barnier, has said the U.K. “must respect the rules” of the bloc if it does not want to be part of a customs union.

“We have to respect the red lines of the British government, but they have to respect the rules of the Union.”

Eurobits....

--Italy’s national election is coming up in a few weeks and Silvio Berlusconi has re-emerged as a probable kingmaker, even as he himself is barred from becoming prime minister again. This week, Berlusconi claimed there are 600,000 illegal immigrants living in Italy and warned that they represent a “social time bomb,” as issues of race and violence have taken center-stage in the campaign.

[A drive-by shooting on Saturday in the city of Macerata that targeted migrants, all Africans, injuring six, was a huge national story, with the shooter being identified as a member of the right-wing Northern League.]

Berlusconi is calling for unauthorized migrants to be repatriated and for the creation of a Marshall Plan for Africa to dissuade migrants from leaving their home countries in the first place.

The three-time prime minister is echoing the language of the anti-immigrant Northern League, a party Berlusconi is in alliance with. The center-right coalition is expected to win the most votes in the March 4 vote, but as of today, it will be tough for it to find coalition partners if it doesn’t achieve an outright majority.

A recent Bloomberg average of January polls in Italy has the center-right at 37 percent, the ruling center-left at 27 percent and the anti-establishment Five Star Movement (which has vowed not to be part of any coalition) at 27.7 percent.

--Poland’s president signed into law a bill imposing jail terms for suggesting the country was complicit in the Holocaust, defying criticism from Israel, the U.S., and activists.

Andrzej Duda said in a televised address that the legislation would ensure Poland’s “dignity and historical truth.” The right-wing government says the law is needed to protect the reputation of its citizens as victims not perpetrators of Nazi aggression during World War II.

Israel says the law curbs free speech, criminalizes basic historic facts and stops any discussion on the role Poles played in Nazi crimes.

More than 3 million of Poland’s 3.2 million Jews were murdered by the Nazis, accounting for about half the number of Jews killed in the Holocaust.

Incredibly, you can go to prison now in Poland for up to three years for mentioning the term “Polish death camps.”  You know how I feel.

President Duda said the bill would ensure that Poland  is “not being slandered as a state and as a nation.”

Israeli Education Minister Naftali Bennett said on Monday, “The blood of Polish Jews cries from the ground, and no law will silence it.”

According to the U.S. Holocaust Memorial Museum, the Nazis also killed 1.9 million non-Jewish Polish civilians.  [Jerusalem Post]

Turning to Asia...China’s private / Caixin reading on the service sector for January came in at 54.7 vs. 53.9, the best since May 2012. Caixin measures the private economy, while the official government PMIs focus on large state enterprises.

In Japan, the services PMI for last month was 51.9 vs. 51.1 in December.

But there was more discouraging news on the wage front, which fell in December at the fastest pace in five months, meaning consumers could cut back in spending, further complicating efforts by the Bank of Japan to get inflation up to their 2% target.

Real wages – adjusted for inflation – fell 0.2% for all of 2017, following an increase in 2016 of 0.7%.

Street Bytes

--As alluded to above, the market suffered its worst week since Jan. 2016, with the Dow and S&P both losing 5.2%, and Nasdaq 5.1%. If we hadn’t rallied late today, it would have been the worst week since October 2008 at the height of the financial crisis.

What will next week bring?

--U.S. Treasury Yields

6-mo. 1.73%  2-yr. 2.07%  10-yr. 2.85%  30-yr. 3.16%

--Oil had its worst week in a long time, and it wasn’t just because of the market turmoil and second thoughts about global demand.  The energy complex was hit with the news of another rise in inventories after a run of 11 weeks of consecutive drawdowns that helped lead to the rally in crude.

--General Motors made $12.8 billion in pretax profits in 2017 while reporting a net loss for the year, mostly because of a $7.3 billion charge related to tax reform.  Pretax profit is the true measure of performance, though, and in North America, it dropped a bit from $12.4 billion to just under $12 billion, which impacts the profit-sharing checks going to UAW-represented workers on Feb. 23, this time $11,750, which is down from $12,000 last year.  But that’s real money. Congratulations, guys and gals.

GM’s shares rose on the solid earnings news, better than expected, and the automaker is operating on all cylinders, it seems. The company sold 8.9 million vehicles globally in 2017, 0.8% higher than 2016.

As for the profit-sharing bonus, the figure compares with $7,500 for Ford workers and $5,500 for Fiat Chrysler UAW reps, with FCA saying it would give an additional $2,000 to U.S. workers, aside from senior leadership.

--First off, major kudos to Elon Musk for the launch of his Falcon Heavy rocket the other day. That was way cool and totally inspirational.  A great moment for him and the SpaceX team.

But at the same time, Elon’s Tesla Motors reported a fourth-quarter loss of $675.4 million on revenue of $3.29 billion, the company’s biggest quarterly loss ever.

The company partly blamed the loss on high costs related to the production of the long-awaited Model 3 sedan.

The electric car maker said revenue was up 36% over the same period in 2016, mostly because of growth in deliveries of the Model S and Model X crossover.

Analysts who remain bullish on Tesla despite the constant loss of blood, said that once production of the Model 3 gets rolling, it’s no problemo in terms of cash flow.

But how can you be optimistic in this regard when Tesla hasn’t remotely come close to meeting any production goals?

Granted, more than 450,000 hopeful consumers placed refundable $1,000 deposits to claim the Model 3 when Tesla first began taking orders in early 2016, but on Wednesday the company advised production rates for the vehicle could be 2,500 cars a week by the end of March and 5,000 at the end of June.  Last fall, Tesla said it would hit 5,000 a week by the end of 2017.

A key issue for the automaker is the fact competitors like Chevy’s Bolt EV and Nissan’s Leaf are stealing sales from the Model 3.

Elon Musk, though, insists his Fremont, Calif., factory will be producing up to 700,000 vehicles a year...he just can’t say when, even as he said in a shareholder letter that he believed the company could begin generating “positive quarterly income on a sustained basis” relatively soon.

I think SpaceX will put a man on Mars before Tesla is generating positive cash flow.

But, Tesla does still have $3.4 billion in cash and they appear to have alleviated concerns they will need to raise more money soon.  [Those deposits are key.]

--Twitter reported its first quarterly net profit and topped the Street’s expectations, with shares surging 20%.

But Twitter missed analysts’ forecasts for user growth, reporting 330 million monthly active users for the quarter, a 4 percent increase from a year earlier but flat from the third quarter.

Twitter said usage was hurt by seasonal weakness and a change that Apple Inc. made to the Safari web browser that reduced the tally of users by 2 million.  Twitter had previously warned on these two issues, and it also said it was stepping up efforts to reduce spam, or automated accounts known as “bots” and fake accounts.

Monthly active users fell to 68 million from 69 million in the third quarter.

But the company swung to a net profit of $91.1 million, or 12 cents per share, in the fourth quarter, from a loss of $167.1 million, or 23 cents per share, a year earlier.  Revenue rose 2 percent year-over-year to $731.6 million, the first increase since the fourth quarter of 2016.

--Shares in Snap soared by about a third on Wednesday, and back above their initial public offering price for the first time in seven months after the instant-messaging site beat the Street on revenue, $285.7m for its fiscal fourth quarter, handily exceeding estimates of $253m, while the company said it was chewing through less cash that expected.  It was the first time since the May 2017 IPO that Snap managed to deliver results ahead of analysts’ forecasts.

Snap added 8.9 million daily users during the fourth quarter – the largest addition of users since the third quarter of 2016, when it was still a private company. The 5% growth to 187 million users in the three months was an increase from 2.9% growth during the third quarter.

The IPO was priced last year at $17 and Snap closed the week at $18.95, way down from the intraday high.

--Walt Disney Co. delivered stronger-than-expected profit in its fiscal first quarter – thanks in part to the federal tax cut – but its revenues dipped below the Street’s estimates with continued declines at the ESPN cable channel and ABC broadcast network.

Investors were expecting revenue of $15.5 billion and Disney delivered $15.4bn.

Disney’s media networks unit, which houses the television business, reported a decline in its operating income for the seventh consecutive quarter, with ESPN reporting operating income of $1.2 billion, down 12% from a year earlier. The sports network continues to lose subscribers amid the cord-cutting trend, with ESPN now being in about 87 million homes, vs. 99 million a decade ago, according to Nielsen data.

Disney is launching ESPN+, a sports streaming service aimed at helping the company capture younger viewers who continue to turn away from traditional pay-TV options.  ESPN+ will cost $4.99 a month when it debuts later this year.

I kind of like this idea, a subscription streaming Major League Baseball and National Hockey League games, among other events.

Disney’s film studio reported operating income of $829 million that was off 2% from a year earlier. “Star Wars: The Last Jedi,” debuted in mid-December and has grossed more than $1.3 billion worldwide, but the company had a decrease in home entertainment results.

--News Corp. reported a 3% rise in revenue for the December quarter, with growth in its digital real-estate unit largely offsetting weakness in the advertising business that weighed on the news and information-services division.

But ex-charges, profit beat forecasts.  Revenue at the news and information-services business (the company publishes the Wall Street Journal, New York Post and major newspapers in the U.K. and Australia) was flat compared with year ago levels, with advertising revenue for the entire news unit down 6%, though circulation and subscription revenue grew by the same amount.

The Wall Street Journal added 71,000 new digital subscribers in the quarter and now has about 1.4 million.

But News Corp. CEO Robert Thomson said in a statement: “The bot-infested badlands are hardly a safe space for advertisers, whose brands are being tainted by association with the extreme, the violent and the repulsive.”

--Meanwhile, the New York Times Co. reported solid revenue growth for the fourth quarter, driven primarily by digital subscriptions as a sizable one-time pension settlement weighed on net income.

The company’s revenue increased 10.1% to $484.1 million in the quarter.  Subscription revenue jumped 19.2% to $269.4 million as the paper added 99,000 digital news subscribers and 58,000 subscribers to its crossword and cooking apps.

Digital advertising revenue grew 8.5%, while print advertising dropped 8.4%.  In total, ad revenue was down 1.3% from the same period a year earlier.

CEO Mark Thompson said for the full year the Times had taken in $607 million in total digital revenue, “putting us well on track toward our goal of $800 million” by 2020.

--Chipotle Mexican Grill reported same-store sales of 0.9 percent in the fourth quarter, better than expectations, ditto profits, but the shares fell over 10 percent as customer traffic continued to slide.  The sales gain and profits was largely due to a 5 percent price hike.

--Yum! Brands announced plans to buy stock worth $200 million in online food-ordering company Grubhub, whose shares hit an all-time high with the liquidity injection as the two companies outlined a strategy for driving sales at Yum’s KFC and Taco Bell restaurants.  The president of another Yum subsidiary, Pizza Hut, is going to serve on Grubhub’s board.

Greg Creed, Yum CEO, said: “We are committed to making our iconic brands easier to access through online ordering for pickup and delivery, and aggressively pursuing delivery as a strategic global growth opportunity.”

I love this; KFC and Taco Bell being my two favorites, only they don’t have stores near me like Burger King, McDonald’s and Wendy’s do.

For the quarter, Yum beat the Street on the bottom line, though its same-store sales figure of 2% was a little shy, while overall revenue was $1.58 billion.  [Same-store sales at KFC rose 3%, 2% at Taco Bell, and 1.4% at Pizza Hut.]

Meanwhile, Yum China Holdings, separate from Yum! Brands (which is everything but China), reported total revenue rose 3%, with same-store sales up 5%, (KFC up 7% and Pizza Hut 1% higher).

--Las Vegas casino mogul Steve Wynn was forced to resign as CEO of his company, Wynn Resorts, with the founder besieged by sexual misconduct allegations.

“It is with a collective heavy heart, that the board of directors of Wynn Resorts today accepted the resignation of our founder, CEO and friend Steve Wynn,” the company said in a statement.  ‘Steve Wynn is an industry giant.  He is a philanthropist and a beloved leader and visionary.  He played the pivotal role in transforming Las Vegas into the entertainment destination it is today.”

Wynn said late Tuesday that the negative publicity had been too overwhelming to continue in his current role.

“In the last couple of weeks, I have found myself the focus of an avalanche of negative publicity,” he said.  “As I have reflected upon the environment this has created – one in which a rush to judgment takes precedence over everything else, including the facts – I have reached the conclusion I cannot continue to be effective in my current roles.”

We seem to have some facts, however, in Mr. Wynn’s case, and he is a dirtball, pure and simple. The Wall Street Journal interviewed dozens of people who worked at Wynn casinos who said his behavior represented a pattern of sexual misconduct, including allegedly pressuring some employees to perform sex acts with him.

Steve Wynn faces investigations by gambling regulators in two states.

Jacky Wong / Wall Street Journal

“For the moment, investors seem to be hoping things will soon go back to normal at Wynn Resorts, following (Wynn’s) departure as chief executive. A surge in its U.S.-listed shares on Wednesday recouped around half of the stock’s losses since (the Journal’s) first reported allegations of sexual improprieties against the gambling tycoon late last month.

“But many uncertainties remain. Mr. Wynn was known to be hands-on with the company’s day-to-day operations. Though the executive team taking over has been around Wynn Resorts for years, the founder’s departure poses significant risks.”

Aside from the regulatory issues, almost all of Wynn Resort’s growth the past two years has come from its Hong Kong-listed subsidiary Wynn Macau, of which it owns 72%.  Macau, though, is being flooded with new competitors for Wynn.

--As I was posting last week, the story was breaking that the Federal Reserve was cracking down harder than before on Wells Fargo, former Fed Chair Janet Yellen’s parting gift.  She sent a message to the Wells board that it would be held responsible for the company’s behavior.

On Friday, Wells was banned from getting bigger until it can convince regulators that it has cleaned up its act.

Hours before she officially left her post, Yellen said in a statement: “We cannot tolerate pervasive and persistent misconduct at any bank.

As part of the negotiations between the bank and the Fed, Wells said it would replace four members of its 16-member board, although the changes were not mandated.

Yellen’s successor, Jerome Powell, was the top  Fed official overseeing the agreement, and it was back in August in a speech that he said of the banking industry in general, “Across a range of responsibilities, we simply expect much more of boards of directors than ever before.”

The bottom line is Wells will not be able to increase the assets – like loans or investments – it was holding above its current level of about $2 trillion.

Needless to say, Wells Fargo shares did not act well, declining 10% after the news came out. CEO Tim Sloan said on an analysts’ call Friday night that while the bank is “open for business,” he expected the Fed action to reduce 2018 after-tax profit by between $300 million and $400 million.

--Separately, according to a Wall Street Journal analysis of federal data, the number of bank branches in the U.S. shrank by more than 1,700 in the 12 months ended in June 2017.  They then continued to fall in the second half of 2017.

But you do have exceptions, such as JPMorgan Chase recently announcing it would add 400 banks in select markets. 

--Procter & Gamble Co. will be cutting hundreds of factory jobs in Kansas City, Kan., and Iowa City, Iowa, and move work to a plant being built in West Virginia, part of a 10-year overhaul designed to get soap, razors and diapers to retailers more quickly.

A new factory in Tabler Station, W. Va., set to open later this year, will employ 900 by 2020.

--As reported by the Wall Street Journal’s Jesse Newman:

“U.S. farmers are gearing up for another tough year.

“Farm incomes are expected to hit their lowest point since 2006 and borrowing costs are rising, federal data shows, as a deepening slump in the agricultural economy enters its fifth year.

“A string of bumper corn and soybean harvests has added to the glut of grain worldwide, eroding prices for U.S. farmers.  Foreign rivals like Russia and Brazil are also chipping away at U.S. dominance in the global grain trade, helping to fuel a multiyear downturn that is pushing some farmers out of business.”

The U.S. Dept. of Agriculture this week forecast that farm incomes would fall 7% to $60 billion in 2018, less than half the record $124 billion farmers earned in 2013.

A big issue going forward now is rising interest rates, amid heavy borrowing, with interest expenses tied to farm real estate projected to hit the highest levels since 1989, the USDA said.

And then you have concerns over trade disputes.  Anxiety in rural America is warranted.

--Hasbro posted an unexpected decline in quarterly revenues as demand for its Star Wars and other partner brands fell, overall revenues falling 2 percent in the fourth quarter, missing analysts’ estimates.  Hasbro, like rival Mattel, is suffering from the bankruptcy of Toys ‘R’ Us, which accounted for a chunk of their sales.

But Hasbro also said that while demand for its Star Wars toys was soft, the company announced it was working with Disney to get its toys on the market sooner for the upcoming release of the next Star Wars movie, “Solo: A Star Wars Story.”

And in the end, reported profit for the fourth quarter beat the Street so the shares rose.

--Los Angeles biotech billionaire Patrick Soon-Shiong is buying the San Diego Union-Tribune and Los Angeles Times newspapers from their Chicago-based parent company, Tronc (formerly known as Tribune Publishing); a deal, if consummated, that would return the U-T and The Times to private ownership.  The purchase price is said to be $500 million, which Tronc will use to pay down debt and expand its digital strategy across its remaining papers, which include the Chicago Tribune, Orlando Sentinel and Baltimore Sun.

--The U.S. solar industry lost nearly 10,000 jobs last year, led by steep losses in mature markets like California and Massachusetts where installation growth has slowed, according to a report from the non-profit research firm The Solar Foundation, which began tracking solar jobs in 2010.

Nationwide, solar employment fell 3.8 percent to 250,271 jobs in 2017 from a high of 260,077 in 2016.

The industry did report strong job growth in states like Minnesota, Arizona and New Jersey. 

--Donations to U.S. colleges and universities jumped to a record $43.6 billion for the fiscal year ending June 30, giving increasing by 6.3%, 3.7% adjusted for inflation, according to the Council for Aid to Education’s annual Voluntary Support of Education survey.

This includes five gifts of at least $100 million, compared with two such megagifts the prior year.

But now it’s about the new tax law, which reduces the tax incentive for charitable giving.

Last year, Harvard led the way with $1.28 billion raised, with Stanford University second at $1.13 billion, and Cornell third at $743.5 million.

The top 20 gift recipients last year, making up less than 1% of all colleges, accounted for 28.1% of the haul.

Of the $100 million gifts, two of the five went to Cornell, one to Columbia, and the others to MIT and Stanford. [Melissa Korn / Wall Street Journal]

--For the record, the ratings for the Super Bowl fell 7% from last year, though the audience, 103.4 million, according to Nielsen, still made it the tenth most-watched program in history.

The decline did not affect NBC financially in the short term as the advertisers who spent an average of $5 million for a 30-second commercial are not guaranteed a minimum audience.  But it could be detrimental to CBS when it sells next year’s ads, though we’ll see how regular-season audiences are trending next September and October.

What was interesting is the audience for big cities was only 3%, while the viewership in the rural heartland was down more than 7%.

--Researchers at Japan’s Yokohama National University have concluded that McDonald’s French fries might lead to a cure for baldness, but not by eating them.  A chemical found in the fries has been used to grow hair follicles on mice, according to a study published in the journal Biomaterials.

The key chemical is dimethylpolysiloxane, which is an anti-foaming agent in the oil used to fry foods including French fries, Chicken McNuggets and fried fish sandwiches.

--Sales of Jameson Irish whiskey surpassed four million cases in the second half of last year, as the spirit recorded sales growth of 12 percent year-on-year, with Jameson experiencing double or triple digit growth in 80 markets across the world, as reported by the Irish Independent.

And that’s your hard liquor update for the week.

Next week, in preparation for the Daytona 500, we’ll take a look at the grain alcohol market.

Foreign Affairs

Syria: It was a horrible week here.  I’ve been warning for months now that we’ve been ignoring the renewed war here at our own peril, and it’s sucking in Israel, and the United States has fumbled away its influence on the outcome, but then that, once again, goes back to the summer of 2012 and Barack Obama’s historic mistake of not working with Turkish President Erdogan on a no-fly zone, in the very area that is now seeing Turkish troops cross into Syria to take on the Kurds, who the U.S. is supposed to be supporting.

The war in Syria is now on a number of fronts, in some cases isolated enclaves, such as Eastern Ghouta, located on the eastern outskirts of Damascus, which on Friday suffered through a fifth straight day of a bombing campaign that has killed more than 230 civilians this week, as reported by the Syrian Observatory for Human Rights.

Syrian warplanes have been battering the enclave’s towns since Monday, trapping thousands of families in makeshift bomb shelters and overwhelming rescue workers.

The UN has been crying for a month-long ceasefire to allow for desperately needed aid deliveries and medical evacuations and the world has been silent, or, in the case of Russia, in collusion with the government in Damascus.

At least 75 were killed on Thursday, as Eastern Ghouta, home to an estimated 400,000, who have lived under a crippling government siege snice 2013, hunkered in fear.  Save the Children estimates 4,000 families live in basements and bunkers. There is no path for escape.  CARE International said it is virtually impossible to provide relief.

Yet Eastern Ghouta is supposed to be one of four “de-escalation zones” declared last year.  But  on Thursday, the UN Security Council failed to support a proposal for a ceasefire.  While the U.S. backed it, Russia said it was “not realistic.”

Washington and Moscow have been at odds all week, as U.S.-led air strikes hit forces allied with the Damascus regime in eastern Syria late Wednesday and early Thursday.

U.S. Defense Secretary Jim Mattis said the coalition acted in self-defense after pro-Damascus forces moved on an area under the control of the U.S.-backed Syrian Democratic Forces.  The U.S. says at least 100 pro-regime fighters were killed.

Syria condemned the strike against its forces as a “war crime,” the Russian ambassador to the UN agreeing with the description. Syria’s foreign ministry called for the U.S. coalition to be dismantled.

Here’s the bottom line. Since the rout of Islamic State last year, many, such as President Trump, have led us to believe the Syrian war is winding down. Instead, the carnage is reaching a new level.

Understand, since December, 300,000 have fled new fighting.  Thousands of innocents have been killed.  And the Assad regime has not authorized a single aid delivery to besieged areas, or an evacuation for urgent medical treatment, in two months, according to the UN.

This is beyond sickening, and we have a clueless leader in the White House...a man being rolled by the Kremlin.

Assad needs to be taken out, but the window of opportunity to do so without causing a major conflict with Russia has long passed.   

Separately, Eric Schmitt of the New York Times:

“Thousands of Islamic State foreign fighters and family members have escaped the American-led military campaign in eastern Syria, according to new classified American and other Western military and intelligence assessments, a flow that threatens to tarnish American declarations that the militant group has been largely defeated.

“As many of the fighters flee unfettered to the south and west through Syrian Army lines, some have gone into hiding near Damascus, the Syrian capital, and in the country’s northwest, awaiting orders sent by insurgent leaders on encrypted communications channels.

“Other battle-hardened militants, some with training in chemical weapons, are defecting to Al Qaeda’s branch in Syria.  Others are paying smugglers tens of thousands of dollars to spirit them across the border to Turkey, with an eventual goal of returning home to European countries....

“ ‘ISIS fighters are fleeing Syria and Iraq,’ the homeland security secretary, Kirstjen Nielsen, said in remarks in Washington last week. ‘Jihadists are going underground, dispersing to other safe havens, including on the internet, and returning to their home countries.’”

Next week, Secretary of State Rex Tillerson tours the region, including a brief trip to Turkey, which Tillerson admitted the other day will be difficult. “The rhetoric is hot. The Turks are angry, and this is a difficult time to do business but it’s our belief that there are still some very fundamental shared interests.”

Tillerson said he is going to urge President Erdogan to show restraint in their operations in Syria.  Today, Turkish warplanes bombarded Kurdish militia targets in the Afrin region.  The Syrian Observatory said the strikes killed seven YPG forces and two civilians.  A Kurdish official said the Turks’ offensive thus far had killed 160 people, including 26 children and 17 women.  60,000 have been displaced.

Lastly, a Russian fighter jet was shot down in Idlib province, northern Syria, a former al-Qaeda-affiliated group claiming responsibility and apparently using a surface-to-air missile (a MANPAD, man-portable anti-aircraft system). The Russian pilot reportedly blew himself up with a grenade rather than be captured.  Russia then launched an airstrike in retaliation and at least 14 civilians were killed, according to the rescue organization known as the White Helmets. Strikes by Russian and regime warplanes have killed at least 144 civilians in Idlib over the past five weeks.

Israel: Very much related to the above, Israeli Prime Minister Benjamin Netanyahu paid a rare visit to the occupied Golan Heights on Tuesday, peering across the nearby border into Syria and warning Israel’s enemies not to “test” its resolve. Netanyahu has been cautioning against any attempt by Iran to deepen its military foothold in Syria or construct missile factories in neighboring Lebanon.

Lebanon’s leaders accused Israel this week of destabilizing the border region between them amid rising tensions.

Netanyahu said in remarks from the Golan: “We seek peace but are prepared for any scenario and I wouldn’t suggest to anyone that they test us.” He did not mention Iran or its Lebanese ally, Hezbollah, by name.  He didn’t need to.

But the prime minister could be indicted this coming week as part of the long-running dual corruption investigations.  He would, however, be able to stay in office, at least for the time being.   But then there’s no telling what he would do to distract the people so as to change the topic.

North / South Korea: The PyeongChang Olympic Games are underway.  Vice President Mike Pence arrived in Seoul on Thursday determined to remind the world of Pyongyang’s advancing weapons capability, the same day North Korea staged a large military parade.

Earlier, Pence strongly suggested further sanctions against Kim Jong Un’s regime were coming, saying the Trump administration would continue pressing to isolate the North.

“The time has come for North Korea to abandon its nuclear and ballistic missiles ambitions, set aside this long pattern of deception and provocation and then – and only then – can we begin to move forward to a peaceable outcome on the peninsula,” Pence told reporters traveling with him.

Thursday night, Pence met with South Korea President Moon Jae-in, who has embraced the diplomatic thaw with the North; Moon hoping the Games help decrease tensions.

As for a potential meeting at PyeongChang with the North Korea delegation, Pence said he remained open to the possibility of an exchange.

But as part of the North’s charm offensive, Kim Yo Jong, the only sister of Kim Jong Un, is leading the nearly two-dozen-strong government delegation.  They are set to meet with President Moon on Saturday.  Vice President Pence, though, opted not to acknowledge her despite sitting feet from her at the opening ceremonies.

The sister was promoted by her brother last year to the ruling party’s political wing, and her presence represents the Kim dynasty’s first official representative to set foot in the South.  Kim Yo Yong is believed to be in her late 20s and shares the same mother as her brother. They grew up together in Pyongyang and attended the same Swiss boarding school, the Yonhap News Agency has reported.

Separately, South Korea’s intelligence agency told lawmakers North Korean hackers were probably behind the $530 million theft of virtual coins from a Japanese cryptocurrency exchange, Coincheck, in December, though it presented no evidence.  It just seems like a natural for North Korea to hack coin markets.  South Korea has previously said Pyongyang was responsible for local cryptocurrency hacks there in 2017.

China: Beijing urged the United States to drop its “Cold War mentality” after the Pentagon announced it planned to diversify its nuclear arsenal with smaller bombs.

“The country that owns the world’s largest nuclear arsenal, should take the initiative to follow the trend instead of going against it,” China’s defense ministry said on Sunday.

The U.S. sees its current arsenal as too big to be used and wants to develop low-yield bombs.

The Pentagon’s Nuclear Posture Review (NPR) argues that developing smaller nuclear weapons would challenge the assumption that its nuclear arsenal is becoming obsolete and no longer an effective deterrent, naming China, Russia, North Korea and Iran as potential threats.

China claims its nuclear force is defensive in nature.  Ha. The NPR accused China of “expanding its already considerable nuclear forces” but China defended its policy saying it would “resolutely stick to peaceful development and pursue a national defense policy that is defensive in nature.”

Russia accused the U.S. of warmongering. The foreign ministry, in a statement, said: “From first reading, the confrontational and anti-Russian character of this document leaps out at you.”

Russia: Opposition leader Alexei Navalny published a video investigation claiming that Russian oligarch Oleg Deripaska acted as a messenger between President Trump’s ex-campaign chief Paul Manafort and a top Kremlin foreign policy official.

Manafort is suspected of having offered information on the campaign to Kremlin-linked metals tycoon Deripaska, which was seen in Washington as evidence of Russia’s suspected interference in the U.S. election.

In his investigation released on Thursday, Navalny said he found the trail in a video posted by a self-described “sex huntress” on social media depicting Deripaska and Russia’s Deputy Prime Minister Sergei Prikhodko aboard a yacht in August 2016.

In July 2016, Manafort offered private briefings to Deripaska on the Trump campaign’s progress in an email, as reported by the Washington Post last year.

Navalny’s investigation alleges that the footage of Deripaska’s yacht meeting with Prikhodko, who served as a foreign policy advisor to Russian leaders for more than two decades, proves the oligarch’s role as a conduit between the Trump campaign and the Kremlin.

“[It’s] because these briefings were actually for Putin, the Kremlin, the Federal Security Service,” Navalny says in the video.

“Deripaska simply transmits, as an agent, this information to Putin. He’s very close to Putin after all,” the opposition leader adds.

Navalny, who has produced similar video investigations on the likes of  Prime Minister Dmitry Medvedev, has been barred from running in next month’s presidential elections by Russia’s Central Elections Committee.  [Moscow Times]

As for the election March 18, with Putin headed to a fourth term, a poll by the Levada Center, the only independent pollster in Russia, revealed back in December that only 28 percent of respondents were sure they would participate.

But now Levada has stopped publishing election polls after the Kremlin labeled the center a “foreign agent,” which puts Levada at risk of prosecution if it is accused of participating in election campaigns in any form.

So a poll loyal to the Kremlin from the Russia Public Opinion Research Centre forecasts turnout of 70 percent, with Putin winning 73 percent.  Look for these to be roughly the final numbers after election officials work their magic in counting the ballots.

Navalny has been calling for a voters’ strike.  In a video appeal last weekend, he said: “You have been deprived of your political rights. Demand normal, competitive elections, and not this fake!”

Random Musings

--Presidential tracking polls....

Gallup: 40% approve of Trump’s job performance, 57% disapprove [Feb. 4]
Rasmussen: 49% approve, 50% disapprove

--In California, four months before a June 5 primary, Lt. Gov. Gavin Newsom and former Los Angeles Mayor Antonio Villaraigosa are running neck and neck in the race for governor, according to a Public Policy Institute of California survey, Newsom favored by 23% and Villaraigosa 21%.  The Republican candidates are way behind and won’t be a factor. The significance of that is that in California, the two candidates who receive the most votes in the primary advance to the November general election, regardless of party. 

In the race for the Senate, Sen. Dianne Feinstein, who is seeking a fifth term, leads by a wide margin over her most formidable challenger, state Senate President Pro Tem Kevin de Leon of Los Angeles. All four of the top candidates are Democrats, further showing how dismal the prospects are for the Republican Party in the state.

--President Trump blew off the traditional Super Bowl TV interview, but the White House issued a statement on the game, the president saying: “Their sacrifice is stitched into each star and every stripe of our Star-Spangled Banner. We hold them in our hearts and thank them for our freedom as we proudly stand for the National Anthem.”

No players from the Patriots or Eagles were spotted kneeling or sitting during Pink’s singing of the “Star-Spangled Banner.”

--Speaking of the Super Bowl, the New Yorker’s David Remnick had a column the other day titled “Football’s Long Eclipse” which addresses the elephant in the room.

In part:

“When I was a kid, I watched (the Ed and Steve) Sabol-produced films incessantly:  ‘NFL Game of the Week,’ ‘Hard Knocks,’ ‘Greatest Moments’...and also ‘Football Follies,’ which featured the League’s fumbles, pratfalls, and bobbled balls. Sabol made the games far more dramatic than they were; there were no longueurs. Each moment of action was heightened, prolonged, monumentalized.

“But what the Sabols, to say nothing of the various NFL commissioners, broadcasters, and advertisers, were not especially eager to emphasize was the damage. Super-Slow Motion was a super deception. Collisions on the field that led to fractured arms and legs, broken backs, cracked spines, torn ligaments, and, above all, concussions, were lost under all the Wagnerian flights, the basso-profundo voice-overs, and the mythopoetical scripts.

“The hits were always ‘spectacular,’ never gruesome. Injured players got ‘dinged,’ then they ‘shrugged it off.’ Someone got his ‘bell rung’ or his ‘cage rattled.’ Euphemism was, for decades, the stoical language of football. And yet we now know, and we have known for long enough, that football doesn’t have ‘an injury problem’; it has a brain-damage problem. Countless players suffer from early dementia, depression, confusion, suicidal tendencies, and countless other alarming, often mortal, conditions resulting from the game....

“How do you ‘fix’ a game in which the attraction of it resides in its violence, in the crash of huge, super athletic men, down after down, game after game, year after year? A special helmet?  More rule changes? No less an authority than the President of the United States has complained that rule changes are ‘ruining the game.’  ‘Today, if you hit too hard, fifteen yards, throw him out of the game!’ an outraged President Trump said during a rally in Alabama last year....

“This will not be the last Super Bowl any more than Ali-Frazier III was the last heavyweight-championship fight. But, just as boxing inexorably shifted to the margins of American life, this might be, for football, the start of the long eclipse.”

--Kyle Smith / New York Post

“Men are scared, and feminists are delighted. But the urge to call out and punish male sexual transgression is bound to clash with an inescapable truth: We’re all in this together, men and women.

“Consider what’s happening in the capital of Florida. Female staffers and lobbyists have found ‘many male legislators will no longer meet with them privately,’ reported The Miami Herald. “I had a senator say, ‘I need my aide here in the room because I need a chaperone,’’ lobbyist Jennifer Green told the paper.  ‘I said, ‘Senator, why do you need a chaperone?...Do you feel uncomfortable around me?’ ‘Well,’ he said, ‘anyone can say anything with the door shut.’’

“  ‘I’m getting the feeling that we’re going back 20 years as female professionals,’ said Green, who owns her company. ‘I fully anticipate I’m going to be competing with another firm that is currently owned by some male, and the deciding factor is going to be: ‘You don’t want to hire a female lobbying firm in this environment.’’

“This kind of thinking is catching on in aggressively P.C. Silicon Valley, where men are taking to message boards like Reddit to express interest in sex segregation – sometimes labeled ‘Men Going Their Own Way,’ or the ‘Man-o-Sphere.’  How will that work out for women in the tech industry, where they already face substantial challenges?....

“Writing in The American Interest, Claire Berlinski calls the #MeToo movement ‘a frenzied extrajudicial warlock hunt that does not pause to parse the difference between rape and stupidity’ and ‘a classic moral panic, one that is ultimately as dangerous to women as to men.’ She tells a story about how she just discovered she has a new power: the power to ruin the career of a professor she knew at Oxford who grabbed her butt 20 years ago while drunk at a party.  ‘I was amused and flattered,’ she writes, saying, ‘I knew full well he’d been dying to do that.... But I also had power over him – power sufficient to cause a venerable don to make a perfect fool of himself at a Christmas party. Unsurprisingly, I loved having that power.’

“Reformers should keep her underlying point in mind: Change may be good, but be wary of unintended consequences. Turning men and women into hostile opposing camps is not going to be good for either sex.”

--State health officials in California today said that 36 Californians under the age of 65 died of the flu in the first week of February, making it 163 Californians under 65 that have died of the flu since October, compared with 40 at the same time last year.

The number of children nationwide who have died is up to 63.

--I received my Wake Forest Magazine the other day and I was sad to see the passing of one of my political science professors, Richard D. Sears.  This guy was out of central casting for what you’d expect a strait-laced professor to be.  He was very tall and after we were all seated he  would stride in and tower over us. 

After I graduated, shockingly, my three official “advisers” from school, my freshman adviser, poli-sci (in which I received my B.A.) and fraternity adviser all died within the first six years.  It was kind of shocking. They were all young.

My political science adviser, Dr. Steintragger, was a fan of the philosopher Jeremy Bentham, the father of utilitarianism, a principle more famously put forward after by John Stuart Mill. It was always “Jeremy Bentham said....”  [I just looked up Bentham to refresh my memory and I see he was in favor of monetary expansion, i.e., free money, as the best way to grow an economy and gain full employment. Gee, see also “today.”]

Anyway, Dr. Steintragger and I would have our regularly scheduled appointments and he knew what I loved, goofing off at the time, so we just talked about life. A good guy.  Ditto Dr. McDowell and Dr. Reinhardt.

--Fox News’ Martha MacCallum had an interview with South Carolina Republican Congressman Trey Gowdy the other day, Gowdy having announced he wasn’t seeking re-election and yours truly having said last week I admired him.

Gowdy said when he announced he was leaving that he loved practicing law and the justice system far more than being a politician.  And then upon questioning from MacCallum, who was trying to get the real answer why, at the height of his influence, which is considerable in Congress, he was really leaving, Gowdy said it was just time to do something else and focus on one simple principle.

“I think the objective is to lead an honorable life.”

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Pray for the men and women of our armed forces...and all the fallen.

God bless America.

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Gold $1318
Oil $59.05

Returns for the week 2/5-2/9

Dow Jones  -5.2%  [24190]
S&P 500  -5.2%  [2619]
S&P MidCap  -5.1%
Russell 2000  -4.5%
Nasdaq  -5.1% [6874]

Returns for the period 1/1/18-2/9/18

Dow Jones  -2.1%
S&P 500  -2.0%
S&P MidCap  -4.2%
Russell 2000  -3.8%
Nasdaq   -0.4%

Bulls 54.5
Bears 15.5 [Source: Investors Intelligence...big drop for bulls, finally, from 66.0 the week before.]

Have a great week.

Dr. Bortrum posted a new column!

Happy Birthday, Bro!

Brian Trumbore

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