Week in Review

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Week in Review

12/23/2017

For the week 12/18-12/22

[Posted 11:00 PM ET, Friday]

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Edition 976

Trump World...Tax Reform....

Consider this column just a prelude to next week, which I plan on being a stem-winder, time willing...I would like to enjoy some egg nog over the holidays, after all.

But for now it was a big week for our president and he’s been torqued off he’s not getting enough credit for all of his accomplishments, The Donald being a most insecure sort.

So I thought I’d give him some airtime, through a few tweets of his the past few days.

“Stocks and the economy have a long way to go after the Tax Cut Bill is totally understood and appreciated in scope and size.  Immediate expensing will have a big impact. Biggest Tax Cuts and Reform EVER passed. Enjoy, and create many beautiful JOBS!”

“DOW RISES 5000 POINTS ON THE YEAR FOR THE FIRST TIME EVER – MAKE AMERICA GREAT AGAIN!”

“Together, our task is to strengthen our families, to build up our communities, to serve our citizens, and to celebrate AMERICAN GREATNESS as a shining example to the world....”

“The Massive Tax Cuts, which the Fake News Media is desperate to write badly about so as to please their Democratic bosses, will soon be kicking in and will speak for themselves. Companies are already making big payments to workers. Dems want to raise taxes, hate these big Cuts!”

“Will be signing the biggest Tax Cut and Reform Bill in 30 minutes in Oval Office. Will also be signing a much needed 4 billion dollar missile defense bill.”

“With all my Administration has done on Legislative Approvals (broke Harry Truman’s Record), Regulation Cutting, Judicial Appointments, Building Military, VA, TAX CUTS & REFORM, Record Economy/Stock Market and so much more, I am sure great credit will be given by mainstream news?”

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No, I’m not saying anything snarky today.  He gets his victory dance, though it’s my column and I’ll have a few things to say next time, many of which won’t be kind to our leader.  For now the economy is indeed growing, as is everyone else’s in the world, which is kind of important, you know, and the stock market is up bigly.

ALL GOOD! ....and on to the review....

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Before I get into the ‘Tax Cuts and Jobs Act,’ which was approved by the House 224-201, and the Senate 51-48, before being signed by the president today, the House and Senate approved a stopgap spending bill on Thursday, ensuring there would be no government shutdown days before Christmas, the Senate voting 66-32 to approve the roughly four-week continuing resolution (CR) that funds government through Jan. 19, the House passing it 231 to 188.

[The Senate needed 60 votes to overcome procedural hurdles, while the House required a majority, meaning the GOP needed at least eight Senate Democrats to enact the bill and they received more than that...enough Democrats not wanting to be associated with a shutdown.]

But while this maneuver was expected, there were some rough spots on the CR, with defense hawks pressing for more funding for the Pentagon, while a coalition of progressive Democrats bucked the bill because lawmakers failed to get a deal on the Deferred Action for Childhood Arrivals (DACA).  Democrats demanded, to no avail, that Congress pass the Development, Relief and Education for Alien Minors (DREAM) Act.

So this will have to wait until January, with President Trump having set a March deadline for Congress to come up with a resolution to the issue.

In addition, two health-care bills that the White House and Senate Majority Leader Mitch McConnell (R-Ky.) had promised to move in exchange for Maine Republican Sen. Susan Collins’ support on the tax-cut bill is also now held off until January.  She will demand results then.

The funding bill does include a short-term extension of the Children’s Health Insurance Program (CHIP), some spending “anomalies” for defense, and other items, including extension of a controversial surveillance program...the National Security Agency’s warrantless surveillance program, which allows government to collect emails and text messages sent by foreign spies, terrorists and other foreign targets overseas.

In addition, Congress left town without being able to agree on an $81 billion hurricane and wildfire relief package.

Democrats complain more could have been done had Republicans not put them on the back burner for the tax package.

January is going to be a mess.  For one, Republicans want to raise defense spending more than spending on non-defense programs, while Democrats want equal increases.

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As for the tax plan, it is as I laid out last week, with some of the bigger aspects the doubling of the standard deduction to $12,000 for singles, $24,000 for couples.

The top bracket drops from 39.6 percent to 37 percent, giving a major windfall to the wealthiest Americans.  [The lowest of seven tax brackets is at 10%.]

The corporate rate plummets to 21% from 35%. [For multinationals with cash overseas, the one-time repatriation tax is 7.5% (14.5% for cash).  We’re all waiting to see how this works...and how much comes back...and what companies use it for.  The decision to leave it overseas or bring it home is not an automatic one, despite what you might hear.]

The legislation also creates a 20% business income tax deduction for owners of “pass-through” businesses, such as partnerships and sole proprietorships, and allows for immediate write-off for corporations of the cost of new equipment, and eliminates the corporate alternative minimum tax.  The write-off for capital equipment is indeed important and impactful.

The tax act will also double the threshold of the estate tax from the current minimum of $5.5 million to $11 million ($22 million for married couples).

And it would open Alaska’s Arctic National Wildlife Refuge to oil and gas drilling, a longtime Republican priority that most Democrats fiercely oppose.

But for states such as California, New York, New Jersey and Connecticut, the cap on deductions for state and local taxes (SALT) is highly negative, just $10,000, combined.  Property values in these states will fall and leave less money for public schools and road repairs.

And the mortgage interest deduction is smaller, a cap of $750,000 rather than on $1 million worth of mortgage loans.

The individual mandate has been repealed, meaning some buying health insurance because they are required by law to do so are expected to go without coverage, leaving insurers stuck with more people who are older and ailing.  Ergo this is expected to make average insurance premiums on the individual market go up by about 10 percent.  [Someday, when I have the time, I’ll get into my own insurance nightmare.]

But while there were celebrations among Republicans for keeping a campaign promise, as well as in the White House, the polling data has been negative on the tax legislation.

In a USA Today poll, 32% support the bill, 48% oppose it.

In a CNN poll, 33% support it, 55% do not.

In a Wall Street Journal/NBC survey, 24% say it is a good idea, 41% say it’s a bad one.

But these numbers are totally irrelevant. What matters is how people feel once the calendar turns to 2018 and they begin to see the legislation’s impact on a personal level. The poll numbers can easily flip and Republicans pray that’s the case by the fall, as campaigning heats up for the mid-term elections.  It’s pretty simple.  Save for the states hit by the impact of partially repealing the SALT deduction, in the first year the people should feel good about it.  There is no recession on the horizon, for starters, and growth will continue to come in at solid levels. Employment will be strong. Sustained wage growth, however, is yet to be seen, while healthcare premiums will continue to soar in many states.

As for the impact on the equity and bond markets, that’s for next week and my yearend review and outlook.

For its part, Corporate America quickly climbed aboard the Trump Train, with FedEx, as part of its earnings release, touting the Tax Cuts and Jobs Act, while increasing its earnings guidance. 

AT&T then followed as it announced it would pass along coming tax savings to workers, saying once the bill was signed it would pay a special $1,000 bonus to more than 200,000 of its non-management workers, the company adding it could hit employees paychecks over the holidays if Trump signed it before Christmas, as was the case today. The company also announced it would invest $1 billion more in the U.S. in 2018.

Comcast announced it too would award one-time $1,000 bonuses to more than 100,000 employees, while saying it expects to spend more than $50 billion over the next five years in infrastructure to improve and extend broadband plant and capacity.

Other companies, including Wells Fargo, Boeing and Fifth Third Bancorp, announced they would pass along tax savings to their workers, some in the form of a hike in the minimum wage for hourly employees.

Boeing said it would move forward with $300 million in investments, including large expenditures for employee training and education and $100 million to enhance Boeing facilities as part of a “workforce of the future” initiative.

Now it’s true many of the above initiatives, especially on the capital spending side, were already in the plans, and there are tax benefits, such as in AT&T paying the $1,000 bonus in 2017 so it can expense it this year at the existing 35% tax rate, as reported by Theo Francis of the Wall Street Journal, plus there is no doubt this makes for great PR, including in AT&T’s case as it seeks approval for its merger with Time Warner, which President Trump doesn’t like because of the CNN angle.

Meanwhile, Trump was so excited about passing his first major piece of legislation that he unintentionally gave Democrats their talking points for the 2018 midterm elections when, at the White House just before the House prepared to sign off on the legislation one last time, he reveled extensively in the win (such as in turning things over to Vice President Pence, who heaped praise on him for a few sickening minutes).

Trump then admitted that the GOP’s talking points weren’t totally honest.

While discussing the corporate tax rate going from 35% to 21%, the president said, “That’s probably the biggest factor in our plan.”

But Republicans have been selling the bill as a middle-class tax cut, first and foremost, with polls showing Republicans have largely bought into the mantra – despite the biggest cuts going to the wealthy and the corporate cuts being permanent (while the individual ones aren’t).

Republicans have also been especially careful in how the tax act is framed, wary of looking like its nothing more than a giveaway to corporations, and the wealthy.

That said, as noted above, it’s about how voters actually feel come November.

Opinion...both sides....

Robert J. Samuelson / Washington Post

“What I most dislike about the Trump / Republican tax plan is the shameless cynicism with which it has been peddled. Recall how it works: The government borrows $1.5 trillion over a decade and instantly uses that money to cut taxes for major constituencies – workers, families, small businesses and big companies.

“The handouts aim to buy votes. This is borrowing to bribe.  It’s not subtle. If it’s not cynical, what would be?

“Democrats can scream all they want about inequality, but the Republicans will have plenty of money to distribute. The nonpartisan Tax Policy Center (TPC) estimates that all income classes will receive cuts and that, in 2018, only 5 percent of taxpayers will experience higher taxes compared with present law. The figure rises to 9 percent in 2025.

“It’s true that the biggest cuts go to the richest taxpayers, but the main reason for that is that these people pay most of the taxes.  In 2018, taxpayers with $200,000 to $500,000 of income would represent 6.6 percent of taxpayers, pay 24.1 percent of all federal taxes and would receive a $6,560 tax cut, equal to  2.9 percent of their after-tax income, according to TPC.

“By contrast, taxpayers with incomes from $50,000 to $75,000 represent 13.9 percent of taxpayers, pay 6.3 percent of all federal taxes and receive a $870 tax cut, equal to 1.6 percent of after-tax income.
“Whether all this shuffling of money has the political effect that Republicans desire remains to be seen. But what’s unusual about the Republicans’ plan is the heavy reliance on borrowed money.  Scott Greenberg of the nonpartisan Tax Foundation estimates that 27 percent of the Republicans’ tax cuts are financed by more debt.  (The rest is financed by ending other tax breaks).

“Strictly speaking, this is not new. The government has run deficits for decades.  It spends more than it takes. But until now, no major Republican or Democrat has – as far as I can remember – suggested borrowing amounts that are tied explicitly to tax cuts....

“It’s probable that, in the past, most members of Congress felt a vague guilt that sanctioning ever larger amounts of federal debt was good for the country.  But now, even that sense of embarrassment and self-restraint is fading, as Republicans openly defend their $1.5 trillion giveaway....

“To be fair, Republicans argue that their tax cuts will pay for themselves by speeding up the economy and generating a gusher of new tax revenue – a claim doubted by many economists.  If Republicans had the courage of their convictions, they would have advanced a stand-alone corporate tax reduction (touted as the biggest contributor to growth) financed entirely by ending other tax breaks.

“As it is, Republicans send exactly the wrong message. We need more taxes, not fewer. Even with the economy near ‘full employment,’ annual budget deficits total hundreds of billions of dollars, and under present policies, they will expand as more Americans retire and health-care costs grow.  Although we can’t know the full consequences, they could be serious.

“There’s something inherently sleazy about borrowing for the express purpose of funding politically convenient tax cuts. It’s a $1.5 trillion bribe.”

Editorial / Wall Street Journal

“The tax reform that will pass Congress Wednesday fulfills a major Republican campaign promise, but more important is that it marks a return to the politics of growth after many lean years of envy and income redistribution. It offers hope of broader prosperity after a decade of slow growth and rising inequality.

“On the merits, the bill is the most pro-growth tax policy since the Reagan reforms of 1981 and 1986.  We should add that it is not as good for individual taxpayers as those two acts. The bill cuts marginal tax rates only a little for individuals, and that will temper its growth impact. The politics of envy that has dominated American politics since the mid-2000s has also infected many Republicans, especially its Beltway intellectual class.

“This reform will rise or fall on its business tax changes, and those are arguably superior to the 1986 act. The corporate rate cut to 21% form 35% solves a core problem of U.S. economic and business competitiveness. Along with 100% expensing, the rate cut slashes the cost of capital enough to cause CEOs to think again about America as a place to invest. Sweeping away many (alas, not all) special tax breaks means fewer incentives to misallocate capital.

“The timing may also be right in giving this already long expansion a second wind. The Obama expansion has been so tepid in part due to historically slow capital investment, and deregulation and tax reform are policy levers designed to revive it.

“The advisers who gave us the slow Obama economy now say this reform is ill-timed, but they look only at the demand side of the economy. They ignore the bill’s supply-side incentives to increase the economy’s productive capacity.  These incentives will be all the more important as the Federal Reserve moves to normalize the monetary policies that lifted stocks and other asset prices during the Obama years.  The Obama policy mix helped the affluent who had assets, while faster growth should spread prosperity more broadly.

“Will it work?  There are wild cards to watch like the Fed, national security shocks and Donald Trump’s trade policy.  But measured by business sentiment, the portents are good.... Mr. Trump is mistaken to focus so much on the stock market, since corrections are inevitable. But the market’s rise since Election Day in 2016 isn’t a political levitation act.  It’s an omen of confidence in higher earnings and faster growth....

“Republicans succeeded despite a narrow Senate majority, no help from Democrats, and the near-universal hostility of the Beltway press. They also had to overcome the Keynesian bias embedded in such institutions as the Congressional Budget Office and Tax Policy Center that are treated as policy oracles when they merely offer guesses about policy outcomes that are often wrong....

“The polls show that most Americans don’t even think they’ll get a tax cut, when nearly all taxpayers will.  Perhaps voters will find that irrelevant in 2018, but the result is certainly better for Republicans than explaining another legislative failure. The far more important payoff will be for the country.  If the result is a return to faster growth that lifts wages and American confidence.”

Trumpets....

--President Trump revealed his new national security strategy in a speech Monday and it was all about him, casting his election as a pivot from failed policies pushed by his predecessors and presenting his ‘America First’ doctrine as the organizing principle for U.S. engagement around the world.

The United States has been cheated and taken advantage of abroad while we suffer at home, per the president, and his security plan will reverse this.

“For many years, our citizens watched as Washington politicians presided over one disappointment after another; too many of our leaders – so many – who forgot whose voices they were to respect, and whose interests they were supposed to defend,” Trump said, before an audience in Washington of Cabinet secretaries, government workers and uniformed members  of the military.

The National Security Strategy is a congressionally mandated mission statement; supposedly a guide to the administration’s priorities for global engagement, trade and defense. Normally it is a low-key affair, released without fanfare, and instead Trump used a speech to harken back to the election, of course.

“You spoke loud and you spoke clear. On November 8, 2016, you voted to make America great again. You embraced new leadership and very new strategies and also a glorious new hope.”

“A nation that does not protect prosperity at home cannot protect its interests abroad,” he said. “A nation that is not prepared to win a war is a nation not capable of preventing a war.  A nation that is not proud of its history cannot be confident in its future.  And a nation that is not certain of its values cannot summon the will to defend them.”

But missing was any emphasis on the United States promoting democracy and human freedom, while he stood there talking about the soaring market, deregulation and the upcoming tax cuts. 

The actual document says this of China and Russia:

“China and Russia challenge American power, influence, and interests, attempting to erode American security and prosperity. They are determined to make economies less free and less fair, to grow their militaries, and to control information and data to repress their societies and expand their influence.”

But Trump seldom criticizes the two in public...and never, Russia. The strategy document released Monday ignores the issue of Russia’s meddling in the presidential election.

“Through modernized forms of subversive tactics, Russia interferes in the domestic political affairs of countries around the world.”

That’s it.  Sad.

There is so much to say on this topic and it’s part of next week’s column.  I also have a little related commentary in the ‘Foreign Affairs’ section below.

For now...Editorial / Wall Street Journal

“The document also says the Administration will ‘champion American values’ around the world, including fair treatment for religious minorities and ‘the dignity of individuals.’ Yet Trump officials have been reluctant for the most part to speak about these values in global forums.  The President sends a conflicting message of  his own when he lathers on the praise for dictators like Mr. Putin and China’s Xi Jinping.

“Mr. Trump took the unusual step Monday of unveiling his strategy with a speech, but by now we know his foreign-policy instincts are personal and transactional. He wants to do deals and charm his adversaries. But the irony is that if he reads his own strategy document, he’ll learn why those adversaries can’t be charmed. A strategy of ‘principled realism’ requires a realist with firm principles in the Oval Office.”

--About 8.8 million people signed up for 2018 ObamaCare health insurance plans on the federally run HealthCare.gov, according to the Centers for Medicare and Medicaid Services, down 4% from last year.

The sign-up period was reduced by the Trump administration to Dec. 15 on the website, which handles online enrollment in 39 states.  The remaining states run their own online enrollment and have deadlines as late as Jan. 31.

--Thomas L. Friedman / New York Times

“On norms, we’ve grown numb to a president who misleads or outright lies every day. Different newspapers measure this differently. The Washington Post says Trump has averaged 5.5 false or misleading claims every day in office, putting him on pace for 1,999 in his first year. According to The Times, Barack Obama told 18 ‘distinct falsehoods’ over his entire eight-year presidency, while Trump, in his first 10 months in office, ‘has told 103 separate untruths, many of them repeatedly.’

“Given the power of the president to shape our public discourse, it’s chilling to imagine what four years and 8,000 lies or misleading statements from Trump will to do trust in government in America – and how deeply that will filter into society, giving permission to anyone and everyone to lie with impunity.

“In terms of institutions, Trump has personally disparaged the FBI, the CIA and the Justice Department. His head of the Environmental Protection Agency has turned the EPA over to the fossil fuel industry. Ditto at Interior.  His IRS is being starved of funding to do its job. And his secretary of state is gutting the State Department, shedding our most experienced diplomats and replacing them with...no one.”

Wall Street

The economic news on the week was very good.  November housing starts came in better than expected, existing home sales for the month were at their highest annualized rate in 11 years, since December 2006, and November new home sales were up 17.5% over October, the biggest spike in 25 years, though builders seem to be giving discounts since the median price fell 0.3%, while year-on-year the median is up only 1.2%.  That said, excellent overall numbers.

November durable goods came in up 1.3%, less than forecast, but this is a highly volatile number, while personal income last month rose 0.3% and consumption increased 0.6%.  A key component in the latter that the Federal Reserve watches closely, their preferred inflation benchmark, the personal consumption expenditures index, was up only 1.5% on core, ex-food and energy, with the Fed’s target being 2%, though this figure has been ticking up.

And we had a final reading on third-quarter GDP, up 3.2% vs. a prior reading of 3.3%, but still back-to-back 3% quarters for the economy, Q2 being at 3.1%.

As for the current quarter, the Atlanta Fed’s GDPNow indicator slipped back below 3% after all of this week’s data and is at 2.8%.

Coupled with the market hitting more new highs this week, it is clear the mood across the country when it comes to the economy is greatly improved. CNBC’s All-America Economic Survey garnered a lot of attention, including at the White House, as its polling data found that for the first time in at least 11 years, more than half of the 800 respondents rated the economy as good or excellent.

41% expect the economy to improve in the next year, near a record.

42% approve of the job Trump is doing as president, up 4 points from the September survey, while 49% disapprove, down 3 points; both figures better than the lion’s share of the other poll data out there.

But in this survey, like all the others, the GOP tax plan polled poorly across nearly every demographic, with even support from Republicans tepid at best at 56%.

Only 26% approved of the plan, while 38% disapproved.  But 36% said they really don’t know enough about it, which is the honest answer at this stage, from an individual standpoint.

As for the Federal Reserve, San Francisco Fed President John Williams sees a steady series of rate hikes over the next couple of years if the economy continues to perform as he expects.

“We’re ending the year with some very good momentum going into 2018,” he told the Wall Street Journal.  “We are operating on all cylinders, which is, I think, a positive sign in terms of the sustainability of the expansion.  Something like three rate increases next year, and two to three increases in 2019.”

But Minneapolis Federal Reserve Bank President Neel Kashkari said he voted against the Fed’s decision to raise interest rates last week over worries on weak inflation and a flattening of the yield curve.

“Now a new concern is emerging: In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession.”

Europe and Asia

First a brief economic note on the eurozone.  The latest inflation readings, as  published by Eurostat, showed euro area (EA19) inflation running at 1.5% annually in November, up from October’s 1.4%, and compared to November’s 0.6% in 2016. 

So we’re inching towards the European Central Bank’s 2% target, though the ECB is going to continue with its easy monetary policy well into next year...at least as of today.

Inflation in Germany is running at 1.8%, France 1.2%, Spain 1.8%, Italy 1.1% and in non-euro U.K., at a ‘hot’ 3.1%.

Catalonia: In Thursday’s special election called by Madrid to settle the independence issue here, the actual vote only muddied the picture further, with parties seeking to break with Spain winning a majority of seats in parliament.

With nearly all votes counted, the pro-independence parties Together for Catalonia, Republican Left of Catalonia and Popular Unity were on course to win a total of 70 seats out of 135.

But while the secessionists hold a majority in parliament, they picked up less than half of the votes.

The Citizens party, which wants Catalonia to remain a semi-autonomous part of Spain, received 25.3%, the region’s biggest winner, taking 37 seats in the chamber.  Its leader Ines Arrimadas said forming a coalition would be “difficult – but we will try.”

Ousted President Carles Puigdemont, who heads the Together for Catalonia party, called for new talks with Spain, and wanted them to take place in Brussels, where he is living in self-imposed exile, or another EU country.

“Catalonia wants to be an independent state. This is the wish of the Catalan people,” Puigdemont said, speaking from Brussels.  “I think the plan of [Prime Minister] Mariano Rajoy is not working, so we have to find new ways to tackle this crisis.”

It is unclear who will be given the first crack at forming a government.

The Spanish government is meeting to discuss its next steps.  Rajoy had hoped the poll would restore stability but instead Spain’s political turmoil looks set to continue. His conservative Popular Party (PP) suffered its worst-ever result in Thursday’s vote, winning only three seats, down from 11 in the previous assembly.

Turnout was more than 80%, a record for a Catalan regional election.

Barcelona’s El Periodico newspaper says the result means a “divided Catalonia.”  “The election that Mariano Rajoy called has shown that Catalonia is firmly divided in two blocs and there is hardly any space for intermediaries.”

Rajoy had imposed direct rule on Catalonia and called the election, a big gamble, after declaring an October independence referendum illegal. Friday, he ruled out calling a national election and said he would make an effort to hold talks with the new Catalan government.  However, he did not clarify whether he would be willing to meet Puigdemont.  Rajoy had vowed to rescind the direct rule he imposed on Catalonia whatever the result, though he could re-impose it if a new government again pursues independence illegally.

It’s clear Rajoy has to grant the region more fiscal and political autonomy.  But Catalonia’s economy is suffering, with more than 3,000 companies having shifted headquarters out of the region, and they are unlikely to return, while deferring further investment until there is stability.

Brexit: EU officials are not confident that British Prime Minister Theresa May will be in a position to hold meaningful negotiations on trade come next March, the formal start date set by the EU, though informal talks will be ongoing from the start of the year.

At a recent summit, EU leaders demanded more clarity from Britain. As the EU’s chief negotiator Michel Barnier said, “It must be fairly precise so we all know where we are going.”

‘Business’ needs to know of the consequences of exiting so that they can prepare.

The EU is preparing to present Britain a Canada-style trade deal by the early summer if the U.K. cannot clarify its demands and remains in “Brexit La-La land,” according to senior EU officials.

But while this is exactly what Britain wants, a Canada-style deal, the EU would no doubt present a much smaller version as a negotiating tactic.

David Davis, the U.K.’s Brexit secretary, is confident Britain will emerge with a “Canada plus, plus, plus” deal, with many in the EU27 having deep interests in maintaining close economic ties.

If it gets to a “plus” deal, Canada style, that refers to agreements on fisheries, aviation, security and foreign policy cooperation not now part of the Canada-EU agreement.

Barnier is going to hold exploratory talks early in January with his counterparts.

In the meantime, he granted the Guardian newspaper an interview and ruled out a special carve-out for the U.K. financial services industry, a major item, and warned that Britain would have to abide by any new rules drawn up by the EU during a transition period after leaving the bloc.

And Barnier and others have made clear Brussels won’t allow the U.K. to just “cherry-pick” what it wants to see in a deal, especially when it comes to immigration and getting rid of the jurisdiction of the European Court of Justice.

“The most difficult part remains to be done. It is also probably the most interesting. But the British have to understand it cannot be business as usual.  We are ready to start working with the government on the three axes it had indicated: exit from the Union, exit from the single market, exit from the customs union. But the clock is ticking. The deadline of March 29, 2019 is their own doing.”

Barnier continues: “They have to realize there won’t be any cherry picking. We won’t mix up the various scenarios to create a specific one and accommodate their wishes, mixing, for instance, the advantages of the Norwegian model, member of the single market, with the simple requirements of the Canadian one. No way. They have to face the consequences of their own decision.”

As for the transition period, which is supposed to smooth the cliff edge?

“There is no mandate to discuss the transition period yet, but it will be short and duly framed. Prime Minister May has stated it should take two years – it cannot last longer for legal reasons. But what matters is the time actually needed to negotiate our future relations.”

Prime Minister May has faced many problems in recent months, and Wednesday she was forced to tell First Secretary of State Damian Green, a trusted adviser, to resign after an inquiry into his behavior found he’d made misleading statements over pornography found on his parliamentary computer by police nearly a decade ago.  Green is the third cabinet minister to quit in two months.

Meanwhile, U.K. car assembly lines are seeing fewer cars roll off the lines for the British market in November vs. last year, owing to Brexit uncertainty and lower consumer disposable income, with inflation at 3% and wages up less so.

The decline last month, 28.1%, was striking, as reported by the Society of Motor Manufacturing & Traders, a trade group.

For the year to date, production has fallen 9%.

Austria: A new coalition government was sworn in on Monday in Austria, one that for the first time in ten years includes the far-right Freedom Party, a big moment for the populist movements in Europe that have roiled politics from time to time.

The Freedom Party, which was founded by neo-Nazis after World War II, is concerning enough that Austria’s president, Alexander Van der Bellen, took the exceptional step of demanding several promises from the new government before he would administer the oath of office.

These included acknowledging Austria’s commitment to the EU and its responsibility to a Nazi past that tore the Continent apart.

The new chancellor, 31-year-old Sebastian Kurz, is Europe’s youngest leader after winning more than 31 percent of the vote in a snap election in October for the center-right People’s Party, a Christian Democratic party founded at the end of WW II.

Kurz, though, coopted much of the far-right’s political agenda, only he gave it a fresh and youthful face in an establishment party that now has a far-right partner.

Heinz-Christian Strache, 48, chairman of the Freedom Party since 2005, becomes vice chancellor. His party was given the interior and foreign ministries, as well as the defense portfolio, although the new coalition vowed to uphold and strengthen Austria’s traditional neutral stance on most issues.

Van der Bellen, normally a figurehead except when it comes to seating a government, said in a statement announcing his approval of the coalition agreement: “A pro-European direction of the future government is central....Austria is and will remain a strong country in the heart of Europe and that it will play an active role in the future shaping of the EU.”

The president also demanded the far-right abandon its desire to set up a “home security” ministry, warning the country must be mindful of its Nazi past.

Meanwhile, Israel said it would boycott Austria’s new government over concerns for the Freedom Party’s anti-Semitic roots, and Chancellor Kurz said he respects Israel’s decision to do so, adding that it will be his party’s “task to do a good job at home as well as convince abroad,” and that he is optimistic they will succeed in dispelling all concerns.

For now, Israeli officials are only to work with lower-ranking officials in the Austrian government.

Germany:  Chancellor Angela Merkel’s office said Friday that the conservatives hope to draw the SPD (Social Democrats) into a grand coalition with offers on healthcare, employment and broadband expansion, Merkel needing their support to secure a fourth term..

The conservatives want a coalition treaty to include a pledge not to raise taxes or increase debt but will not draw any red lines ahead of the talks, said Peter Altmaier, Merkel’s chief adviser.

Talks will begin in earnest between the two in mid-January.

Poland: The EU called Wednesday for national governments to discipline Poland for failing to uphold the bloc’s democratic values, recommending an unprecedented process that could lead to sanctions and loss of voting rights.

It’s about some of the laws approved by Poland’s Senate, signed into law by the president, that will force two-fifths of Supreme Court Justices to retire and give politicians sway over court appointments.

The decision to discipline Poland was backed by French President Macron and German Chancellor Merkel.  The move underscores an erosion of trust between the EU’s largest states and its eastern members ahead of Brexit talks with the U.K.

Turning to Asia....In China, the average cost of a home in November for the 70-city index was up 5.1% year-over-year, according to the National Bureau of Statistics, continuing the trend of a slowing pace of growth.  Prices year-over-year are down 0.3% in both Shanghai and Beijing, and down 3.2% in Shenzhen (next to Hong Kong).  Prices in Guangzhou were up 6.6%.

In Japan, November exports rose more than expected, 16.2%, according to the Ministry of Finance, with imports up 17.2%.

Exports to China rose 25.1% year-over-year, led by equipment to manufacture liquid crystal displays.

Exports to Asia overall rose 20.4%, including steel to Thailand and hybrid cars to South Korea.

Exports to the U.S. rose 13% led by cars and excavators.

Separately, Bank of Japan Gov. Haruhiko Kuroda ended any speculation he was preparing the ground for raising interest rates next year amid a global wave of policy tightening by central banks led by the Federal Reserve.

Kuroda said consumer prices were the key to any change in policy, and with core CPI at 0.8% in October – the fastest rise in 2 ½ years but still far from the bank’s 2% target, no change should be expected at the start of 2018, though he seemed to leave the door open to raising rates before the 2% inflation level is actually hit.

At its meeting, the BOJ kept its target for 10-year Japanese government bond yields at around zero and its short-term deposit rate at minus 0.1%. The bank also pledged to continue to buy government bonds at an annual rate of $705bn, which is a symbolic gauge of its commitment to easing.

Street Bytes

--The Dow Jones and S&P 500 finished up a fifth consecutive week, all three major averages, including Nasdaq, hitting record highs before backing off a little, the Dow finishing up 0.4% to 24754, the S&P up 0.3% to 2683 and Nasdaq also 0.3% to 6959.

As for the final week of 2017 coming up, the “Santa Claus Rally” is defined as the last five trading days of the year, of which today was the first, and the first two of the new year, with the market as measured by the S&P up 75% of the time historically during this period.

--U.S. Treasury Yields

6-mo. 1.53%  2-yr. 1.89%  10-yr. 2.48 %  30-yr. 2.83%

The yield on the 10-year broke out of its narrow trading range and at 2.48% is at its highest level since March, and above the 12/31/16 close of 2.44%.  Bonds took a hit on the passage of the tax reform bill and the feeling that stronger growth could lead the Fed to act more than now forecast.

--Eric Schmidt shocked Silicon Valley when he announced he was stepping down as executive chairman of Google’s parent company, Alphabet.

Schmidt, 62, was originally tapped as CEO in 2001 to provide “adult supervision” for Google co-founders Sergey Brin and Larry Page, in Brin’s own words.  Schmidt is staying on as a “technical advisor.”

In a statement Schmidt said: “In recent years, I’ve been spending a lot of my time on science and technology issues, and philanthropy, and I plan to expand that work.”

But the timing of the move raises questions because Alphabet waited three days to disclose Schmidt was stepping down, according to a filing.

As in Schmidt is a known womanizer despite being married for 37 years to Wendy Schmidt, who said in 2012 they started living separate lives because she felt like “a piece of luggage” following him around the world.

A source told the New York Post, though, that despite recent attempts by news outlets to find a Harvey Weinstein-like bombshell, there is nothing...no sexual harassment. The source added that had something been uncovered, Google would have canned Schmidt completely.  [Carleton English, Emily Smith, and Ian Mohr]

--The EU’s top court, the aforementioned European Court of Justice, ruled that Uber should be regulated like other taxi operators, in a move that won’t impact Uber as much as first believed, but may impact other online businesses in Europe.  The ECJ said, “The service provided by Uber connecting individuals with non-professional drivers is covered by services in the field of transport. Member states can, therefore, regulate the conditions for providing that service,” it said.  The case followed a complaint from a professional taxi drivers’ association in Barcelona that Uber’s activities in Spain amounted to misleading practices and unfair competition from its use of non-professional drivers.

Uber has argued it was simply a digital app that acted as an intermediary between drivers and customers looking for a ride and so should fall under lighter EU rules for online services.

The company is actually already operating under transportation law in most EU countries and the case is indeed as much about businesses like food-delivery services that are beginning to proliferate in Europe as it is the ride-hailing service.

That said, Uber continues to battle with regulators market after market.  What it boils down to, as in so much of EU policy, is “harmonizing” the rules between the states, as the EU says it wants to build an integrated digital single market.

--Germany’s competition authority warned Facebook over its personal data collection process, saying it was transferring data in an “abusive” way from third parties outside its network. Germany’s cartel office (FCO) ruled Facebook was abusing its “market dominant” position in the country.

The above-mentioned European Court of Justice will soon be ruling on Facebook’s ability to transfer personal information such as pictures and emails from the EU to the U.S.

The head of Germany’s FCO, Andreas Mundt, said, “From the current state of affairs we are not convinced that users have given their effective consent to Facebook’s data tracking and the merging of data into their Facebook account.

Earlier this year, Berlin passed a tough new law cracking down on hate speech by fining social media giants large sums for failing to delete hateful posts or fake news.

--Boeing Co. is in takeover talks with Brazilian aircraft maker Embraer SA, a move designed to fight back against recent efforts by rival Airbus to move into the market for smaller passenger jets.  The deal is a natural fit for Boeing, Embraer being the largest maker of co-called regional jets that serve smaller airline routes.

Airbus recently announced a similar deal to take a majority stake in a jetliner program run by Canada’s Bombardier Inc., the second-largest maker of regional jets.

But the Brazilian government stands in the way of a Boeing-Embraer combination, Embraer being a crown jewel in Brazilian industry, and while the government’s first comments were ‘no,’ Boeing no doubt is willing to negotiate substantial concessions, such as maintaining the brand, management and jobs.  Plus Boeing could offer to protect the government’s interest in Embraer’s defense business, which already has a joint venture with Boeing.

--UPS is making a big investment in all-electric big rigs by placing an order for 125 of the sleek new semi-trucks from Tesla.  This is the largest to date order for the vehicle unveiled in November that is reportedly going to cost between $150,000 and $200,000 per.

But I keep saying Tesla is talking of production in 2019, which I predict will be more like 2030, or perhaps as Zager and Evans sang in their #1 pop hit, “In the year...2525...”

According to Tesla, and USA TODAY, a standard diesel truck would be 20% more expensive to operate than a Tesla truck: $1.26 per mile compared to $1.51 per mile.

--In another potential blow to the New York-New Jersey metropolitan area (on top of largely eliminating the SALT deduction per the new tax bill), Trump administration officials have suggested they may scrap a two-year-old agreement to fund a nearly $13 billion proposed commuter rail tunnel under the Hudson River that was badly needed 20 years ago, replacing it with an even mix of federal and state money.

The plan for the Gateway tunnel is viewed as one of the nation’s most urgent infrastructure projects.

Last week, New York and New Jersey agreed to repay $3.6 billion in federal loans to cover each state’s share of the megaproject’s cost, and the Port Authority of New York and New Jersey also said it plans to borrow, and repay, $1.9 billion from the federal government.

But the feds are now saying those loans are part of the government’s contribution to the tunnel, which breaks with past funding practices for large projects of this kind, in which the states use federal loans to finance their share.

One expert, Scott Rechler, a board member at the Metropolitan Transportation Authority, noted: “The states are saying they are going to pay the loans back with interest. This is a project that can’t get financed any other way.”

The $3.6bn that NJ Transit and New York state are repaying was borrowed through the Department of Transportation’s Railroad Rehabilitation and Improvement Financing program.

Kathryn Wylde, president and CEO of the Partnership for New York City, told Crain’s: “I think it’s just a poor reading of the facts. Unlike the federal government, states don’t print money. They rely on loans, including federal infrastructure loans, that they can repay over time. Under no scenario does that diminish their obligation and contribution to the project.”

--An Amtrak train making the first-ever run along a faster new route hurtled off an overpass south of Seattle on Monday and spilled some of its cars onto busy Intestate 5 below, killing at least three people, and injuring dozens.

We then learned shortly thereafter the train was traveling 80 mph in a 30 mph zone, according to the National Transportation Safety Board, and as revealed by the train’s event data recorder.

Today, the NTSB said an analysis of cameras and a review of the data show the engineer remarked about the speed just six seconds before the crash and applied the brakes, but not the emergency brake.

--Everyone was talking Thursday about the shares of Long Island Ice Tea, which in pre-market trading soared nearly 500% off its Wednesday close of $2.44 after the company said it was shifting its primary corporate focus to blockchain technology.

The company is changing its name to Long Blockchain Corp., while continuing to operate Long Island Brand Beverages LLC (LTEA) as a wholly-owned subsidiary and maintain the focus of this business on the ready-to-drink segment of the beverage industry.  But from now on the primary focus will be “the exploration of an investment in opportunities that leverage the benefits of blockchain technology.”

Blockchain technology powers Bitcoin and other cryptocurrencies that have taken the world by storm, and the move by Long Island Iced Tea was seen as a classic sign of a top in the bubble surrounding Bitcoin.

So what happened the very next day, starting Thursday evening?  The price of Bitcoin cratered 25%, over 30% intraday.  As I go to post it has recovered a bit to $14,000 (Coindesk), but it was over $20,000 on Sunday.

One more on the topic....Germany joined other European governments in calling for global bitcoin regulation amid mounting concern the digital currency is being used by money-launderers, drug traffickers and terrorists.

Look for this to be a major topic at the next Group of 20 meeting of finance ministers.

Recently, two Nobel economics laureates denounced Bitcoin.  Joseph Stiglitz said it should be outlawed and doesn’t serve “any socially-useful function.”  Robert J. Shiller said the attraction of the currency was a narrative akin to a “mystery movie” that draws in people who want to outsmart the system.  [Bloomberg]

--Papa John’s founder John Schnatter is stepping down as CEO next month, about two months after he publicly criticized NFL leadership over the national anthem protests by players.

Schnatter is being replaced by Chief Operating Officer Steve Ritchie on Jan. 1, the company announced Thursday.  Schnatter, the face of the chain’s commercials and the company’s biggest shareholder, remains chairman of the board.

Schnatter had blamed slowing sales growth at Papa John’s – a longtime NFL sponsor and advertiser – on the outcry surrounding players kneeling during the anthem.

During an earnings call on Nov. 1, Schnatter said, “The controversy is polarizing the customer, polarizing the country.”

The company apologized two weeks later, after white supremacists praised Schnatter’s comments.

Papa John’s hasn’t decided whether he will still be its spokesman.

--Railway giant CSX Corp. announced Saturday that CEO Hunter Harrison died, just a few days after announcing he was taking a medical leave of absence.

--MetLife Inc. announced it had failed to pay pensions to potentially tens of thousands of people and will have to strengthen its reserves because of the costs of finding and repaying them.

MetLife has about 600,000 receiving benefits these days and the number impacted could be roughly 30,000, with most of these scheduled for benefits of $150 or less a month.  You can imagine the difficulty of tracking down many of them.

--ESPN boss John Skipper unexpectedly stepped down because of a substance addiction.  Word is Walt Disney Co. will seek a replacement from within.

Skipper had led ESPN since 2012 and had been with the network 20 years.

Once a profit machine for Disney, ESPN has been unable to stem the loss of subscribers and advertising to new media like Netflix, Facebook and YouTube, while at the same time the cost of sports rights has surged.

The network recently went through another round of layoffs, 160 employees, after firing about 100 in April.

--“Star Wars: The Last Jedi,” met high expectations with an opening weekend of $220 million in the U.S. and Canada, and another $230 million in other countries, except China, where it opens next month.

For the U.S. and Canada, it was the second-biggest box-office opening of all time, not counting inflation.  Only 2015’s “Star Wars: The Force Awakens,” did better with $248 million in its domestic opening.

The global opening of $450 million is the fifth-biggest ever.

But...there were some signs the follow-on audience during the week wasn’t quite up to snuff.  We’ll see what the figures are for this weekend.

--Kind of funny.  Last week, NBC’s “Today” show averaged 4.6 million viewers, good enough to beat “Good Morning America” for the third Lauer-less week in a row.  The last time “Today” managed to outdraw “GMA” three straight weeks was during and immediately after the 2016 Rio Summer Olympics, which aired on NBC.

It is interesting that extra viewers are seemingly sticking around to see Savannah Guthrie and Hoda Kotb after the initial curiosity to see how NBC would cover the event of Lauer’s departure.

Curiously, “CBS This Morning” has not suffered with the loss of Charlie Rose as its ratings remain the same as in his final week.

Ergo, at least for now, we can say the vastly overpaid Lauer and Rose weren’t as important to viewers as they were to the network executives who paid them so handsomely.

Foreign Affairs

Israel: The United Nations delivered a stunning rebuke of President Trump’s recognition of Jerusalem as Israel’s capital, casting an overwhelming vote condemning the move and calling on the U.S. to withdraw the decision.

However, while the vote was 128-9 against, 35 abstained.

Major allies like Britain, France and Germany voted for the resolution, while Australia and Canada just stood back.  [Or the two went out for a premium beer, both countries specializing in same.]

The resolution itself is non-binding, just a formal statement of UN opinion, and it’s merely symbolic.

But in the run-up to the General Assembly vote, U.S. Ambassador to the UN Nikki Haley sought to warn those who opposed the Trump administration’s decision on Jerusalem that there would be consequences.

President Trump then followed up on the warning, suggesting the U.S. could cut off foreign aid for countries that opposed the U.S.

“They take hundreds of millions of dollars and even billions of dollars, and then they vote against us,” Trump said.  “Well, we’re watching those votes.  Let them vote against us, we’ll save a lot. We don’t care.”

The U.S. vetoed a similar resolution in the UN Security Council earlier in the week, though the panel’s other 14 members voted in favor of that measure, which Haley called an “insult” to the U.S.

Haley said after the General Assembly vote: “America will put our embassy in Jerusalem. That is what the American people want us to do, and it is the right thing to do.  No vote in the United Nations will make any difference on that. But this vote will make a difference in how Americans view the UN.”

At a Cabinet meeting the day after, Trump singled out Haley and her message to UN member states for praise.

“I like the message that Nikki sent yesterday at the United Nations for all of these nations that take our money and then they vote against us at the Security Council, or they vote against us potentially at the assembly,” said the president. 

Related to the above, Palestinian President Mahmoud Abbas came out against the American peace initiative and said the Palestinians would not accept any plan made by the Americans due to President Trump’s decision to recognize Jerusalem.

In a Christmas letter to Christians, Abbas wrote that the Palestinians will not “accept any plan from the U.S.” due to the White House’s “biased” support of Israel and its settlement policy.  He also said the American plan “is not going to be based on the two-state solution on the 1967 border, nor is it going to be based on international law or UN resolutions.”

Hours before the General Assembly vote, Turkish President Recep Tayyip Erdogan slammed Trump.

“Mr. Trump, you cannot buy Turkey’s democratic will with your dollars,” in response to the threat to cut off aid to those supporting the resolution.”

Israeli Prime Minister Benjamin Netanyahu sharply criticized the UN, calling it “a house of lies.”

Israel’s Ambassador to the UN Danny Dannon said ahead of the vote that “The Palestinians are choosing again to hide behind speeches and not to take any steps on negotiations. The attempt to transfer initiatives aimed at denying history are irrelevant. Jerusalem is the capital of the Jewish people and the state of Israel and we don’t need approval from anyone.”

Saudi Arabia: Saudi air defenses shot down a ballistic missile fired by Yemen’s Iranian-backed Houthi rebel group towards Riyadh on Tuesday. There were no reports of casualties or damage. The Houthis said they aimed the missile at a palace where a meeting of Saudi leaders was under way. This is one of several missiles fired from Yemen in recent weeks.

At the same time the UN human rights spokesman said coalition airstrikes had killed at least 136 non-combatants since Dec. 6.

So the conflict in Yemen, which is a proxy war between the Saudis and Iran, grinds on, with more than 10,000 killed and two million displaced.  It’s been 1,000 days since the Saudi-led coalition began military operations in Yemen after the Iran-aligned group drove Yemeni President Abed-Rabbu Mansour Hadi into exile.

On a different topic, the Wall Street Journal is reporting tonight that Saudi authorities are demanding at least $6 billion from Saudi Prince al-Waleed bin Talal to free him from detention.

The 62-year-old prince, known to American investors and followers of CNBC and the like, was one of dozens of government officials, royals and businesspeople rounded up in November in a wave of arrests billed as Crown Prince Mohammed bin Salman’s opening salvo against corruption.  Some of those taken in have since negotiated financial settlements. 

Al-Waleed’s fortune is estimated at over $18 billion by Forbes, which would make him the Middle East’s wealthiest individual. But sources tell the Journal the prince is loath to just hand over $6 billion as it would require him to dismantle a financial empire he has built over 25 years. He wants to maintain control of his conglomerate, Kingdom Holding Co. In the meantime, he and the others remain in detention at the Four Seasons in Riyadh.

North Korea: According to the U.K.’s Daily Telegraph, the White House has “dramatically” ramped up its military plans against North Korea and is preparing to deliver a “bloody nose” attack amid fears diplomacy won’t thwart Kim Jong-un from making good on his threats.

One option is to destroy a launch site before Pyongyang uses it for a new missile test, while another is targeting weapons stockpiles, according to the paper.

The hope from the administration is that such a move would show Kim that the United States is serious about stopping his pursuit of nuclear weapons and it might force him to negotiate.

“The Pentagon is trying to find options that would allow them to punch the North Koreans in the nose, get their attention and show that we’re serious,” a former U.S. security official briefed on policy told the Telegraph.

Recently, Sen. Lindsey Graham told the Atlantic that if Kim tested another nuclear weapon, the odds of Trump using a military option would skyrocket from 30 percent today to 70 percent.

Separately, the White House on Tuesday blamed Pyongyang for a massive cyberattack back in May that crippled hundreds of thousands of computers around the world, the U.K. having done the same weeks earlier.

North Korea launched the virus known as WannaCry in a “careless and reckless attack” that damaged businesses and put lives at risk, Tom Bossert, the White House homeland security and counterterrorism adviser, told reporters.  Hospital computer systems in the U.K. were among the institutions hit, as well as schools and business.

The U.S., which normally doesn’t publicly attribute such attacks to specific countries or actors, said in doing so this time it hoped the public shaming would help deter future aggression.

Meanwhile, South Korea’s spy agency believes the North is behind hacking attacks on a crypto-currency exchange in the South, with at least $7 million in digital money stolen (before it ballooned in value), while stealing the personal information of some 30,000 people.

China: Beijing criticized President Trump’s decision to label China a strategic rival and called on Washington to “abandon a Cold War mentality” and accept China’s rise.

Trump’s decision reflects a “victory of hardliners” in his administration, the official Xinhua News Agency said.  It warned U.S.-Chinese economic relations were likely to face “even more pressure and challenges.”

“We urge the United States to stop deliberately distorting China’s strategic intentions and abandon a Cold War mentality,” said a foreign ministry spokeswoman, Hua Chunying.  “Otherwise it will injure others and damage itself.”

Trump’s report hit a series of sore spots for Beijing in that it affirmed ties with Taiwan, and pledged to “re-energize our alliances” with Southeast Asian governments, some of which have conflicts with China over claims to portions of the South China Sea.

In a statement from the Chinese Embassy in Washington: “It is selfish to put your national interest above other countries’ interest and the mutual interest of the international community. The Chinese side is willing to have peaceful coexistence with all countries. The United States should also adapt and accept China’s development.”

Trump’s national security directive promises to “maintain our strong ties with Taiwan” and provide for its “legitimate defense needs,” which is a most sensitive point for China since Beijing has declared it a “core interest” over which it will go to war, if necessary.

The administration signed a law this month that opened the way for U.S. Navy ships to visit Taiwan, at which point a Chinese diplomat was quoted by state media as saying the mainland would attack the day that happened.

The Global Times, a Communist Party mouthpiece, editorialized: “It is impossible for the United States to restrain China.  As China continues to grow and its influence continues to spill over, this is the root cause of Washington’s anxiety.”

Editorial / The Economist

“To ensure China’s rise is peaceful, the West needs to make room for China’s ambition. But that does not mean anything goes.  Open societies ignore China’s sharp power at their peril.

“Part of their defense should be practical.  Counter-intelligence, the law and an independent media are the best protection against subversion. All three need Chinese speakers who grasp the connection between politics and commerce in China.  The Chinese Communist Party suppresses free expression, open debate and independent thought to cement its control.  Merely shedding light on its sharp tactics – and shaming kowtowers – would go a long way towards blunting them.

“Part should be principled. Unleashing a witch-hunt against Chinese people would be wrong; it would also make Western claims to stand for the rule of law sound hollow. Calls from American politicians for tit-for-tat ‘reciprocity,’ over visas for academics and NGO workers, say, would be equally self-defeating. Yet ignoring manipulation in the hope that China will be more friendly in the future would only invite the next jab. Instead the West needs to stand by its own principles, with countries acting together if possible, and separately if they must. The first step in avoiding the Thucydides trap is for the West to use its own values to blunt China’s sharp power.”

Russia:  President Trump on Monday said that the planned terror attack in Russia thwarted by a CIA tip could have left “thousands” of people dead had the U.S. not given its rival the heads up.

Trump said “That is the way it’s supposed to work,” when discussing intelligence sharing between the two, Putin thanking Trump in a phone call.

In a series of raids last week, Russian authorities arrested members of a terror cell linked to ISIS in St. Petersburgh, seized explosives, weapons and ammo and dismantled a bomb-making workshop, state media reported.

Partly in response to the Trump-Putin call, former Director of National Intelligence James Clapper said Putin played Trump like an “asset” when he thanked him for the thwarted plot.

“I think this past weekend is illustrative of what a great case officer Vladimir Putin is,” Clapper told CNN.  “He knows how to handle an asset, and that’s what he’s doing with the president.”

Having engaged with Russian intelligence officers in the 1990s, Clapper said information-sharing with the Kremlin is usually a one-way street in which it will gladly take information without ever returning the favor.

On the claims of election meddling, the chairman of the House Homeland Security Committee says he is worried that President Trump has not issued an “outright condemnation” of Russia for its actions in the 2016 vote.

Rep. Michael McCaul (R-Texas), who was widely viewed as a contender for Trump’s secretary of Homeland Security, told The Hill in an interview that he has told the administration the president needs to “more forcefully” stand up to Moscow.

But one year into the administration, McCaul’s appeal has gone unanswered.

“When you look at the intelligence, it is very clear the attribution goes directly to the Kremlin. That worries me.”

“Russia is not going to stop their bad behavior unless there are consequences to it,” McCaul said.  “I haven’t seen any consequences, and I fully anticipate in 2018 and certainly the next presidential election that they’ll be trying to do the same thing.  And I think we need to be prepared for that.”

Meanwhile, on the issue of Ukraine....

Editorial / Wall Street Journal

“On Monday the White House released a new national security strategy that named Russia as a ‘revisionist’ power seeking to upend global order.  On Wednesday President Trump followed up by confirming he’d approved the sale of lethal defensive weapons to Ukraine as it resists Vladimir Putin’s aggression.

“Mr. Putin invaded and then illegally annexed Crimea in 2014, and Ukrainians have been fighting since to stop the march of Moscow-backed separatists in their south and east.  They’ve had little material support from the West.  That’s about to change now that the Trump Administration has approved a $41.5 million sale of weapons that include the Model 107A1 Sniper Systems, ammunition and parts.

“This is a welcome reversal from Barack Obama, who denounced Russia’s assault on Ukraine but refused to sell more than non-lethal items like night-vision goggles.  Mr. Putin learned that he could invade a sovereign neighbor and pay little price.  Would Russia have gone into Syria if the West had shown some spine over Ukraine?

“Team Obama argued that lethal weapons would provoke Mr. Putin, who could escalate the Ukraine conflict to his advantage. But Defense Secretary James Mattis rebutted that argument on a visit to Kiev in August: ‘Defensive weapons are not provocative unless you are an aggressor, and clearly Ukraine is not an aggressor, since it’s their own territory where the fighting is happening.’

“Mr. Putin has turned Ukraine into another ‘frozen conflict’ he can accelerate or tone down on his whim. The point of lethal aid is to raise the price of his intervention. He could escalate but at the risk of sending more Russians home in body bags. Having crossed the Rubicon of lethality with this arms sale, the Administration ought to follow up by selling more powerful weapons, such as antitank and anti-aircraft missiles, that address Russia’s biggest military advantages.  Mr. Trump’s National Security Council recommended such a sale last month....

“Mr. Putin probes for ways to expand Russian power and then strikes, gauges the response, and then keeps striking until the price becomes too high. Against Barack Obama, he found he could keep pushing with little consequence. A strong U.S. push back in Ukraine will do more to impress Mr. Putin than all of Mr. Trump’s rhetoric about desiring good relations.”

Lastly, according to a poll conducted by the independent Levada Center released Thursday, patriotic fervor has shot through the roof. For the first time since the fall of the Soviet Union, 64 percent of respondents said that Russia is a “great nation with a special place in world history.”  Only 13 percent shared this sentiment in 1992, according to Levada.

Additionally, 72 percent of respondents named Russia a great power, while 82 percent said their nation must retain that role.

Levada pollster Karina Pipiya associated the surge of patriotism with a “post-Crimean mobilization” and a reaction against the “unjust” and “anti-Russian” position of Western countries, as reported by the Vedomosti business daily and the Moscow Times.

South Africa: The ruling African National Congress, ANC, elected Cyril Ramaphosa, a unionist turned wealthy businessman, as its new leader as the party deals with the scandal-plagued tenure of President Jacob Zuma.

Zuma, 75, no longer has an official position within the ANC, but he still has two years left on his presidency.

Ramaphosa, 65, will now stand as the presidential candidate for the next vote in 2019.  He is seen as pragmatic, pro-business and standing firm against corruption. He had been Nelson Mandela’s personal choice to succeed him as president in 1999, but the party instead chose Thabo Mbeki.

Random Musings

--Presidential tracking polls....

Gallup: 36% approve of President Trump’s job performance, 58% disapprove.
Rasmussen:  44% approve, 54% disapprove.

A CNN poll had Trump’s approval rating at a new low, 35%, down from 45% in March, and the worst approval rating of any elected president’s first year in the White House by a wide margin.

Using polling data available from CNN, CNN/ORC, CNN/USA Today/Gallup and Gallup, George W. Bush ended his first calendar year at 86%, John F. Kennedy 77%, George H.W. Bush 71% and Dwight Eisenhower 69%.

Richard Nixon, Jimmy Carter, Bill Clinton and Barack Obama all finished their first year with approval ratings in the mid-to-high 50s.

Ronald Reagan finished his first calendar year at 49%.

Trump still receives 85% approval from Republicans, but only 33% of independents, which has been my focus, and 4% of Democrats.

--In the above-noted Wall Street Journal/NBC News survey, asked whether they believed the Trump campaign colluded with Russia during the 2016 presidential campaign, 38% said yes, 35% said no, and 26% said they weren’t sure. Asked whether Congress should begin impeachment hearings to remove Trump from office, 54% said no, while 41% said yes.

--Karl Rove / Wall Street Journal

“The White House ‘is planning a full-throttle campaign to plunge the president into the midterm elections,’ according to the Washington Post. Aides insist that President Trump ‘wants to travel extensively and hold rallies’ and ‘is looking forward to spending much of 2018 campaigning.’ If true, this plan should be shelved. Making the midterms about Donald Trump is a very bad idea.

“To begin with, he has the worst ratings in his first year of any modern president.  Mr. Trump’s approval in the Gallup poll is 35%.  By comparison, President Obama ended his first year at 50% and Bill Clinton at 54%, and both watched their party get shellacked in the midterms.  Even George H.W. Bush at 73% lost a few seats in 1990.

“If Mr. Trump barnstorms for Republican candidates, his unpopularity will rub off on them. Alabama’s recent Senate race may be a special case because of the accusations against Roy Moore. But the fact remains that the president could not carry Mr. Moore to victory.... Democratic turnout nearly reached presidential-election levels without a corresponding increase for the GOP.

“While Mr. Trump draws energy from adoring crowds at his rallies, those unscripted moments are also when he’s most likely to generate unnecessary controversy....

“If the president wants to help his party, he should lower his political profile. Early next year, he should raise gobs of money for candidates at events closed to the press.  Then in the summer and fall, he should attend fundraisers for the Republican National Committee, the state parties and the GOP’s campaign committees, again closed to the press.

“Most of his time should be devoted not to priorities but policy, especially things that will boost his approval numbers. The fact remains that Mr. Trump’s personal behavior weighs down his ratings. His policies – tax cuts, deregulation, energy exploration, strong defense, seriousness on immigration – are more popular than he is, especially when they are explained without his name attached.

“Republicans cannot keep Congress simply by appealing to Mr. Trump’s most avid fans. The party must unite an energized base with independent voters.”

--In a new Gallup Poll, Hillary Clinton’s favorability ratings hit an all-time low of just 36 percent, down five points from June.  Her unfavorable rating is at 61 percent, a new high.

Throughout the 2016 campaign, however, Clinton’s favorable ratings were never high, only about 40 percent, but that was still higher than then-candidate Trump.

Bill Clinton’s own favorable rating is down to 45%, 52% unfavorable. Gallup said this was the lowest level for him since March 2001, shortly after the end of his presidency, when it was just 39%.

--In his year-end news conference in the Capitol, Sen. Mitch McConnell was asked whether he blamed Trump’s former chief strategist, Steve Bannon, for Democrat Doug Jones’ win in the special election in Alabama earlier this month.

“Well let me just say this: The political genius on display of throwing away a seat in the reddest state in America is hard to ignore.”

--President Trump recently signed a Space Policy Directive, designed to set NASA on a path to get us back to the moon and then eventually Mars.  But as Jeffrey Kluger points out in TIME, the bump in NASA’s budget to $19.5 billion is only 0.5% of the overall federal budget compared to 4.4% at the peak in 1966, which was $5.9 billion – or $45.7 billion in 2017 dollars.

--The National Center for Health Statistics, part of the federal Centers for Disease Control and Prevention, released two reports on Wednesday that were disturbing.  Life expectancy for a baby born in the United States in 2016 was 78.6 years, a decrease of more than a month from 2015 and more than two months from 2014, the first two-year decline since 1962-63 when spikes in flu deaths were likely to blame.

A separate report said drug overdoses are way up, which is the likely cause of the decline in life expectancy, which flies in the face of a world in which lives are getting longer and heathier.

Drug overdose deaths surged 21% to more than 63,600 in 2016, owing largely to synthetic opioids including the deadly ingredient fentanyl, according to the CDC.

--We note the passing of Clifford Irving, 87, a man who some of us of a certain age remember perpetrated one of the biggest literary hoaxes of the 20th century in the early 1970s.

Irving concocted a supposedly authorized autobiography of the reclusive billionaire Howard Hughes based on meetings and interviews that never took place.

At the time, Hughes had not spoken to the press since 1958, had just left Las Vegas for Paradise Island in the Bahamas, and Irving, a novelist and nonfiction writer, who had recently published an as-told-to memoir, “Fake!: The Story of Elmyr de Hory, the Greatest Art Forger of Our Time,” was intrigued with Hughes.

So Irving convinced editors at his publisher, McGraw-Hill, that Hughes had contacted him because of his admiration for the Elmyr de Hory book and that Hughes had proposed a similar treatment.

Irving had read a 1970 article on Hughes in Newsweek that contained a letter written by the billionaire, and Irving used that to forge letters from Hughes to back up the story, and began calling his publisher from exotic locations where, he claimed, he was meeting with and building a relationship with Hughes.

McGraw Hill fell for it and paid Irving a $750,000 advance on a book.  LIFE magazine bought the serial rights for $250,000. Dell obtained the paperback rights for $400,000.

The scrutiny in the media was unrelenting, but Irving even convinced Mike Wallace for “60 Minutes” the story was real.

But then right before publication, Hughes himself debunked the story through a representative and later in a conference call with seven journalists based in Los Angeles.

Swiss banking authorities then discovered a fake account belonging to “H.R. Hughes,” opened by Irving’s wife, Edith Irving, a German-born Swiss citizen, using a forged passport and the name Helga R. Hughes.

By March 1972, Clifford Irving was pleading guilty to conspiracy in federal court.  He was given a prison sentence of 2 ½ years and served 17 months. A research assistant, in on the scam, was given a lesser sentence.  [William Grimes / New York Times]

--My friend Bobby C., a Marine and current commercial airline pilot, had this comment on the recent politicization of the FBI and Department of Justice, according to some in Congress.

“The military system of producing officers is far from perfect, but, the military beats into you, from day one, to maintain a politically neutral public persona, and they highly encourage you to rarely make even private comments about politics.

“All government organizations probably have similar strictures, but rarely, if ever, enforce them through performance evaluations like the military does.

“It will take the FBI and DOJ a long time to recover from all of this, if they even care to.”

--Pope Francis made a big mistake in presiding over the funeral of Cardinal Bernard Law, the disgraced former archbishop of Boston, after Law died in a hospital in Rome following a long illness.

The Pope, in issuing a brief statement on Law’s death, did not mention the victims of clergy sex abuse.

But in his Christmas address, the Pope’s State of the Union, he blasted the Vatican bureaucracy to its face, decrying “what he described as a cancer of plotting, pride and ambition among Vatican officials, which he said was holding back reform in the highest echelons of the Catholic Church.” [Francis X. Rocca / Wall Street Journal]

Pope Francis reserved his sharpest language for unnamed “betrayers of trust” who “let themselves be corrupted by ambition or vainglory” and, once let go, “erroneously declare themselves martyrs of the system, of the ‘uninformed pope,’ of the ‘old guard,’ instead of reciting a mea culpa.”

--Finally, some good news. Ironically, I wrote of American skier Lindsey Vonn last week and less than 24 hours later she pulled off a stunning win in a World Cup super-G race at Val d’Isere.  It truly shocked the sport because Vonn had recently suffered what was viewed as a serious back injury. So yet another comeback has been completed for Lindsey as she sets her sites on the Olympics.  You go, Girl!

[Vonn and fellow American Mikaela Shiffrin are literally about the only reason to watch the Games, by the way. Without the NHL participating in Pyeongchang, the hockey competition will be wanting....is my guess. But then there is the women’s figure skating final program...I mean you gotta watch that for drama...but now I’m rambling....]

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

MERRY CHRISTMAS!  God bless us, everyone.

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Gold $1279
Oil $58.35

Returns for the week 12/18-12/22

Dow Jones  +0.4%  [24754]
S&P 500  +0.3%  [2683]
S&P MidCap  +0.9%
Russell 2000  +0.8%
Nasdaq  +0.3%  [6959]

Returns for the period 1/1/17-12/22/17

Dow Jones  +25.3%
S&P 500  +19.8%
S&P MidCap  +14.7%
Russell 2000  +13.7%
Nasdaq  +29.3%

Bulls  64.1
Bears  15.1 [Source: Investors Intelligence]

Enjoy the holidays, friends.  Travel safe.

I’ll take a stab at 2018 next time.

Brian Trumbore

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