1. Don’t Get Too Euphoric About the Tax Bill. Shutdown, Disappointment Loom

    In recent days, the U.S. House of Representatives passed a historic tax reform bill (the first since 1986), and the Senate Finance Committee approved a different Senate version of the tax reform bill and sent it to the full Senate for a vote. This sets up the possibility of a full Senate vote after Thanksgiving, followed by a House-Senate Conference to reconcile the two versions of the bill, then a final vote on a single bill passed by both houses of Congress before Christmas and presidential approval before the end of the year.

    That’s the good news. Here’s the bad news. There are plenty of hurdles in the way as this article describes. Before the Senate can take up the tax bill, the House and Senate both have to deal with a possible government shutdown on December 8. That means finding some compromise on a long list of hot button issues including funding for Trump’s wall with Mexico, deportation of illegal immigrants brought to the U.S. as children (the “Dreamer Act” also referred to as “DACA”), funding for Planned Parenthood, funding for Obamacare (called “SCHIP”), and more.

    Then there’s the fact that Republicans can only lose two votes from their Senators before the entire process fails. Ron Johnson of Wisconsin has already come out against the bill and others may follow. This is further complicated by the possible loss of a Republican Senate seat in a special election on December 12 in Alabama because of the Roy Moore scandals.

    The stock market has already priced in a tax cut. Markets won’t go up much more if the bill passes because they already expect it to pass. But if the bill fails (for any or all of the reasons listed above) markets could plunge on the bad news. Seems like a good time to lighten up equity exposure and go to cash until the legislative dust settles.

  2. Europe is Going from Strength to Strength, Contrary to the Naysayers

    I have been baffled for years at Americans’ inability to understand Europe and the euro. In 2010, prominent economists such as Paul Krugman, Joe Stiglitz, and Nouriel Roubini were running around saying that Greece should be kicked out of the Eurozone.

    They said Spain should quit the euro, go back to the peseta as a currency, and devalue. They also said the Eurozone should break into a “two-tier” structure with a Northern Tier of hard currency countries like Germany and the Netherlands, and a Southern Tier of currency weaklings like Italy and France. I publicly argued with all of them at the time.

    I said no countries were being kicked out, no countries would quit, and new members would be added over time. That’s exactly what happened. When I made my forecast there were 16 members of the Eurozone. Now there are 19 members and a 20th is on the way soon with others waiting in the wings. (The UK “Brexit” is another matter because the UK never joined the Eurozone. They are exiting the EU, which is not the same as the Eurozone. The Eurozone is far more important precisely because it has its own currency and central bank).

    I even wrote an entire chapter on the economic strengths of Europe in my 2014 book, The Death of Money. This article vindicates the view I have taken all along. It explains how Europe has become a magnet for direct foreign investment, and has taken steps to address longstanding issues of labor mobility and inefficient regulation.

    The euro is poised for a major rally against the U.S. dollar. This article explains why.

  3. Canary in a Coalmine: Venezuelan Credit Defaults Begin; More on the Way

    Venezuelan debt crashed and burned last week as described in this article. The major state-owned oil company, Petroleos de Venezuela SA, or PDVSA, defaulted on its debt. S&P and Fitch ratings declared the company to be in default. The International Swaps & Derivatives Association (ISDA, the rule-making body on over-the-counter derivatives) declared PDVSA credit default swaps to be payable also.

    The PDVSA is likely to be the first of many Venezuelan defaults. Government debt looks unpayable, and is currently being renegotiated, which is another kind of default. Other Venezuelan companies with dollar-denominated debt are in worse shape. None of this comes as a shock.

    Venezuelan credit has been deteriorating for over a decade under the rule of first Hugo Chavez, and now Nicolás Maduro. The Venezuela currency, the bolívar, is essentially worthless and civil society has descended into chaos bordering on civil war. Yet, the significance of this story goes far beyond Venezuela.

    The 1998 global financial crisis started with a simple Thai default in 1997. The 2008 global financial crisis started with an uptick in mortgage defaults in 2006. Financial crises have a “snowflake and avalanche” dynamic in which small catalysts (the snowflake) soon cause catastrophic results (the avalanche).

    The Venezuelan crisis definitely has the potential to spread to other emerging markets and possibly cause a new global financial crisis in 2018.